Kuwait's Zain, which has $430 million frozen in Iraqi bank accounts, has written to Iraq's prime minister saying Baghdad had breached a bilateral investment treaty between the two countries, said a source familiar with the matter.
The spat could worsen relations between the two Arab neighbours a few months after Kuwait let Iraq postpone paying $4.6 billion in war reparations until 2017, helping ease strains on Baghdad's finances following the slump in oil prices.
Zain is majority shareholder in Zain Iraq, the country's No.1 mobile operator by subscribers, which has the equivalent of 128.82 million dinars ($429 million) frozen in local accounts.
The freeze was implemented at the behest of Iraq's tax authority, which in 2011 said Zain Iraq owed $185 million in unpaid capital gains tax on the operator's $1.2 billion acquisition of rival mobile company Iraqna in 2007.
Unusually, the government has tried to levy capital gains on Zain Iraq as the asset buyer, rather than on the seller, Egypt's Orascom Telecom, which was later renamed Global Telecom . An Iraqi court is due to hear Zain's appeal against the tax bill on March 8.
Zain and Iraqi communication ministry officials declined to comment on the letter, while Global Telecom did not respond to requests for comment.
In the letter, to Iraq's Prime Minister Haider al-Abadi and several government departments, Zain argues the state had breached several of the terms of the investment treaty between Kuwait and Iraq, the source said, speaking on condition of anonymity.
Such investment treaties are reciprocal agreements to protect private investments by people or institutions from one country into the other, and typically allow for foreign investors to directly sue states over any dispute via international arbitration rather than through local courts.
Zain, which has successfully appealed against nearly $5 billion of fines and claims in Iraq, would still prefer to reach agreement with the government rather than pursue international arbitration, the source added.
Iraq's tax authority also says Zain Iraq, whose net profit last year was $122 million, owes $175 million in unpaid income tax for the years up to and including 2010.