Download - Bridge Agreement (Lstkinternational 101126015601 Phpapp01)

8/6/2019 Bridge Agreement (Lstkinternational 101126015601 Phpapp01)

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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


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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
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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
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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?
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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?
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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


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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


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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.


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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


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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.


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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

Download - Bridge Agreement (Lstkinternational 101126015601 Phpapp01)

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