MINIMIZING TAX PAYMENTS AND LIABILITY IN MAJOR PROJECTS THROUGH CONTRACTS MANAGEMENT TECHNIQUES. BDO Richfield Advisory Limited Tax & Legal Services

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2 MINIMIZING TAX PAYMENTS AND LIABILITY IN MAJOR PROJECTS THROUGH Duangnetr Sarachai 9 June 2009

3 Presentation outline Tax risk management Legal aspect consideration Tax planning & tax saving opportunities Identifying tax issues to avoid tax troubles Techniques to manage payment & contract management

4 Tax risk management

5 Tax risk management Understanding tax positions in your business Understanding relevant tax liabilities when entering into contracts Determining tax issues Proposing tax issues to your tax risks management team: accounting director, tax director, CFO, CEO,tax advisor Discussing on tax issues with your contractual party Requesting a tax ruling from Revenue Department

6 Legal aspect consideration

7 Legal aspect consideration Hire of work VS Sale of goods contracts Hire of work VS Licensing contracts

8 Legal differences: Hire of work VS Sale of goods contracts Hire of work Scope of works: required Completion of works: required Written evidence: not required Sale of goods Type or specification of goods: required Transfer ownership of goods: required Written evidence: required for civil lawsuit (from Baht 20,000)

9 Legal differences: Hire of work VS Licensing contracts Hire of work Scope of works Consideration for works performed Completion of works Written evidence: not required Licensing Description of license Consideration for the use of copyright, know-how, goodwill or other rights in similar nature including license and computer software Term of licensing Written evidence: not required

10 Tax consequences: Hire of work, Sale of goods and Licensing contracts Tax Liabilities Withholding tax Hire of works Sale of goods 3%,5% No Licensing 3% for royalty (5%-15% for offshore) VAT 7% 7% 7% Stamp duty 0.1% No No

11 Tax planning & tax saving opportunities

12 Tax considerations (onshore) Corporate income tax: Sec 65 & 3.6, D.R.No.Tor.Por.1/2528; Withholding tax, Section 3 tredecim, Departmental Instruction No.Tor.Por 4/2528, Clause 8: 40(7); Value added tax, Section 77/1(10), tax point Sec 78, 78/1, tax base Sec 79; and Stamp duty, type of instrument, tax point, Sec 113 or 114 and Clause 4 of Stamp duty Schedule

13 Tax planning for onshore contractor For instance: one construction project consisting of materials, equipments and labor, value of project: Baht 80,000,000. Tax planning 1. One contract combined materials, equipment cost and labor cost 2. Split contracts by separate entity

14 Tax consequences Only one contract combined materials cost and labor cost Corporate income tax 30% of net profit Withholding tax 3% of 80 M 2,400,000 VAT 7% of 80 M 5,600,000 Stamp duty 0.1% of 80 M 80,000 Total 8,080,000 VAT charged from Employer.

15 Tax consequences Split contracts by separate entity (Private ruling No.Gor Kor 0811/1391 dated 8 October 2545) Sale of materials and equipments: 70,000,000 Baht Hire of labor: 10,000,000 Baht Tax Materials Cost 70 M Labor 10 M Corporate income tax 30% of net profit 30% of net profit WHT 3% No 300,000 VAT 7% 4,900, ,000 Stamp duty 0.1% No 10,000 Total 5,910,000

16 Comparison of tax payable by each method Method 1 Method 2 WHT 2,400, ,000 VAT 5,600,000 5,600,000 Stamp duty 80,000 10,000 Total 8,080,000 5,910,000 Tax saving 2 2,170,000

17 Advantages and disadvantages of 1. Advantages 1. More convenient to prepare and arrange documentations 2. Easier to comply with the tax law 3. Avoid to have arguments with the Revenue officer 4. Hold VAT liability until receipt of payment Disadvantages 1.Cash flow 2.Tax refund may cause tax examination 5. Not require to prepare goods and materials record (VAT purpose) 6. No additional cost for new entity 7. Deduct tax credit with tax payable or refund tax

18 Advantages & disadvantages of 2. Disadvantages 1. The arrangement of documentation is complicated. 2. It is potential to argue with the Revenue officer in case of tax examination. Advantages 1. Goods portion is not subject to WHT. 2. It may have good cash flow. 3. Goods and materials record is required and stock shortfall is concerned. 4. There are additional cost for new entity. 5. Tax point of sale of goods arises upon the delivery of goods, before receipt of payment.

19 Tax planning for offshore entity Objective: Legally avoid having tax presence in Thailand Minimize tax payable

20 Tax consideration (offshore) Corporate income tax (permanent establishment) (Section 76 bis) Withholding tax : Departmental Instruction No.Taw Paw 4/2528, Clause 12 Double Taxation Agreement Value added tax (Section 85/3 & 83/6) Stamp duty (Executed in Thailand or executed outside Thailand and subsequently brought into Thailand Section 111).

21 Tax planning for offshore entity Permanent establishment: having Activity-type PE in Thailand :specified in DTA: construction, installation, assembly or supervision (Activity test) and Period 3, 6 months or 183 days in any calendar year or accounting period (Time-test) Connected project Period under the contract Include suspension period, holiday.

22 Tax planning for offshore contractor For instance: one construction project consisting of materials, equipments and labor, value of project: Baht 100,000,000. Tax planning Offshore supply contract: materials and equipment cost Baht 80,000,000 Engaging by A Co. Onshore supply contract: onshore materials and equipment, installation and construction cost Baht 10,000,000 and labor Baht 10,000,000 engaging by new Thai Co. Offshore supply contract executed outside Thailand and the ownership of offshore materials and equipments transferred outside of Thailand.

23 Tax consequences Tax Offshore 80 M Onshore 20 M CIT30% No On net profit WHT 3% No 600,000 VAT7% No 1,400,000 Stamp duty 0.1% No 20,000

24 Comparison of tax payable by each method Not split entity Split entity CIT 30% All net profit Onshore net profit WHT 5% of 100 M 3% of 20 M VAT 7,000,000 1,400,000 Stamp duty 100,000 20,000 Profit remittance 10% of profit remitted 10% of dividends

25 Split of contracts Intention of contractual parties to split contract : it is acceptable (how you draft the contract); Offshore portion: not tax in Thailand; Reduction of withholding tax payable - no withholding tax on sale of goods contract; No sunk cost of input tax, if any; Reduction of stamp duty payable - no stamp duty on sale of goods contract

26 Case study: Hire of work VS Sale of goods contracts Supreme Court Decision No. 124/2540 : Split of sale and service contracts concerning telephone network Supreme Court Decision No. 4450/2542: Split of sale price and service fees in one contract concerning telephone terminal and installation

27 Case study: Hire of work VS Sale of goods contracts Supreme Court Decision No. 8327/2544 Split of sale and service contracts concerning telephone network (PE issue)

28 Summary of Court decisions on the split of the hire of work and sale of goods contracts Split of sale price and the fee of hire of work in one contract is acceptable under certain following conditions: 1. The Court shall consider the context in the Agreement. 2. The contractor shall not have agent, employee or go-between upon the execution of the contract. 3. The contract must not agree that the contractor has obligation to provide the materials and equipment.

29 Summary of Court decisions on the split of the hire of work and sale of goods contracts 4. The price of materials and equipment are separately agreed from the price of the hire of work in the contract; 5. The transfer of ownership takes place outside of Thailand; 6. The terms of payment for offshore materials and equipment is not tied to the completion of hire of work.

30 Identifying tax issues to avoid tax troubles

31 Identifying tax issues to avoid tax troubles Tax consequences of entity entering into the major contract: Joint venture VS consortium Income recognition (Instruction No. Tor.Por.1/2528 Clause 3.6) [Supreme Court Decision No. 2744/2544] Advance payment and retention (DI No.Paw 73/2541, private ruling No.Gor Kor 0802/paw dated 16 July 2539) Royalty: the use or the right to use of equipments for the industrial, commercial, or scientific purposes (USA, India, Canada, Switzerland, Spain, etc.) Tax consequences incurred from subcontract: transfer of claim (Supreme Court Case 4413/2547)

32 Joint venture VS Consortium Joint venture - create new tax entity subject to definition of juristic company or partnership under Sec 39 of Revenue Code Consortium - not create new tax entity, then not subject to Sec 39 (Private ruling No.Gor Kor 0809/3072 dated 16 March 2543) (Private ruling No.Gor Kor 0811(Gor Mor.01)/ 833 dated 23 May 2543)

33 Criteria to be determined: Joint venture or Consortium (By RD rulings) Joint venture Joint capital Joint works Joint profit and loss Consortium No word contained as JV in the written agreement No joint capital Clearly separate works for each party No joint receipt of revenues No sharing of profit (Private ruling No.Gor Kor 0802/12307 dated 25 July 2539)

34 Tax consequences: Joint venture VS Consortium Joint venture Register as tax entity All income :30% in joint venture entity Register for VAT Tax invoice, receipt issued or received in the name of JV Consortium Not register Income received by each party shall be included in CIT computation of each party s accounting. Not register for VAT Tax invoice, receipt issued or received in the name of each party

35 Income recognition construction contract Accrual basis for construction business Matching Concept: cost of construction and percentage of completion of work - Amount of advance payment received greater than completion of work done: not be computed as taxable income in such accounting period (Instruction No. Tor.Por.1/2528 Clause 3.6) [Supreme Court Decision No. 2744/2544]

36 Techniques to manage payment & contract management

37 Techniques to manage payment & contract management Tax risk management contract drafting is not enough Tax compliance contract monitoring Contract interpretation lawyer, tax specialist Contract and accounting records documentation Tax audit and contract disclosure

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39 Presenter profile Name Position Expertise Duangnetr Sarachai Tax Manager, Tax planning for business contracts, international taxation, real estate business Contact Tel: details Fax: duangnetr.sarachai@bdo-thaitax.com

40 BDO profile specialises in providing tax and legal services to multinationals operating in Thailand and the Asia Pacific region. BDO Richfield Limited, the Thailand member firm of BDO international, is one of the largest accounting and advisory firms in Thailand.

41 BDO International BDO International is a worldwide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. BDO International is the world's fifth largest international accounting and advisory network, with over 1,000 offices in 110 countries and more than 44,000 professionals.

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