Tax Planning & Tax Risk Management for Construction Contracts

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1 Tax Planning & Tax Risk Management for Construction Contracts Conference on Drafting, Negotiating & Managing Successful Construction Contracts By Omega World Class May 2017, The St. Regis Bangkok presented by Picharn Sukparangsee 23 May 2017

2 Construction Contracts and Tax Risk The Eastern Economic Corridor of Thailand or the EEC, consists of Chonburi, Rayong, and Chachoengsao provinces. The Bill on Eastern Special Economic Zone Act or the EEC Bill is still pending, the main incentives to be provided might be as the following: - Exemption of Corporate Income Tax (CIT) for up to 15 tax years; - A land lease for years; - A five-year business visa; - Investor, management, and experts will be taxed on the net income at the rate of personal income tax of not exceeding 17%; and - A fast tracked environmental impact assessment or EIA.

3 Bill on Land and Building Tax Act On 28 March 2017, draft Bill on Land and Building Tax Act was proposed by the Cabinet to the National Legislative Assembly of Thailand ( NLA ) and will be considered by the NLA. The new law, if enacted, is to replace the existing law on house and land tax and law on local development tax. Land and building tax will be levied based on value of land and building. Key points of the Bill can be summarized as the following: 1. Taxpayers -Taxpayers will be owners of land, building, including an owner of a condominium unit and any person who is in possession of land or building which belongs to state. 2. Taxable property All land and buildings in Thailand are taxable. However, a tax exemption will be granted to certain categories of land and building e.g. land and building used for residential purpose (under the condition that value of such land/building must not be more than baht 50 million) and common property of a condominium 3. Tax base The tax base will be based on the value of taxable property which shall be based on the appraised value. In calculation of tax base of a building, the depreciation rate as specified by the Treasury Department will be taken into account.

4 Bill on Land and Building Tax Act (Cont.) Key points of the Bill can be summarized as the following (Cont.): 4. Tax rate The tax rate is varied and will depend on usage of taxable property as follows: - Land and/or building used in agricultural activities: not exceeding 0.2% of tax base; - Land and/or building used for residential purpose: not exceeding 0.5% of tax base; - Land and/or building used for commercial and/or industrial purpose: not exceeding 2% of tax base; and - Wasteland/building wasted: not exceeding 5% of tax base. 5. Tax collector Land and building will be collected by any of local adminstration where such land or building is located. Local administrations include Provincial Aministrative Organization ( PAO ), Sub-district Administrative Organization ( SAO ), The City of Pattaya, Bangkok Metropolitan Administration, and City/Town/ Sub-district Municipality.

5 Bill on Land and Building Tax Act (Cont.) Study is conducted in relation to real estate betterment tax for collection of tax form owners of real estates along infrastructure projects such as underground, express ways, trains and ports. Income tax and capital gain tax are both incorporated into the Revenue Code. Revenue and expenses of a company are subject to provisions of the Revenue Code. Transfer of real estate is subject withholding tax, specific business tax and stamp duty. Personal income tax is chargeable on net income of an individual. Corporate income tax is levied on net profits of a company.

6 Double Taxation Agreement (DTA) Capital gains on transfer of real state shall be taxed in a country where the real estate is located. Agreements include: Engineering agreement Construction agreement Installation agreement Consultancy agreement Sale agreement Service Agreement Loan agreement Guarantee agreement Assignment agreement Payment for hire of work or services is subject to tax. Payment for sale of goods is generally exempt from withholding tax. Payment for raw materials used in construction business must have tax receipts.

7 Double Taxation Agreement (Cont.) Loan Agreement Interest on loan must be chargeable and subject to tax Guarantee Agreement Guarantee fee must be paid and subject to tax Different of treatment between interest payable in respect of construction Interest before completion of project Interest after completion of project Sale of immovable project after 5 years by an individual is exempt from specific business tax. Individual holding and corporate holding of land and building must be carefully considered. Inheritance tax impacts real estate holding and real estate development. Gift tax is to limit an amount of real estate to be given to children of an owner. Lease of real estate is not subject to VAT. Service fee is subject to VAT. Input VAT from construction of a building cannot be deducted from output VAT. Input VAT cannot be used if input VAT is paid for construction of a building which is sold for let for a non-vat business within 3 years after completion of the construction.

8 Issues Division of agreements into sale agreement and service agreement might be challenged by the Revenue Department if sale and service are done by one company. Should separation of agreements still be made? Should one or two companies be used for a purchaser s side? Is a form of agreement still acceptable? Is substance over form applied in Thailand? What is construction or non-construction? How are receipts for raw materials be accepted by the Revenue Department? Can an average of input VAT for VAT business and input VAT for a non-vat business be made and adjusted? Tax arrangement should be prepared for input VAT to be able to be offset from output VAT.

9 Issue (Cont.) Construction and fees Input VAT from construction are as follows: design fee structure charge architectural fee consulting fee supervision fee Can input VAT on design fee, structure charge, architectural fee, consulting fee and supervision fee be used to offset output VAT? Construction, payments and VAT electricity system, air compression, air conditioning and lift are direct costs of services Can input VAT on electricity system, air compression, air conditioning and lift are direct costs of services be deducted from output VAT?

10 Issue (Cont.) What are difference between construction of a building and renovation of a building? Construction of a building Construction of a cement well for storage of water Building of steel structure as a garage Division of room with gypsum wall or with grating is not construction of a building; Addition of a storage room for extinguisher is not construction of a building. Sale agreement is separated from service agreement. Lease agreement is separated from service agreement. Buildings on land of MOF A company constructs a building on land leased from the MOF to be used as a hotel which shall be transferred to the MOF. Can the company use all input VAT from construction to be deducted from output VAT?

11 Bridges of BMA BMA bidding for 15 intersection bridges and agreements are divided into bridge construction agreement and installation agreement. What are Tax burdens? CIT WT VAT Stamp duty

12 Chicken processing farm A company constructed buildings at 6 sites, the company must make average of input VAT from construction of buildings from portions of use building areas. However, the Company cannot divide areas of buildings of which building is used for a VAT business and which building is used for a non-vat business. it is considered appropriate by the BMA to have an average of input tax in proportion of revenue in the past year of each of businesses. Can an average of input VAT from portion of a VAT business be deducted from output VAT for computation of VAT?

13 Expressway A company constructed an expressway under construction contract with EXAT (Expressway Authority of Thailand ) and received payments in forms of down payments, financial fees and interest, construction fees and interest, supervision fees and interest, the company must include revenue in proportion of percentage of completed works for payment of CIT on accrual basis. A company transfers assignment for payment under a payment certificate of B to a bank and a subcontractor, the assignment results in transfer of right of collection from a creditor to an assignee. A debtor is obliged to make payment to the assignee. Is the assignment a sale of goods or provision of service and subject to VAT? A company borrowed money from a bank for use of construction under construction contract. When the company completes and delivers each of phases of the works to B, B will issue a payment certificate to the Company. The company will then assign the right under the payment certificate of B and will issue a PN to the bank as security for payment and will receive money from the bank.

14 Expressway (Cont.) Is the company as a service provider is required to pay VAT? Is EAXT required to withhold tax on the payment? The company assigns the right under the payment certificate to the bank, such assignment does not affect liability of the company and B. When the bank receives payment from B on behalf of the company, the company must issue a receipt and issue a tax invoice to B. The company subcontracts some work to C. After completion of the subcontract work, the company will assign the payment certificate of B to C and C will assign right under the payment certificate of B and issue PN to the bank. Is the subcontractor required to pay VAT? The company makes payment to the subcontractor. Is the company required to withhold tax on the payment? Cooperation is made among government authorities including the Revenue Department, the Customs Department and the Department of Business Development. VAT has different treatment from customs duties. A tax I.D. number of a payer and a tax I.D. number of a payee are required by the Revenue Department.

15 Case Study I (Sale and Service) Com A Com B Sale Com C Com D Service

16 Case Study II (Sale and Installation of Machinery) Co 1 Sale of machinery Co 2 Subcontract for installation of machinery Co 3 Resale of machinery Co 4 Installation of machinery

17 Case Study III (Guarantee, lending, sale and service) Exim Bank Insurer Com Lender Seller Service Provider Purchaser Employer

18 Thank you very much for your kind attention BANGKOK GLOBAL LAW OFFICES LIMITED 540, Unit 1705, 17th Floor Mercury Tower, Ploenchit Road, Lumpini Sub-district, Pathumwan District, Bangkok Thailand Tel: +66 (0) Fax: +66 (0) picharn@bgloballaw.com