How would you characterize the investment and business climates of the Kurdistan Region? How welcoming is the Region for foreign companies considering involvement, and what are the main challenges for foreign companies?
Aside from Oil & Gas, which represents the source of revenues for the Region, over the last few years we have seen an influx of private foreign investment. This is especially true in banking and construction where there is a decrease in speculation amongst foreign investors about the health of the economy. In fact, many perceive Kurdistan as a more progressive, secure place with great returns. The Kurdistan Region is rich in natural resources which have yet to be excavated. These resources will bring in great wealth, the majority of which is earmarked for infrastructure projects such as roads and bridges, sewage, schools, tourism, agriculture, IT, fiber optics, and telecom. These future projects will surely bring jobs and prosperity to an already growing economy. Foreign banks are entering the market in notable numbers which is seen to create healthy competition, as well as working to educate local banks to modernize and connect with international banks. One big challenge that is facing Kurdistan is the lack of information and transparency. The Prime Minister’s office recognizes this and is encouraging all KRG ministries to collect key economic data and follow transparent rules and regulations. Once information is available to local and international investors, uncertainty in the market will decrease, and investors can proceed to make better informed business decisions. Additionally, there is still much room for a skilled local workforce. This poses a hindrance to employers who are demanding sophistication and productivity. Iraq was deemed a closed society for so many years, and having opened up at such a pace, a lot of changes need to be made.

What sort of reforms to the legal framework do you think would enhance the development of the economy?
KRG’s Board of Investment has already introduced an Investment Law that provides incentives and tax credits to private investors in an effort to attract them to invest in the Region. There also needs to be more coordination between the various ministries. At times, the inconsistency in the application and enforcement of these laws might add risks to a market that is in need for foreign investment.

How developed are the Kurdistan Region accounting standards requirements for auditing practices, and what kind of auditing issues should the foreign business community be informed about?
The accounting profession in Kurdistan is quite sophisticated but has suffered exposure to changes in international standards due to years of economic sanctions and the unsettled political arena. The Institute of Auditors and Accountants, while an effective body in enforcing regulations, has not been very active in updating its members with new developments in the profession. The Kurdistan Region follows the Iraqi Unified Accounting System, whereby a rigid and standard set of accounts must be used in preparing local financial statements. Deloitte is well versed and has extensive knowledge of all local statutory requirements to ensure adherence and compliance with such requirements.

How would you characterize the tax system in the Kurdistan Region?
Theoretically the Iraqi tax code is well written and covers many areas, including corporate income tax, employment taxes, social security funding, real estate taxes, and custom duties plus several other areas. In practice, however, and due to years of neglect, lack of an enforcement body, and perhaps weak audit procedures and guidelines have resulted in non-compliance and tax avoidance. This has resulted in mistrust and non-reliance on the submitted financial statements which induced the tax authorities to assess taxes on internally developed deemed profit schedules, categorized by industry sector. These arbitrary assessments have created an uncertain environment for foreign investors who prepare and report accurate financials along with tax computations based on their true operating results. Deloitte is currently investing in developing the breadth of our Iraqi service offerings, and has already developed a strong working knowledge of the Iraqi tax and regulatory system. We are a member of the ITIC [International Tax Investment Center], an organization that works closely with the Iraqi authorities to develop best practices and resolve issues with respect to the application of the tax law for foreign companies.

What are the most important legal changes that foreign investors need to be aware of?
Investment Law no. (4) of 2006, with all its provisions, is perhaps the most important legal change investors should be aware of. The law, amongst other incentives, provided for a moratorium on taxation on certain Board of Investment approved projects, and treated foreign investors and foreign capital the same way as national investors and their capital investment. It also allocated and allotted plots of land for approved projects. Furthermore, the law created a legal framework and provided for guarantees to protect the rights of foreign investors. It also laid out the foreign investor responsibilities thus creating a friendly environment to operate from within.

The market is ripe and demand continues to spur activity. This along with new oil discoveries and increasing government infrastructure spending are contributing to a healthy economy and a growing sense of stability.

How would you characterize the private equity environment in the Kurdistan Region?
The private equity environment is alive and vibrant; however, as the market becomes more sophisticated, we foresee the need for financial due diligence work, mergers and acquisitions, market and corporate feasibility studies, finance and investment strategies, and many other advisory services. Once the Erbil Stock Exchange is up and running, we hope that many of the local conglomerates take advantage of the opportunity to list their companies via a structured and monitored IPO process. In the meantime, these larger entities must begin the process today of transforming their entities from a family-owned structure to a corporate structure. This would facilitate the external audit process which will provide assurances to outside investors and the public about the integrity and performance of such entities.

Which areas do you think are the most beneficial for investment in the Kurdistan Region?
The field outside Oil & Gas and its related services is wide open; the Region is in dire need of many industries. We have seen an active construction industry trying to meet demand for residential and commercial space. We have also seen an influx of foreign banks trying to extend credit to somewhat risky but high return investments. Infrastructure projects are next, including sewage, roads and bridges, and schools. Tourism, agriculture, meat and poultry plants, dairy production, technology, fiber optics are all investment opportunities on the horizon.

Is confidence increasing for long-term investments in the Kurdistan Region?
The market is ripe and demand continues to spur activity. This along with new oil discoveries and increasing government infrastructure spending are contributing to a healthy economy and a growing sense of stability.