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1. Overview and Background:

Ard

Al-

Futtaim

For General Trading

Company

Ltd.

(

Accept space

(

Ard

Al-

Futtaim

) was established on May 30th, 2012 in Baghdad – Iraq. The entity has ceased the operations and the

company

has an

intercompany

loan

balance

its

balance

sheet as payable to the parent

company

.

Ard

Al

Futtaim

is not in a position to repay the

loan

balance

due to it does not have adequate

cash

and is making losses. The

loan

was given by

Ard

Al

Futtaim

’s shareholder ‘Select Auto’ which holds 100% shares in

Ard

Al

Futtaim

. The extract of the 2018 financial statements as reflecting the below: Description Amount (In IQD) Extract Of Accumulated Losses 5,798,662,980

Balance

Sheet

Account

code 22 Short Term Loans 5,318,545,830

Balance

Sheet

Account

code 242 2. Discussion Due to the landscape is complicated and not very easy in Iraq, the options for the

intercompany

loan

waiving should be discussed and decide for the pre-preparation of the liquidation stage. The

loan

offset options had been summarized under three options. 2.1. Netting of the previous

year accounting

Accept comma addition

year, accounting

losses against to

intercompany

payable

/

loan

From the audit

standpoint

(accounting or presentation of financial

statement

), the

transaction

itself easy in terms of accounting adjustment in two

balance

sheet accounts.

However

, in the meantime, there is some

kind

of documentation to be put in place, if

this

transaction

is questioned,

in other words

, it should able to

kind

of support. As per Deloitte

practice

and

experience

in another

company

which located in Kurdistan Region - The shareholder meeting is needed where the branch manager as well should be involved, -

This

meeting minutes should be attested by the

company

register in Iraq From the

tax

legislation

standpoint

, there should be no

tax

payable

since

Suggestion

for

the

transaction

doesn’t have any P&L

impact

.

This

kind

of

transaction

doesn’t occur very often as per the Iraqi

Tax

Legislation, but as

Deloitte

Suggestion

a Deloitte experience

experience

in Iraq Kurdistan Region, it’s possible to execute without any

tax

burden.

However

, the

Ard

Al

Futtaim

is located

Suggestion

are located

in the Federal Iraq region, both authorities have the same

approach

with slight changes, but it indicates that

this

option

can apply in the same

approach

. 2.2. Capitalization of the

intercompany

payable

/

loan

The Capital Increase scenario can be challenging, due to

this

option

has not been tested in Iraq as per Deloitte

experience

.

On the other hand

,

this

process should be very much administered by the lawyer and legal teams. There may be some certain conditions; -

the

Suggestion

The

capital increase may require to prove that sufficient

cash

balance

need to keep in the

bank

account

-

such

Suggestion

Such

kind

of a capital increase (without injecting the

cash

for capital increase), it cannot be ensured whether can be implemented in Iraqi

practice

or not, - From the accounting and legal

standpoint

,

this

option

may be challenging Since

Ard

Al

Futtaim

does not have

this

cash

balance

in the

bank

account

,

this

option

may be considered in the future. To pursue

this

option

in the future,

this

option

is highly required

cash

transfer through the

bank

account

to prove

/

show it as a

balance

in the

bank

account

could be a deal-breaker. 2.3. Waiver to

intercompany

payable

/

loan

balance

From the audit

standpoint

(accounting or presentation of financial

statement

), the

transaction

may not require many formalities and the easiest

option

from

this

view. From the

tax

point of view,

such

a

transaction

routed through the

income

statement

may trigger the

tax

implication.

This

option

can be seen as a

benefit favor

Accept comma addition

benefit, favour

benefit favour

the parent

company

by

Suggestion

with

the

Tax

Authority

and it should be recognized as taxable revenue. In

practice

, the

tax

authority

has the deemed profit

approach

which treats 20% of the revenue generated from the main activities and 100% of the other

income

as

Suggestion

at

the corporate

tax

base. According to the deemed profit

approach

, the waiver of the

loan

can be seen as one of the

transaction

, it may not be correlated with the main activities of the

company

by the

tax

authority

. In

this

case, the

transaction

amount will be treated as 100%

taxable

Suggestion

tax

revenue. So,

this

option

carries the highest financial burden potential in terms of

tax

legislation varying 3% (20% x 15%) to 15%. Waiving the

loan

is the least

favorite

something regarded with special favor or liking

favourite

because it has the P&L

impact

and it may trigger the

tax

impact

. 3. Conclusion & Recommendation The options had been discussed, accounting & audit, corporate

tax

, and legal

standpoint

. In the light of the aforementioned discussions, it’s agreed to focus the energy and effort on the

first

option

.

Tax

Point of view, since

this

transaction

has not an

income

statement

impact

, we do not anticipate any

income

or

tax

to be raised from

this

transaction

. Since the advance assessment has not been implemented in Iraq Legislation, the only possibility is the submission of the

tax

the return and financial

statement

and leave it to the

tax

authority

to provide its own feedback on the

tax

liability. As per Deloitte’s

experience

in the

practice

, the

tax

inspectors very likely to focus on

income

statement

items rather than

balance

sheet items, since usually, they can trigger more

taxability

. Due to the main concentration on the

income

statement

, relatively

option

one (netting of the previous

year accounting

Accept comma addition

year, accounting

losses against the

intercompany

loan

) has the least risk for additional financial &

tax

burden and it carries

the low

Suggestion

the lowest

lower

risk of

tax

authority

being aware of

this

transaction

.