Effective Tax Risk Management in Managing Construction Contracts & Projects

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Norah Hines
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1 Effective Tax Risk Management in Managing Construction Contracts & Projects presented by Picharn Sukparangsee at The Conference on Construction Contract Summit 2016 arranged by OMEGAWORLDCLASS from 14 to 15 June 2016 at Sheraton Grande Sukhumvit, Bangkok 1

2 Effective Tax Planning & Tax Risk Management in Managing Construction Contracts & Projects Key elements and advantages of Effective Tax Planning Understand basic principles of taxation law of Thailand, its rules and regulations. Taxation law of Thailand is applicable on worldwide basis, not on territorial basis. Tax rulings must be carefully reviewed to learn facts and interpretation of the facts by the tax officials and to understand policy of the Revenue Department. Judgments on tax cases of the Supreme Court of Thailand should be examined and analyzed. Review transactions and structure of a company for tax efficiency. Regularly update important tax rules, regulations, cases and rulings. Thailand has land and house tax law and local municipality tax law but has no property tax law in its real nature. Property Tax Bill On 7 June 2016, the Cabinet of Thailand approved in principle a Bill on Land and Building Tax B.E. ( Bill ), if enacted into an Act, which shall repeal the existing Land and Building Tax Act B.E (A.D.1932) and the Local Development Tax Act B.E (A.D. 1965). The objective of this Bill is to enhance efficiency in tax collection by the local government authorities and to improve system of Land and Building Tax The key features of the Bill are as follows: 1. Taxpayer An individual or a legal entity who a) owns land or building; or b) possesses or utilizes the government-owned land and/or building 2. Organization responsible for tax collection: Sub-district Municipality, Town Municipality, City Municipality, Sub-district Administrative organization, Bangkok, and Pattaya The land and building tax collected will belong to the local government authority collecting them. 3. Subject of tax The land and building tax will be levied on land, building and condominium. 4. Tax base Appraisal value pursuant to the Land Code 5. Ceiling tax rates (a) (b) 0.2% of appraisal value for land used for agricultural purposes; 0.5% for residential use; 2

3 (c) (d) 2% for commercial use; and 5% for vacant or undeveloped land 6. Exemption (a) State-owned property not used for commercial purpose; (b) Private property that a government agency can use for the purpose of public interests; (c) Public property; (d) Embassy-owned property; (e) Common property in condominium and housing development; and (f) The first house with an appraisal price below 50 million baht 7. Range of tax rates for each type of properties (a) Agriculture use: from 0% to 0.1% (b) Residential use: - The first house with an appraisal price below 50 million baht is exempted. - For the first house with an appraisal price exceeding 50 million baht, only the exceeding amount from 50 million baht is subject to land and building tax at the rate from 0.05% to 0.1%. - Other houses: from 0.03% to 0.3% (c) Other land and building for commercial use will be taxed from 0.3% to 1.5% (d) Vacant or undeveloped land: from 1% to 3% and the rate will be doubled every 3 years if the land remains unused. Revenue Code of Thailand Personal income tax source doctrine and resident doctrine total income expenses and allowances new tax exemptions or reductions net income and progressive tax rates Corporate income tax A company incorporated in Thailand or a company incorporated under laws of a foreign country and carrying on its business in Thailand shall pay tax on net profits arising in Thailand and in foreign countries. A company incorporated under laws of a foreign country and carrying on businesses in other countries and in Thailand shall pay tax on net profits arising from or in connection with business carried on in Thailand only. Recognition of revenues and expenses on accrual basis as opposed to cash basis for personal income tax 3

4 Deductible expenses expenses related to the business of the company, not personal expenses expenses shall have receipts Non-Deductible expenses expenses not related to business of the company personal expense, gift Personal income tax is chargeable on a source basis and a resident basis. Corporate income tax of Thailand is collectible on the principle of incorporation, not the place of central control and management. Capital gain tax is part of income tax under Thai taxation law. Value added tax (VAT) VAT is levied on sale of goods, provision of service, and import of goods and service. But export of good and services is 0% or exempted from VAT Customs duty is imposed on value of the goods and royalty payable, if any, by a Thai subsidiary to its parent company. The standards rate of 10% VAT have been temporarily reduced to 7% for many years. Exemption for VAT lease of immovable property is exempted from VAT. VAT invoices for construction business may not be used for VAT of a company. Export of service Service is wholly used in foreign countries, 0% VAT is available. Service is partially used in Thailand, 7% VAT is applicable on service used in Thailand. Specific business tax specific businesses such as banking, insurance and real property businesses. 3.3% specific business tax is applicable on revenues from real property business. Stamp duties Stamp duty must be affixed on any of instruments made or brought into Thailand Transfer of land and/or building is subject to transfer fee, withholding tax, specific business tax or SBT and/or stamp duty 0.5 % stamp duty is generally chargeable on a transfer of real property 4

5 Exemption or reduction of stamp duty on sale of real property may be used in Thailand to promote real estate business while stamp duty is applied in a foreign country to control excessively speculative real estate business. DTA As of 1 June 2016, Thailand has 60 double taxation agreements with its counterparties. Double taxation agreements between Thailand and its counterparties cover only income tax and petroleum tax, not value added tax and specific business tax Benefits to residents of the contacting states only allocation of income and capital gains Specific income and other income Relief from double taxation- exemption method and credit method Exchange of information 15 action plans in respect of BEPS are under study by the Revenue Department of Thailand. Sale office and car repair centre A building for a sale office and car repair centre was built by a company. All expenses were used for calculation of VAT. Later, part of the building is let out to tenants. As result, areas of the building were used for VAT and non-vat businesses. The company cannot claim for all input taxes arising from construction of the building but input tax shall be proportionated. Construction of a cement well and a garage Construction of a cement well and a garage constitute a building. Such building must be used in a VAT business. The building was later used or leased out for a non-vat business within 3 years from the tax month of completion of the building. Input VAT from such building is a prohibited VAT and cannot be offset against VAT output. Purchase of land and building A company purchased land and building. Subsequently, the company purchased another land and building and terminated the previous agreement on the purchase of land and building and used the number of the previous building and notified the change later. It shall be deemed that the Company sold the first land and building and the input VAT from the payment for materials and the payment for the design of the first building is the prohibited input VAT to be deducted from the output VAT. 5

6 On the other hand, the company made the payment for materials and the payment for the design of the second building, the payments are deemed to be the input VAT which is direct and relevant to the business operation of the Company, as a result, the Company can offset the input VAT from the output VAT. Transfer of ownership of buildings and fixtures Transfer of ownership of buildings and fixtures to a government authority is not required to be registered with the Department of Land, Company A by Company B is not required to pay specific business tax Building for office of a company Company A is a VAT registrant and built a building for its own business, car sale business, which is subject to VAT on land of Company B. Company A is entitled to offset input tax against the output tax at the time of start of construction of the building. Sale and Construction Agreement Sale and Construction Agreement is divided into sale price and construction price between a foreign company and a government authority. Payment for construction made by the government authority to the foreign company is subject to 1% withholding tax. Sale of condominium unit Condominium unit A is not common property to be required to be transferred under Section 15 of the Condominium Act. Company A transfers condominium unit A to the juristic person without any compensation, a tax official has power to assess compensation at the market price on the date of the transfer. Free Zone A company in a free zone takes cars from the free zone to be kept at the warehouse of the company outside the free zone, the company is regarded as an importer and shall pay VAT on cars and the VAT liability arises on the date on which the cars are taken out of the free zone not for export. Computer Program A company sells and installs computer programs to its customers and ownership of the software belongs to the software ownership company. It falls under service, not sale and shall be subject to VAT at the time of the payment. Service out of Thailand 6

7 A company proceeded for repair and addition of a gymnasium located in a foreign country which falls within service provided out of Thailand. The payment received by the company is not subject to VAT. The company is not required to pay VAT and issue the tax invoice. Payment for mould delivered in Thailand A Thai company made the payment for manufacture of the mould to a foreign company which sent its employees to install the mould, provided advice and had a test run of the mould for 1 or 2 weeks in Thailand, it is deemed that the foreign company carried on its business in Thailand. If an agreement does not provide for the right to make a copy, to modify and to distribute the use of the mould and for the transfer of technology, the payment is regarded as business profit. If the foreign company which is incorporated in a country having DTA with Thailand, does not carry on its business in Thailand and has no permanent establishment in Thailand, the foreign company is required to pay tax in Thailand. Specific Business Tax If a buyer pays government fee, tax, withholding tax and specific business tax in place of the seller, the seller shall include the fees and the taxes paid by the buyer as the revenue of the seller for computation of corporate income tax in a relevant accounting period. The fee and the taxes on the sale and purchase of land paid by the buyer in place of the seller are in the nature of investment on the land and are prohibited from being deducted as expenses. Software The payment for use of software is subject to withholding tax. Training of personnel for utilization of the software is related to the royalty which is chargeable to tax. Payment of royalty The rate of withholding tax for payment for the use of software may be reduced under certain DTA between Thailand and its counterparties. Tax Planning Exemption or reduction of tax should be explored. A lot of companies are widely used in the construction business. Combination or separation of agreements depends upon facts and circumstance including tax consideration. Supply agreement is used in cross border transactions. Engineering agreement may be separately prepared from Supply agreement. Service agreement in Thailand is subject to withholding tax but service agreement in a foreign country is subject to withholding tax unless a foreign company does not carry on its business in Thailand, is incorporated under law of Thailand and does not have a PE in Thailand. Lease agreement should be separated from service agreement. 7

8 International property management agreement may result in payment for know-how. Payments made under technical service agreement by a Thai company to a foreign may or may not be subject to withholding tax. Expenses for computation of the corporate income tax must be supported by receipts. A separate company may be incorporated to secure receipts for expenses. Employment agreement is not subject to VAT but service agreement is subject to VAT. Sale of real property and sale of personal property differ in terms of tax liability. Foreign companies are still used to hold shares in Thai companies for tax planning. Funding for construction projects in Thailand may be made by foreign banks for legal and tax reasons. Repayment of the principal amount of the loan is not subject to tax. Interest is subject to withholding tax unless interest is exempted from withholding tax if interest is paid to a foreign government or any government authorities as provided in DTA. Interest for payment for land, building and machinery may be deducted as revenue expenses or may be allowed as capital expenditure which is dependent on type of interest payable. Front-end fee, standby fee, management fee and agency fee under financing agreement may be regarded as business profit or interest. Loan agreements between companies may provide for different interest rates for tax reasons. Guarantee fee must be chargeable for guarantee by a parent company to secure payment by its subsidiary. Joint venture or consortium may be carefully explored for construction of a project in Thailand by a foreign company. Gross-up provision should be allowed for cross-border transaction only. A domestic transaction should not have a gross-up provision. 8

9 Thank you very much for your kind attention BANGKOK GLOBAL LAW OFFICES LIMITED Rajanakarn Building, 20 th Floor, 3 South Sathorn Road, Sathorn, Bangkok 10120, Thailand picharn@bgloballaw.com Tel: +66 (0) Fax: +66 (0)

Tax Planning & Tax Risk Management for Construction Contracts

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