bridge agreement (lstkinternational 101126015601 phpapp01)
TRANSCRIPT
-
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
1/13
Lump-sum Turnkey
Tax considerations to reduce the local taxes by a split of the contracts.
By Rechtsanwalt/Steuerberater Dr. Ulrich Eder, Bangkok and Dsseldorf
-
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
2/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Lump Sum Turn Key Agreement
Turn key vs. component agreement
Test runs successfully completed
Interface and timing risks
Fit for purpose
FIDIC book master agreements
One combined package of contracts
Consistent and integrated provisions
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
3/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Legal Structure
Offshore Prime
Contractor
Local Principal
Offshore Sub
Contractor
Local Sub
ContractorChinese Sub
Contractor
Lump Sum Turn Key Engineering
Building construction
Delivery of components
Erection & assembling
Site supervision
Start-up & initial op
Exposes entire
contract revenue to
tax
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
4/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Tax Implications of the Agreement
Tax inefficiencies arising from a single consolidated contract for the entire work
and lump sum price
Under Local/German DTT sale of goods does not constitute a PE, but in
case of combined LSTK service part of the agreement constitutes a PE for
the whole scope of deliveries and services.
Under Local tax laws no withholding tax on sale, but in case of combined
LSTK withholding tax on the full remuneration amount.
Withholding tax can be credited against corporation income tax obligations,
if any.
Tax cash refund in general possible, but request usually causes in
aggressive tax audit.
Risk of adjustment, because less comparable data for mixed agreements.
Importance of duration of construction work? 6 months? 12 months?
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
5/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Split of the LSTK agreement
Offshore contract
- Offshore design and
engineering
- German
components
- Chinese
components
- Ownership trans-
ferred outside of
Onshore
- Offshore spare parts
Onshore contract
- Local engineering
- Local components
- Erection / assembling
- Building construction- Site supervision
- Start up & initial op
- Onshore spare-parts
- Onshore training
- Split of the contract- Split of the contractors
- Syndicated offer
PE of offshore
contractor?
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
6/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Umbrella Agreement
Comfort letter of the offshore company to the buyer/employer
Three main functions:
to assure that the service provider is financial capable to fulfill its
obligations, including penalties and damages claims.
to assure that buyer/employer has no problem to address the correctcontractual partner for claims and information
horizontal defense, prevent the contractors from relying on the defaults of
the other parties to avoid performing their contractual obligations.
No overruling and modification of service contract by cross-default clause or
taking over of service responsibility by seller
Umbrella Agreement should qualify as agreement not to be necessarily
disclosed to the tax authorities, because it is irrelevant tax-wise
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
7/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Consortium Agreement
Rights and obligations of each member
Allocation of costs, risks,
Internal chargeback
Secondment Agreements
Transfer of employees Internal costs allocation
Financing agreements
stand-alone conditions
no collateral in project
no reference to project
Procedures
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
8/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Rationale of the Split
Multiple contracts are not artificial, but required due to the complexity of the
project. The contractual arrangements are not composite but divisible.
The fact that all the agreements in a whole are designed as a turnkey contract
does not necessarily mean that the entire bundle of contracts must be
considered an integral contract for tax purposes.
The fact that separate and distinct obligations were set out with respect to the
supply and service components indicate that liability is different with respect to
various components.
With clearly separate payments for the offshore and the onshore supply of
goods and services, the contract should be viewed as having separate
performance requirements and not as something that must be read andapplied as a whole.
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
9/13
-
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
10/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Tax Implications after the Split
Offshore contract (Purchase part should be conducted by the Local company)
Profits are taxed abroad, tax authorities will look for Local PE
No withholding tax
Local tax authorities will try to reclassify offshore services as royalties
Onshore contract (Service should be rendered by the domestic company orbranch (PE))
Under the DTA profits are generally taxed outside of Onshore
If there is a PE in Onshore, it will be taxed here
Withholding tax of 3%, but deductible against profits
Stamp duty, if any, reduced to the service part
Remuneration has to be adjusted to arms length principles (transfer pricing)
Problem: Tax effects of the umbrella agreement
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
11/13
-
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
12/13
Dr. Ulrich Eder, Mulvana, de Angeli & Associates www.recht-in-thailand.com
Resum: Advantages and downsides
Split of LSTK agreement results in tax savings
Local onshore contractor can be affiliate to offshore company or its
branch.
Split results in risk transfer which has to be compensated by bridge
agreement. Any assistance fees paid from offshore to onshore contractor might be
classified as royalties with a withholding tax rate of 15%.
The art of Splitting the Agreement is more than a handcraft
Additional costs by the involvement of Local onshore partner
Non-tax: Offshore contractor does not need Local Business License
Structure is not in-line with FIDIC books.
Structure has to be agreed by both parties. Local principal will not take
over the tax risks.
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/ -
8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)
13/13
Dr. Ulrich Eder, Rechtsanwalt und Steuerberater
Mulvana, de Angeli & Associates Ltd.
Suite #1205, M. Thai Tower, All Seasons Place
87 Wireless Road, Bangkok 10330 Thailand
Cell: (6685) 112-5500
Tel: (662) 654-0350-4Skype: ulricheder
Email: [email protected]
Recht in Thailand: www.recht-in-thailand.com
http://www.recht-in-thailand.com/http://www.recht-in-thailand.com/mailto:[email protected]?subject=Lump%20Sum%20Turn%20Keyhttp://www.recht-in-thailand.com/http://www.recht-in-thailand.com/mailto:[email protected]?subject=Lump%20Sum%20Turn%20Keymailto:[email protected]?subject=Lump%20Sum%20Turn%20Key