CONSTRUCTION PROJECT RISK MANAGEMENT 2014

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‘CONSTRUCTION PROJECT

RISK MANAGEMENT 2014’

Managing Tax Risk in Construction Projects

Ruji Aphiworakitphan

BDO Advisory Limited

Tax & Legal Services

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Presentation Outline

Tax considerations:

Project Owner & Contractor

Tax planning:

Pre-construction

Tax monitoring:

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Tax Risk Management Page 3

Tax Considerations

on Construction Contract

Project Owner & Contractor

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Tax Considerations on Construction Contract

Project Owner Contractor

Depreciation Offshore & onshore contractors Deductible &

non-deductible expenses Income recognition VAT creditable Sale of goods & hire of work

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Tax considerations: Project Owner

Depreciation of construction project: the project is ready to use – when?

• Installation • Commissioning • Test –run

• Completion and deliverable

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Tax considerations: Project Owner

Deductible and non-deductible expenses – What?

During the construction: capital expenditures e.g. transport fees, interest, taxes, government fees, cost of equipment and services, etc.

After completion of construction: non-capital expenditures (but not include renovation or refurbishment) e.g. interest, service fees: technical support, supervisory and maintenance

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Tax considerations: Project Owner

VAT Creditable

• Input VAT on sale of goods and import of goods

• Input VAT on provision of services

• No VAT on hire of service (employment of its employees)

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Tax considerations: Project Owner

VAT Non-creditable

• Input VAT incurred from the construction of building for usage in the non-VAT business

• Sale or lease out or use of the building in non-VAT business within 3 years from the tax month of completion of

construction but not include certain transactions e.g. business rehabilitation, partial and entire business transfer,

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Tax considerations: Project Owner

Withholding Tax Liabilities

• Offshore constructor: non-DTA tax resident and DTA tax resident (business profit and PE, royalties) and tax rates • Onshore constructor: hire of work (service, transport)

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Tax considerations: Contractor

Joint Venture or Consortium Offshore & Onshore Contractor

• Offshore contractor: PE, Alien Business License, work permit

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Tax considerations: Contractor

Income Recognition: Accrual basis

• Percentage of completion contract method: cost to cost and engineering survey/report

(Thai Accounting Standard No. 11 (amended 2009))

(Departmental Instruction No.Tor.Por.1/2528, Clause 3.6) Supreme Court Judgment No. 2744/2544

ruled to support the percentage of completion method

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Tax considerations: Contractor

Stamp Duty

• Construction contract is a hire of work contract – subject to stamp duty

• Liable person: contractor (unless agreed otherwise to be borne by the customer)

• Stamp duty: every Baht 1 for service fee of Baht 1,000 without maximum

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Tax planning

Pre-construction

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Tax planning: Pre-construction

Onshore Contractor

• Split of contracts: sale of goods and services – to reduce withholding tax and stamp duty

• Elements of sale contract and service contract should be

absolutely separated: purpose of contract, contract price etc. • Seller and service provider is not necessary to be separated

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Tax planning: Pre-construction

Onshore Contractor: Precedent Cases of Split of Contracts

Revenue Department Ruling No. GorKor. 0702/2301 dated 24 March 2009

• Objective of the Company is to provide construction services • Split contract for sale of materials and construction

• The price per sale contract and service fee per construction

contract are both income from hire of work

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Tax planning: Pre-construction

Onshore Contractor: Precedent Cases of Split of Contracts (cont.)

Supreme Court Judgment No. 2091/2553

• Construction of Electricity, Communication, Sanitation and Air

Condition System

• Split contract for sale and service separately, separate scope of

work/objectives, goods price/ service fee, payment term

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Tax planning: Pre-construction

Offshore Contractor

• Split of contracts: sale of goods and services

• Subcontract of onshore construction works to local contractor to avoid PE and Alien Business License

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Tax planning: Pre-construction

Offshore Contractor: Split of contracts

• Sale of goods is not subject to withholding tax and stamp duty • Offshore supply contract shall be executed outside Thailand (no

employee, agent or go-between in Thailand dealing with the customer for the sale)

• Ownership of offshore goods shall be transferred to the customer outside Thailand

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Tax planning: Pre-construction

Offshore Contractor: Split of contracts (cont.)

• Provision of offshore services may be exempt from withholding tax under the double tax agreement depending on nature of services.

• Self-assessed VAT for the project owner would not be a cost and would be creditable for VAT business.

• Stamp duty only applies to service contract.

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Tax planning: Pre-construction

Offshore Contractor: Avoiding PE under the Double Tax Agreement

• No fixed place: office, building site, etc (Asset test)

• No qualified activity: construction, installation, assembly or supervision (Activity test); and

• No qualified period of time: 3, 6 months or 183 days in any calendar year or accounting period (Time-test)

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Tax planning: Pre-construction

Offshore Contractor: Secondment

• Secondment of foreign employees to the subcontractor and not be reimbursed their remuneration to the offshore contractor • Foreign employees obtain work permit under the employment

of subcontractor

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Tax Monitoring

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Tax monitoring: During & Post-construction

Implementation of Tax Planning

• period of services performed in Thailand, invoicing, reimbursement

Contract Monitoring

• party who bears the tax payment, gross up price and tax on tax calculation

Withholding Tax

• double tax agreement, due date, tax rates and filing

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Tax monitoring: During & Post-construction (cont.)

Self-assessed VAT

• service provided outside Thailand and use in Thailand, due date and filing

Documentation

• transfer pricing, stamp duty and period of retention of documents

Tax Audit and Disclosure of Information

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BDO

THAILAND

Tax & Legal Contacts

RUJI APHIWORAKITPHAN

Manager

Tax & Legal Services

ruji.aphiworakitphan@bdo-thaitax.com Telephone: +662 260 7290

Mobile: +6687 695 9451 Fax: +662 260 7297

Qualifications

Bachelor of Law degree from Thammasat University and Graduate Diploma from Institute of Legal Education of the Thai Bar.

Experience

Ruji has over 8 years experience providing tax and legal advisory services. Ruji specialises in advising on, personal income tax,

corporate income tax, value added tax, stamp duty and property tax. She also has significant experience in advising on tax planning and carrying out tax review and tax due diligence assignments.

Tax Risk Management Page 25

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BDO PROFILE

THAILAND

BDO Advisory Limited specialises in providing tax and legal services to multinationals operating in Thailand and the Asia Pacific region.

BDO Advisory Limited, a limited liability company incorporated in Thailand, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO is the brand name for the BDO International network and for each of the BDO Member Firms

INTERNATIONAL

BDO International is a worldwide network of public accounting firms, called BDO Member Firms, serving international clients. BDO International is the world's fifth

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BDO ADVISORY LIMITED

Tax & Legal Services

28th Floor, CTI Tower

191/16 New Ratchadapisek Road Klongtoey, Bangkok 10110 Thailand Telephone:+66 2 260 9467

TeleFax: +66 2 260 2680 Website: www.bdo.co.th

Tax Risk Management Page 27

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