The Government of Iraq (GOI) continues to face reconstruction challenges after the defeat of the ISIS physical caliphate, an uneven security environment, an economy primarily dependent on oil revenues, and deep institutional corruption. Widespread street protests that began October 2019 led to the resignation of then Prime Minister Adil Abd al-Mahdi, amid calls for greater government accountability, improved government services, and more jobs. After two other PM-designates were unsuccessful, the Iraqi Council of Representatives approved Mustafa al-Kadhimi, his political platform, and some proposed cabinet ministers on May 7, 2020.
An uneven security environment, including the threat of resurgent extremist groups, remains an impediment to investment in many parts of the country. Other lingering effects of the fight against ISIS include major disruptions of key domestic and international trade routes and the destruction of economic infrastructure, especially in the ISIS-controlled territory in Mosul and parts of northern and western Iraq. Some militia groups that participated in the fight against ISIS remained deployed even after the completion of combat operations. Some militia also appear to be under only marginal government control and have been implicated in a range of criminal and extralegal activities, including extortion. However, the security situation varies throughout the country and is generally less problematic in the Iraqi Kurdistan Region (IKR).
Despite these challenges, the Iraqi market offers some potential for U.S. exporters. Iraq imports large volumes of agricultural commodities, machinery, consumer goods, and defense articles. While non-oil bilateral trade with the United States was just over USD1 billion in 2019, Iraq’s economy had an estimated GDP of USD200 billion. Government contracts and tenders are the source of most commercial opportunities in Iraq in all sectors, including the significant oil and gas sectors, and have been financed almost entirely by oil revenues. Increasingly, the GOI has asked investors and sellers to provide financing options and allow for deferred payments. Although there has been slow progress in negotiating flare-gas-capture projects on associated gas-to-oil production and licensing the exploration of free gas fields, Iraq announced the release of a national gas plan in early 2020, which identified several long-term investment projects to modernize and increase the capacity of the country’s gas industry.
Investors in Iraq continue to face extreme challenges resolving issues with GOI entities, including procurement disputes, receiving timely payments, and winning public tenders. Difficulties with corruption, customs regulations, irregular and high tax liabilities, unclear visa and residency permit procedures, arbitrary application of e-regulations, lack of alternative dispute resolution mechanisms, electricity shortages, and lack of access to financing remain common complaints from companies operating in Iraq. Shifting and unevenly enforced regulations create additional burdens for investors. The GOI currently operates 192 state-owned enterprises (SOEs), a legacy from decades of statist economic policy.
Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, but have a pro-business, visa-on-arrival option and traditionally more stable security situation. However, the region’s economy has struggled to recover from the 2014 ISIS offensive, the drop in oil prices, and the aftermath of the 2017 Kurdish independence referendum. Key factors in the IKR’s ability to attract business and investment interests include: stable oil prices, budget support to the Kurdistan Regional Government (KRG) from the central government, and agreements between the GOI and KRG on a unified customs system and the shipment of Kirkuk oil through the IKR pipeline to Turkey.
Numerous efforts to facilitate business climate improvements saw positive movement in the past year. Since November 2018, the U.S. Embassy Baghdad Trade and Investment Team has operated as a partner post of the U.S. Commercial Service, supported by its office at the U.S. Embassy Amman. As a result, the U.S. Embassy in Baghdad now offers eight fee-based services, including market reports, local partner matching, and trade missions.
The U.S. government and the GOI have revived the 2005 U.S.-Iraq Strategic Framework Agreement and the Trade and Investment Framework Agreement (TIFA), and held the second TIFA meeting in June 2019 with good success. The American Chamber of Commerce in Iraq, having relaunched in October 2015, provides a platform for commercial advocacy for the U.S. business community. Local businesses also are re-energizing an American Chamber of Commerce presence in the IKR.
|TI Corruption Perceptions Index||2019||162 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2019||172 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||Not Ranked||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2018||2,216||https://apps.bea.gov/international/
|World Bank GNI per capita||2019||5,740||http://data.worldbank.org/indicator/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The GOI has publicly and repeatedly stated its desire to attract foreign investment as part of national plans to strengthen local industries and promote the “Made in Iraq” brand. Although the GOI partnered with the World Bank and Kuwaiti government to host the Kuwait International Conference for the Reconstruction of Iraq in February 2018, the GOI has yet to follow through on commitments made at the conference to reform processes and regulations that hinder investment. Iraq has claimed that countries have not followed through on their financial pledges, either.
Iraq operates under its National Investment Law (Investment Law), amended in December 2015. The Investment Law outlines improved investment terms for foreign investors, the purchase of land in Iraq for certain projects, and an investment license process. The purchase of land for commercial or residential development remains extremely difficult. Since 2015, Iraq has been a party to the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).
Foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals. State-owned banks in Iraq serve predominantly to settle the payroll of the country’s public sector. Privately-owned banks, until recently, served almost entirely as currency exchange businesses. Some privately-owned banks have begun commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending. The financial sector in the IKR is still recovering from years of financial instability, and the Central Bank of Iraq (CBI) levied sanctions against the IKR’s financial institutions immediately following the Kurdistan independence referendum in September 2017.
Recently, the GOI has been exploring financing options to pay for large scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.
According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited. However, Iraq’s Investment Law limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.
Despite this legal equity between foreign and domestic investment, the GOI reserves the right to screen foreign direct investment. The screening process is vague, although it does not appear to have been used to block foreign investment. Still, bureaucratic barriers to foreign direct investment, such as a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license, remain significant.
The IKR operates under a 2006 investment law and its supporting regulations. The KRG is generally open to public-private partnerships and long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production. Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).
The GOI established the National Investment Commission (NIC) in 2007, along with its provincial counterparts Provincial Investment Commissions (PICs), as provided under Investment Law 13 (2006). This cabinet-level organization provides policy recommendations to the Prime Minister and support to current and potential investors in Iraq. The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using NIC services. The NIC can also grant investment licenses and facilitate visa and residency permit issuances for business travelers. In November 2019, the Council of Ministers enforced a retirement requirement for government officials, ending the term of Dr. Sami al-Araji as the Chairman of the NIC, and replacing him with an acting chairman until a new chairman is assigned.
Limits on Foreign Control and Right to Private Ownership and Establishment
Iraqi law stipulates that 50 percent of a project’s workers must be Iraqi nationals in order to obtain an investment license (National Investment Regulation No. 2, 2009). Investors must prioritize Iraqi citizens before hiring non-Iraqi workers. The GOI pressures foreign companies to hire more local employees and has encouraged foreign companies to partner with local industries and purchase Iraqi-made products.
The GOI generally favors SOEs and state-controlled banks in competitions for government tenders and investment. This preference discriminates against both local and foreign investors.
Other Investment Policy Reviews
In the past three years, the GOI did not conduct any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).
Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s Companies Registration Department. The procedure costs and time to obtain a business license can be found at . Many international companies use a local agent to assist in this process, due to its complexity. The GOI is working with UNCTAD to streamline the business registration process. The KRG is also working to put the business registration process and procedures online. Initial steps have been completed in both projects.
The KRG offers business registration for companies seeking business only in the IKR; however, companies that seek business in both the IKR and greater Iraq must register with the GOI Ministry of Trade.
Iraqi laws give the NIC and PICs authority to provide information, sign contracts, and facilitate registration for new foreign and domestic investors. The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration. Investors can request these services through the NIC website: . The NIC does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project. The NIC can also connect investors with the appropriate provincial investment council.
These official investment commissions do struggle to operate amid unclear lines of authority, budget constraints, and the absence of regulations and standard operating procedures. Importantly, the investment commissions lack the authority to resolve investors’ bureaucratic obstacles with other Iraqi ministries.
To incorporate a company in Iraq, an investor must first obtain a statement from an Iraqi bank showing a minimum capital deposit. All investors must also apply for an investment license from the appropriate national, regional, or provincial investment commission. Companies must register with the Ministry of Finance’s General Commission for Taxation (GCT) and register employees for social security (if applicable). Companies receive their tax identification number as part of registering their business with the Ministry of Trade. Companies that provide security are also required to register with the Ministry of the Interior.
The Kurdistan Board of Investment (BOI) manages an investment licensing process in the IKR that can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment. Due to oversaturated commercial and residential real estate markets, the BOI has moved away from approving licenses in these sectors but may still grant them on a case-by-case basis. Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations. Some businesses have reported that the KRG has not provided all of the promised support infrastructure such as water, electricity, or wastewater services, as required under the investment law framework. Additional information is available at the BOI’s website: .
Iraq does not restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
Iraq’s overall regulatory environment remains opaque and the Investment Law does not establish a full legal framework governing investment. Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for companies that bid on public procurement contracts or seek to invest in major infrastructure projects. The KRG procurement reform measures, beginning in 2016, sought to address these problems, but with little result. Iraq’s commercial and civil laws generally fall short of international norms.
The absence of other investment laws, and the GOI’s failure to implement laws, creates ambiguity. One example is Iraq’s Legislative Action Plan for the Implementation of WTO Agreements, which is the legislative “road map” for Iraq’s eventual WTO accession. While the Council of Representatives passed a Competition Law and a Consumer Protection Law in 2010, the GOI has not established the legally-requisite Competition and Consumer Protection Commissions that would implement the reforms and oversight. Without these commissions, investors do not have recourse against unfair business practices such as bid rigging or abuse of a dominant position in the market.
The process of Iraqi government rulemaking can be opaque and lends itself to arbitrary application. To illustrate, while ministries must publish regulations imposing duties on citizens or private businesses in the official government gazette, internal ministerial regulations have no corresponding requirement. This loophole allows officials to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and businesses. Furthermore, the lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult to accurately interpret the regulatory environment. In addition, accounting and legal procedures are opaque, inconsistent, and generally do not meet international standards.
Draft bills, including investment laws, are not available for public comment. The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.
The GOI encourages private sector associations but private sector associations are generally not influential, given the dominant role of SOEs in Iraq’s economy. In the IKR, private sector associations have some influence and many, such as the contractors’ union, are very active in advocacy with the KRG.
Iraq has limited transparency of its public finances or government held debt. Publicly available budgets did not include expenditures by ministry or revenues by source and type. The budget provided limited details regarding allocations to, and earnings from, SOEs. Financial statements for most SOEs were generally not publicly available. Limited information on debt obligations was available on the Central Bank and Ministry of Finance websites.
International Regulatory Considerations
Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.
Legal System and Judicial Independence
Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped. Over decades of war and sanctions, Iraqi courts did not keep up with developments in international commercial transactions. Corruption and bureaucratic bottlenecks remain significant problems. As trade with foreign parties increases, Iraqi courts have seen a significant rise in complex commercial cases. Although contracts should be enforceable under Iraqi law, such enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.
Laws and Regulations on Foreign Direct Investment
Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983). Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.
Competition and Anti-Trust Laws
The Council of Representatives (COR) passed a Competition Law and a Consumer Protection Law in 2010. However, the Iraqi government has yet to form the Competition and Consumer Protection Commissions authorized by these laws. The COR has also amended Iraqi law several times to promote fair competition and “competitive capacities” in the local market (2010, 2015).
The Council of Ministers has also issued many recommendations regarding the amendments of investment licenses and to improve the investment and businesses environment in Iraq. The August 2019 Resolution 245 announced investment opportunities through the NIC.
The prominent role of SOEs in Iraq and corruption issues undermine the competitive landscape.
Expropriation and Compensation
The Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation. The Constitution stipulates that expropriation may be regulated by law, but the COR has not drafted specific legislation regarding expropriation. Article 9 of the Investment Law guarantees non-seizure or nationalization of any investment project that the provisions of this law cover, except in cases with a final judicial judgment. The law prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation. Iraq’s Commercial Court is charged with resolving expropriation cases. Over the past six years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.
In the IKR, the BOI can impose fines and potentially confiscate land if it determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license. The IKR investment law (Article 17) outlines an investor’s arbitration rights, which fall under the civil court system. Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.
ICSID Convention and New York Convention
Iraq is considering, but has not yet signed or ratified, the convention on Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the ad hoc arbitration rules and procedures that the UN Commission on International Trade Law has established (UNCITRAL Model Law). The enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.
Investor-State Dispute Settlement
In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq — a court of specialized jurisdiction for disputes involving foreign investors — as part of a national strategy to improve Iraq’s investment climate. This court began hearing cases in January 2011. In 2017, a Higher Judicial Council survey of the 16 federal courts of appeals that heard Iraq’s commercial cases showed that 1,565 commercial cases had been filed and 83 percent of those cases had been completed. Given that all of Iraq’s ministries are located in the capital, and the vast majority of commercial cases involve a foreign party and an Iraqi government agency, the Baghdad Commercial Court reviews far more commercial cases than the general jurisdiction courts in the surrounding provinces. In 2017, 982 commercial cases were filed with Baghdad’s Commercial Court, representing 63 percent of the total commercial cases filed.
In the IKR, commercial disputes are handled through the civil court system.
International Commercial Arbitration and Foreign Courts
Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983). Iraq formally joined the ICSID on December 17, 2015, and on February 18, 2017, Iraq joined the ISDS process agreement between investors and states.
Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor. Bankruptcy is not criminalized. The Iraqi Companies Law regulates the process for the liquidation of legal entities. Nevertheless, the mechanism for resolving insolvency remains opaque. Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2020 Doing Business Report.
4. Industrial Policies
The Iraqi Investment Law offers foreign investors several exemptions for qualified investments, including a ten-year exemption from taxes, exemptions from import duties for the necessary equipment and materials throughout the period of project implementation, and exemption from taxes and fees for primary materials imported for commercial operations. The exemption increases to 15 years if Iraqi investors own more than 50 percent of the project. The law allows investors to repatriate capital brought into Iraq, along with proceeds. Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange. Hotels, tourist institutions, hospitals, health institutions, schools, and colleges enjoy additional exemptions from duties and taxes for the import of furniture, tools, equipment, machinery, and means of transportation, but foreign companies that sell goods or services to any entity in Iraq may be subject to Iraqi taxes.
Foreign and domestic companies may have tax-exempt profits if their project is with the GOI and the project is listed in the National Investment Plan, which the Ministry of Planning prepares annually. The GOI ministries overseeing investment projects provide updates for the list of investment contracts to the Ministry of Finance, including its tax commission, the GCT. Foreign and domestic companies that have registered businesses in order to execute contracts outside the National Investment Plan do not receive tax exemptions. Companies have reported difficulties obtaining favorable tax treatment after deals are struck. However, in some cases, GOI entities have negotiated partial or short-term tax exemptions for companies as part of a project contract.
Income tax language is included in GOI petroleum contracts with the Ministry of Oil and applies to each consortium and its partners. The Council of Ministers ratified the contract language, which supersedes the Tax Code. Secondary contracts that a consortium issued are treated differently. The consortium is required to withhold 7 percent from secondary contracts for remittance to the GOI. Companies pay a profit tax of 15 percent unless they operate in the oil sector, which has a 35 percent tax profit rate. The definition of “petroleum activities” is subject to interpretation. Any business or individual considering doing business in Iraq should obtain competent advice from a private accountant and attorney.
Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits. Foreign investors may choose to invest in the IKR with or without local partners, and full repatriation of profits is allowed. While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and involve significant knowledge transfer. Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the BOI.
Foreign Trade Zones/Free Ports/Trade Facilitation
Free Trade Zones (FZs) are permitted under Iraqi law per the Free Zone Authority Law No. 3/1998, for industrial, commercial, and service projects. The Free Zone Commission in the Ministry of Finance administers the law, but lacks a specific mandate to develop the FZs. Under the law, capital, profits, and investment income from projects in an FZ are exempt from all taxes and fees throughout the life of the project. Goods entering into Iraq’s market from FZs are subject to normal import tariffs; no duty is levied on exports from FZs.
Activities permitted in FZs include: industrial activities such as assembly, installation, sorting, and refilling processes; storage, re-export, and trading operations; service and storage projects and transport of all kinds; banking, insurance, and reinsurance activities; and supplementary and auxiliary professional and service activities. Prohibited activities include: weapons manufacture and environmentally-polluting industries.
Iraq currently has four FZs with tax exemptions and other incentives for the transportation, industrial, and logistics sectors. The largest is the Basrah/Khor al-Zubair FZ, comprising 18 square km and located southwest of Basrah at the Khor al-Zubair seaport. Operational since June 2004, it hosts a number of local and foreign companies. The Ninewa/Falafel Free Zone is located in the north. Plans to develop the FZ in Fallujah are ongoing. The Falafel and Fallujah zones are located in formerly ISIS-held areas, and the possibility of continued political instability makes further development in the near future unlikely. There is also an FZ in Baghdad. In May 2019, Iraq and Kuwait announced a new joint FZ project in Safwan port, pending approvals.
In the IKR, there are currently no FZs. The KRG has approved plans for zones in all IKR provinces.
Performance and Data Localization Requirements
Iraqi labor law describes two categories of workers: local Iraqis and foreign workers whom the GOI other Iraqi entities employ. The Investment Law stipulates that foreign workers may be hired for investment projects, after priority has been given to Iraqi workers. At least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that Iraq lacks skilled labor and it can be a challenge to meet this requirement. Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.
In the IKR, hiring locally is encouraged, but not mandated. Before applying for the residency permit required for legal employment, foreign workers must obtain a security clearance from the KRG Ministry of Interior, a medical clearance which includes an HIV test, and a work permit from the KRG Ministry of Labor and Social Affairs (MOLSA). Some foreign companies have reported prolonged delays in obtaining necessary residency permits for foreign workers. The appointment of foreign nationals as managers of foreign-owned limited liability companies requires additional clearances.
Foreign investors can apply for a visa at Iraqi embassies, or in some cases, through the NIC. In other cases, investors can apply for and receive visa approval letters from the Ministry of Interior, which grants visa upon arrival to one of Iraq’s airports. An Iraqi government entity must sponsor a foreign investor and provide him/her with an official invitation letter. Obtaining visas for foreign contractors regularly takes several months and allegations of corruption are commonplace. Business travelers are supposed to be granted a one-year, multiple-entry visa, although sometimes Iraqi embassies outside of the United States grant shorter visa duration to U.S. citizen applicants.
Once in Iraq, foreign investors and employees must obtain work permits, the process for which is often lengthy and unpredictable. There are frequent instances when work or business travel is delayed because foreign employees are unable to receive a visa.
U.S. citizens traveling to the IKR can obtain a visa upon arrival at the airport, valid for 30 days. This visa is not valid for travel in Iraq outside the IKR, as the GOI does not honor KRG-issued visas. U.S. citizens who plan to stay for longer than 30 days must extend their IKR visa or obtain a residency permit. The KRG does not require HIV tests if the travel is shorter than 15 days.
Additional information can be found on the U.S. Department of State’s website: www.travel.state.gov.
The GOI does not follow any forced localization policy in which foreign investors must use domestic content in their goods and technology. There are no requirements for IT providers to turn over source code and/or provide access to surveillance.
The GOI strongly resists offering ownership or profit sharing with any potential foreign investor. The GOI prefers to structure foreign investments as contracts by which it agrees to pay for services or equipment at a price that a clause in the annual budget law guarantees, as opposed to a price based on profits or returns. The KRG, in contrast, has employed “build-own-operate” project structures and production sharing contracts in its management of the energy, oil, and gas sectors.
5. Protection of Property Rights
Since 2009, Iraqi law has allowed foreigners to own land and the amended Investment Law expressly provides foreigners the right to own land for the purpose of developing residential real estate projects. It also allows foreign investors to own land for industrial projects if they have an Iraqi partner. Additionally, foreign investors are permitted to rent or lease land for up to 50 years, with an option to renew. The GOI approved implementing regulations in 2010 that allow investors to obtain land for residential housing projects free of charge on the condition that land value is excluded from the sales price. The land registration can be revoked if the domestic or foreign investor does not carry out the obligations of their agreement.
For non-residential, commercial investment projects — including agriculture, services, tourism, commercial, and industrial projects — investors can lease government land. The terms and duration of these leases vary by project type and the result of negotiations between the parties. Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land. These smaller percentages of the “rent allowance” rate, ranging from 1 percent to 25 percent, amount to significant rent reductions for leased land.
In the IKR, foreign land ownership is allowed under Law Number 4 (2006). The BOI initially awarded more than half of all investment licenses to housing projects, but that percentage has declined in favor of priority sector development areas of agriculture, industry, and tourism. Delays in the transfer of land title have sometimes slowed projects.
Mortgages and liens exist in Iraq, and there is a national record system. However, mortgages are not common. Iraq ranks 121 out of 190 countries in the World Bank’s “registering property” index of its 2020 Doing Business report.
Intellectual Property Rights
Legal structures that protect intellectual property (IP) rights in Iraq are inadequate and infringements are common. Counterfeit products are widespread in the Iraqi marketplace, including pharmaceutical drugs. According to a 2018 study by the Business Software Alliance on self-reported piracy, 85 percent of Iraq’s software was unlicensed in 2017, consistent with the levels found in each survey since 2009. During the past year, the COR has not enacted any new IP-related laws or regulations. The GOI attempts to track seizures of counterfeit medicines. Reporting is inconsistent.
The GOI’s ability to enforce IP protections remains weak and spread across several ministries. The Ministry of Culture handles copyrights, and the Ministry of Industry and Minerals houses the office that registers trademarks. The Central Organization for Standardization and Quality Control, an agency under the Ministry of Planning, handles the patent registry and the industrial design registry. The Ministry of Planning’s patent registry office has occasionally included Arab League Israel Boycott questionnaires in the patent registry application, which U.S. companies are not allowed to complete under U.S. law. IP infringement cases are primarily heard in commercial courts, although on a relatively infrequently basis cases may be transferred to the criminal courts.
A draft IP law, which would comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and consolidate all IP responsibilities into a single body, has been redrafted several times but has not progressed in the COR.
In 2018, the Council of Ministers Secretariat reviewed IP forms and processes for simplification. As a result, the patent application is now based on World Intellectual Property Organization (WIPO) standards. However, the application processes for all classes of IP protection favor domestic applicants through requirements for local Iraqi-national agents and optional, but advantageous, in-person review committee meetings.
Iraq is a signatory to several international intellectual property conventions and to regional and bilateral arrangements, which include: 1) the Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) the WIPO Convention, ratified by Law No. 212 of 1975 (Iraq became a member of the WIPO in January 1976); 3) the Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) the Arab Intellectual Property Rights Treaty (Law No. 41 of 1985).
Iraq is not listed in USTR’s Special 301 report or notorious market report.
6. Financial Sector
Capital Markets and Portfolio Investment
Iraq remains one of the most under-banked countries in the Middle East. The Iraqi banking system includes 68 private banks and seven state-owned banks. As of early 2020, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks. The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets. Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs. Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.
Credit is difficult to obtain and expensive. Iraq ranks 186 out of 190 in terms of ease of getting credit in the World Bank’s 2020 Doing Business Report. Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more wire transfers and other fee-based exchange services than lending. Businesses are largely self-financed or between individuals in private transactions. State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.
The CBI introduced a small and medium enterprise lending program in 2015, in which 35 of the 48 private banks have participated. In early 2020, it launched a real estate lending initiative, and an Islamic finance consolidation program.
The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit. Although CBI granted private banks permission to issue letters of credit below USD50 million, TBI continues to process nearly all government letters of credit.
Money and Banking System
Although banking sector reform was a priority of Iraq’s IMF Stand-By Arrangement, the GOI has had only incremental success reforming its two largest state-owned banks, Rafidain and Rasheed. Private banks are mostly active in currency exchanges and wire transfers. CBI is Iraq’s central bank, headquartered in Baghdad, with branches in Basrah and Erbil. CBI’s Erbil branch, and the IKR’s state-owned banking system, are now electronically linked to the CBI system. The CBI now has full supervisory authority over the financial sector in the IKR, including the banks and non-bank financial institutions.
Foreign Exchange and Remittances
The currency of Iraq is the dinar (IQD). Iraqi authorities confirm that in practice, there are no restrictions on current and capital transactions involving currency exchange as long as valid documentation supports underlying transactions. The Investment Law allows investors to repatriate capital brought into Iraq, along with proceeds. Funds can be associated with any form of investment and freely converted into any world currency. The Investment Law also allows investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.
The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the USD, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market. Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer. There are no taxes or subsidies on purchases or sales of foreign exchange.
There are no recent changes to Iraq’s remittance policies. Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law. Iraq does not engage in currency manipulation. Iraq is listed as a jurisdiction with strategic deficiencies according to the Financial Action Task Force.
Sovereign Wealth Funds
Iraq does not have a sovereign wealth fund.
7. State-Owned Enterprises
tableSOEs are active across all sectors in Iraq. GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system. The GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq, as many SOEs are unproductive. These firms employ over half a million Iraqis, many of whom are underemployed. The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods. The GOI had expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its previous international financing programs.
Iraqi law permits SOEs to partner with foreign companies. When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website. Partnerships are negotiated on a case-by-case basis, and require the respective minister’s approval. The Ministry of Industry and Minerals (MIM), which oversees the largest number of Iraq’s SOEs, established the following requirements for partnerships: minimum duration to three years, the foreign company must register a company office in Iraq, and the foreign company must participate in the production of goods. Foreign companies have faced challenges in partnerships because the GOI has, at times, cut subsidies to SOEs after partnerships were formed and due to conflicts between the parent ministry and the GOI’s official policy. In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.
GOI entities are required to give preferential treatment to SOEs, under multiple laws. A 2009 Council of Ministers’ decision requires all Iraqi government agencies to procure goods from SOEs unless SOEs cannot fulfill the quality and quantity requirements of the tender. A Board of Supreme Audit decision requires government agencies to award SOEs tenders if their bids are no more than 10 percent higher than other bids. Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless Iraqi SOEs state that they cannot fulfill the order. Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill SOE-promulgated tenders. Further, SOEs are exempt from the bid bond and performance bond requirements that private businesses are subject to.
As a result of years of sanctions and war, most of these SOEs suffer from sclerotic management and dependence on GOI contracts. Many of them are not commercially viable due to bloated payrolls and obsolete equipment, although some have adapted and are producing goods for the domestic market. In 2015, the MIM developed a plan to restructure its 59 SOEs. Under the proposed plan, the MIM would rate SOEs based on their profitability and degree of government dependence. The government would then sell or shut down unprofitable SOEs that are unable to cover payroll obligations. However, no action to implement this plan has been undertaken. Another attempt at reform under the 2017 Federal General Budget Law would have expanded the potential role of private investment in SOE reform, giving governorates the mandate to expand partnerships with the private sector, with approval of the governorate’s council.
Iraq is not party to the Government Procurement Agreement within the framework of the WTO.
Iraqi law supports a degree of autonomy in the selection process of an SOE’s board of directors. For example, it requires that a minister’s sole appointment to a board of directors receive the approval of an “opinion board.” Nevertheless, in practice, the majority of board members have close personal and political connections to their parent ministry’s leadership.
SOEs do not adhere to OECD Guidelines. Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions. However, in practice, SOEs defer to the parent ministry for the vast majority of decisions. SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit. These reports are not published and sometimes exclude salary expenses.
The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors. Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions. There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block. Presumably, foreign investors would have an opportunity to invest in privatization projects. The IMF Stand-By Arrangement had required the GOI to conduct an audit of state-owned banks and the World Bank’s Development Policy Loan had required Iraq to audit SOEs.
8. Responsible Business Conduct
The international oil companies active in Iraq are required to observe international best practices in corporate social responsibility (CSR) as part of their contracts with the GOI. Nevertheless, the GOI does not have policies in place to promote CSR and raise awareness of environmental and social issues among investors. The concept of CSR is not widely recognized in Iraq and few NGOs and business associations are monitoring it. Iraq has not subscribed to the OECD’s Guidelines for Multinational Enterprises.
In the IKR, oil companies are mandated in their production sharing contracts with the KRG to give back to the communities in which they work through corporate responsibility agreements. These agreements require yearly payments from which the KRG prioritizes and allocates funds for projects such as improved roads, university training for local youth in the geotechnical and energy fields, and health clinics.
Investors are required to protect the environment and adhere to quality control systems. These include soil testing requirements on the land designated for the project as well as conducting an environmental impact study. In practice, the GOI lacks a mechanism to enforce environmental protection laws and implementation is limited.
Iraq became a member of the Extractive Industries Transparency Initiative (EITI) in 2009. The Government of Iraq established a 15-person committee to work on EITI, including several Directors General within the Ministry of Oil, four representatives from NGOs, and oil company executives. The committee provided required reports through 2013. In February 2017, the World Bank approved a USD350,000 program to assist Iraq with carrying out its EITI obligations. In November 2017, the EITI Board concluded Iraq had made inadequate progress and temporarily suspended Iraq’s membership.
Iraq ranked 162 out of 180 on Transparency International’s 2019 Corruption Perception Index. Public corruption is a major obstacle to economic development and political stability. Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and customs.
While large-scale investment opportunities exist in Iraq, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, at all levels. While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders. Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.
Moving goods into and out of the country continues to be difficult, and bribery of or extortion by port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2020 Doing Business report.
U.S. firms frequently identify corruption as a significant obstacle to foreign direct investment, particularly in government contracts and procurement, as well as performance requirements and performance bonds.
Several institutions have specific mandates to address corruption in Iraq. The Commission of Integrity, initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding the enforcement of laws, and preventing crime. The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. COI Law No. 30, passed in 2011, updated the CPA provisions by granting the COI broader responsibilities and jurisdiction through three newly created directorates: asset recovery, research and studies, and the Anti-Corruption Academy. On October 28, the COR abrogated CPA Order 57, which had established Inspectors General (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. government, these offices had been responsible for inspections, audits, and investigations within their ministries, although detractors claimed they in fact added another layer of bureaucracy and corruption.
The Board of Supreme Audit, established in 1927, is an analogue to the U.S. government’s General Accountability Office. It is a financially and administratively independent body that derives its authority from Law 31 of 2011 — the Law of the Board of Supreme Audit. It is charged with fiscal and regulatory oversight of all publicly-funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.
None of these organizations have provided an effective check on public corruption.
Neither the Commission for Integrity nor the IGs has effective jurisdiction within the IKR. The Kurdistan Board of Supreme Audit is responsible for auditing regional revenues with IKP and GOI oversight. The IKP established a regional Commission of Integrity in late 2013 and increased its jurisdiction the next year to include other branches of the KRG and money laundering.
Iraq is a party but not a signatory to the UN Anticorruption Convention. Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Resources to Report Corruption
According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the Commission for Integrity and the inspector general of a GOI ministry or body.
Commission for Integrity
Department of Complaints and Reports
10. Political and Security Environment
Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country. Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and Western interests remain possible targets. In addition, anti-U.S. sectarian militias may threaten U.S. citizens and companies throughout Iraq.
The Department of State maintains a Level Four Travel Advisory for Iraq and advises travelers not to travel to Iraq due to terrorism, kidnapping, and armed conflict. U.S. government personnel in Iraq are required to live and work under strict security guidelines. State Department guidance to U.S. businesses in Iraq advises the use of protective security details. Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/. Some U.S. and third-country business people travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.
11. Labor Policies and Practices
Iraq continues to face high unemployment, a large informal sector, lack of satisfactory work standards, and a large unskilled labor force. Domestic and foreign investors often cite the lack of skilled Iraqi labor as one of the major impediments to investing in Iraq, as political instability and violence led many highly-educated Iraqis to leave the country in recent years. More than 1.7 million Iraqis remained displaced as of April, with most unable to find jobs or pursue livelihood activities to support their families.
Foreign investors tend to rely on foreign workers, although at least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that it can be a challenge to meet this requirement.
In the IKR, hiring locally is encouraged but not mandated. Foreign employees must obtain a security clearance and a work permit before applying for the residency permit required for legal employment. Some companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.
The Iraqi Constitution states that citizens have the right to form and join unions and professional associations. Iraq is a party to both International Labor Organization conventions related to youth employment, including child labor. Iraqi labor laws also regulate working conditions and prohibit all forms of forced or compulsory labor, including by children. However, the GOI has not effectively monitored or enforced the law, which has resulted in unacceptable working conditions for many workers.
Iraqi’s labor law, revised in 2016, is more consistent with current international standards than previous laws and allows for collective bargaining, further limits child labor, and provides improved protections against discrimination at work. The law addresses sexual harassment at work and provides protection against it and enshrines the right to strike, which had been banned since 1987. The GOI no longer limits workers’ affiliation with more than one union or federation, and coverage has been expanded to include all workers not covered by Iraq’s civil service law. The IKR did not implement the new labor law and continues to operate under the 1987 statute.
MOLSA sets a minimum monthly wage for unskilled workers. The private sector sets wages by contract, and the GOI sets wages for those working in the public sector. The Council of Ministers last approved changes to the public sector pay scale in January 2015, reducing the pay gap between low- and high-ranking employees. In addition, all employers must provide some level of transport, accommodation, and food allowances for each employee, but the law does not fix these allowance amounts. In December 2013, the GOI launched a Social Safety Net program to assist the unemployed and persons with disabilities in gaining access to financial aid and benefits from the government; as of April 2018, MOLSA’s Directorate of People with Disabilities and Special Needs reported the program covers approximately 4 million individuals. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
The U.S. International Development Finance Corporation (DFC) provides debt and equity financing, political risk insurance, and technical development to mobilize private sector investment to advance development in emerging economies. DFC currently has eight active projects in Iraq with a total commitment level of over USD280 million. These include projects in the energy, housing, and finance sectors as well as insurance for humanitarian and other assistance.
Iraq is a signatory to the Riyadh Convention; however, it is not a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”), which is typically a requirement for DFC political risk insurance.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
The GOI collects and publishes limited statistics with which to compare international and U.S. investment data. The NIC and PICs granted 1067 licenses between 2008 and 2015 (latest statistics available) with a total potential value of USD53.9 billion. An investment license does not mean that the proposed investment will be implemented.
In the IKR, the Kurdistan BOI granted 51 licenses in 2018, with a total potential value of USD3.13 billion. Compared to 2017, the BOI granted licenses to 18 more projects, representing a capital increase of USD2.4 billion (340 percent). The granting of an investment license from the BOI does not mean that the proposed investment will be implemented. All of the licenses granted in 2018 were to national (i.e. Iraqi-owned) projects.
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.
14. Contact for More Information
Embassy Baghdad Economic Section
Al-Kindi Street, International Zone, Baghdad
Office: +1-301-985-8841 x3013