A related-party transaction tax review in Iraq helps groups prepare for the questions that Iraqi auditors and the tax authority will ask about dealings between the Iraqi entity and other group companies, shareholders or connected persons. Iraq does not have detailed transfer pricing regulations of the kind found in many jurisdictions, but that does not mean related-party transactions escape scrutiny. The tax authority can disallow expenses it considers unsupported or excessive, adjust income it considers understated and estimate profits where records appear unreliable. Iraqi auditors, in turn, must review and disclose related-party transactions in the statutory financial statements.
A structured review identifies all related-party dealings, assesses their terms and prepares documentation that supports both the audit and the tax return.
The Income Tax Law No. 113 of 1982, as amended, allows deductions for expenses incurred in producing taxable income and empowers the General Commission for Taxes to review and adjust returns. The Companies Law No. 21 of 1997, as amended, contains rules on transactions involving managers and shareholders and on financial statements. The Iraqi Unified Accounting System and applicable auditing standards govern the preparation and audit of statutory accounts, including related-party disclosures.
Identifying related parties
The review should begin with a list of related parties: the parent and other group companies, shareholders, directors and managers, their family members and companies they control, and joint venture partners. This list should be updated annually and shared with the finance team and auditors.
Mapping related-party transactions in a related-party transaction tax review in Iraq
The next step is to map all transactions with related parties:
- Purchases and sales of goods.
- Services received and provided, including management, technical and support services.
- Royalties and licence fees.
- Loans, guarantees and interest.
- Leases of property and equipment.
- Secondments of staff and cost recharges.
- Asset transfers.
For each transaction, the review should record the counterparty, the agreement, the amount, the pricing method and the payment status.
Assessing terms and pricing
The review should consider whether each transaction is on terms that independent parties would accept. While Iraq does not prescribe specific transfer pricing methods, the authority will look for reasonableness. Useful benchmarks include prices charged to unrelated customers, market rates for services and interest, published licence rates and the group's global policies. Transactions that significantly reduce Iraqi taxable income, such as high service fees or below-market sales to affiliates, warrant particular attention.
Documentation for auditors
Iraqi auditors will require information to verify and disclose related-party transactions. The documentation should include agreements, invoices, payment records, explanations of pricing and evidence that services or goods were received. Providing a consolidated related-party schedule with supporting documents streamlines the audit and reduces audit qualifications.
Documentation for the tax authority
The tax authority may request more detailed evidence when reviewing the return, particularly for deductions. The documentation should demonstrate the commercial rationale for each transaction, the benefit to the Iraqi entity and the basis for pricing. Tax advisory services in Iraq can help prepare related-party files.
Governance and approvals
Related-party transactions should be approved in accordance with the Companies Law, the articles of association and internal policies. Approvals by persons without a conflict, recorded in minutes, support both corporate compliance and the tax position. Corporate governance advice in Iraq can assist with approval procedures.
Common risk areas
Typical risk areas include undocumented service charges, interest on shareholder loans at rates above market, rent paid to shareholders for property used by the company, sales to affiliates at low margins and write-offs of related-party receivables. Each should be reviewed and supported.
Annual review cycle
The review should be performed annually, ideally before the audit, so that documentation is ready and any issues are addressed before filing. Changes in group structure or new transactions should trigger updates.
Practical checklist for an annual review
- Update the list of related parties, including directors' and shareholders' interests.
- Extract all transactions with related parties from the accounting system.
- Confirm that each transaction is supported by a written agreement.
- Document the pricing method and comparable evidence where available.
- Confirm approvals in board or general assembly minutes.
- Prepare a schedule for auditors with supporting documents.
- Identify transactions likely to attract tax scrutiny and prepare explanations.
- Reconcile intercompany balances with the counterparties' records.
Preparing for future transfer pricing rules
Many jurisdictions in the region have introduced or strengthened transfer pricing rules in recent years, and Iraqi practice may develop in the same direction. Groups that already document related-party transactions systematically will be better placed to comply if formal requirements are introduced, and will be able to demonstrate consistency with their practice in other countries. Treating the annual review as a foundation for future requirements, rather than only as an audit exercise, is a prudent approach.
Responding to tax authority queries
When the tax authority queries a related-party transaction, the company should respond with a concise explanation of the commercial purpose, the agreement, the pricing basis and evidence of performance. Providing a well-organised file at the first request usually limits the scope of further questions. Responses should be consistent with the information given to auditors and disclosed in the financial statements, because inconsistencies are likely to be noticed. Where adjustments are proposed, the company should consider whether objection is justified and whether a corresponding adjustment may be available in the counterparty's jurisdiction.
Illustrative example. An Iraqi manufacturing company buys raw materials from a group affiliate abroad, pays royalties to its parent, borrows from a shareholder and rents its factory from the founder's family. Its auditors qualify the accounts due to incomplete related-party disclosures, and the tax authority later questions the royalty and rent. The company conducts a related-party review, documents each transaction, benchmarks the rent and interest against market rates, and obtains board approval for each arrangement. Subsequent audits are unqualified, and the authority accepts most of the deductions.
Key takeaways
- A related-party transaction tax review in Iraq identifies all group dealings and assesses their terms.
- Iraq lacks detailed transfer pricing rules, but the tax authority can disallow or adjust unsupported transactions.
- Documentation should serve both statutory auditors and the tax authority.
- Annual reviews before the audit allow issues to be addressed before filing.
How Etihad Can Help?
A disciplined related-party transaction tax review in Iraq reduces audit qualifications and tax adjustments. Clear identification, reasonable terms and good documentation are the foundations.
Etihad Law Firm advises groups on related-party transactions, documentation, governance and tax disputes in Iraq. We help clients present their group dealings clearly to auditors and the tax authority.