Tax n Construction Contract

Denial Defoe, of Robinson Crusoe, in his book “The Political History of the Devil” stated “only two things in life are certain – death and taxes.” As per Roman Philosopher Lucius Seneca, everything we do has a tax attached to it like waiting around is a tax on travellling, theft is a tax on aboundance, Rumars and gossips are taxes for public fame, divergence and random frustration are taxes for happy relationship, stress and problems are taxes on success and so on.?

However, in case of a country’s economy, As per the data, it is beyond the doubt that substantial portion of taxes comes from the construcion industry due to the size of economy involved in it and one of the major body of taxes therein is Value Added Tax (VAT), where is a always unforeseen height of uncertainty. Even when parties think they have addressed the matter, any imprecision in wording the relevant clause could find them in a surprising situation.

A poorly drafted contract can often result in unintended consequences when it comes to VAT and the parties’ responsibilities. Neither of the parties in construction wants to face the costly mistake of having to absorb unexpected VAT costs in their bottom line. Construction contracts by their nature are complex. VAT can create significant cash flow issues and reflects 7.5% of the contract price, it is important that all terms and conditions anticipate possible VAT obligations for both parties.Therefore, a contract should address each of the fundamental areas to avoid ambiguity and limit risk of VAT liability. For example, if the materials are being brought in under a VAT deferral arrangement, the contract price in total will still be subject to VAT unless the contractor is importing the materials as agent of the developer. When the contractor issues their invoice, they need to be clear that the costs are exclusive of VAT so that when VAT is applied to the invoice no “double taxation” occurs. ?

Tax Under FIDIC

FIDIC clarifies that Taxes such as VAT are payable under the applicable law for the works or services that are being provided / being paid for, and so they vary greatly around the world. For this reason FIDIC does not make express provision for VAT in the General Conditions of Contract - this is a matter for the Employer to address in the invitation to tender so that all tenderers know when, where and at what rate VAT is payable.

However, there are few general provisions for tax in FIDIC General conditions of the Contract where the Contractor has the obligation for the tax and shall indemnify and hold the Employer harmless against and from the consequences of any failure to do so.

FIDIC Sub-Clause 1.13 states “the Contractor shall give all notices, pay all taxes, duties and fees, and obtain all permits, licences and approvals, as required by the Laws in relation to the execution and completion of the Works and the remedying of any defects; and the Contractor shall indemnify and hold the Employer harmless against and from the consequences of any failure to do so, unless the Contractor is impeded to accomplish these actions and shows evidence of its diligence.”

FIDIC Sub-Clause 6.2?states “The Contractor shall inform the Contractor’s Personnel about their liability to pay personal income taxes in the Country in respect of such of their salaries, wages, allowances and any benefits as are subject to tax under the Laws of the Country for the time being in force, and the Contractor shall perform such duties in regard to such deductions thereof as may be imposed on him by such Laws.”

FIDIC Sub-Clause 14.1 states “the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract, and the Contract Price shall not be adjusted for any of these costs except as stated in Sub-Clause 13.7 [Adjustments for Changes in Legislation];”

?and “Notwithstanding the provisions of subparagraph (b), Contractor’s Equipment, including essential spare parts therefor, imported by the Contractor for the sole purpose of executing the Contract shall be exempt from the payment of import duties and taxes upon importation.”

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Tax Under JCT and NEC3

In the JCT Standard Building Contract with Quantities, the tender price is expressed as being “exclusive of VAT” and the Employer is to pay “in addition” any VAT properly chargeable in respect of the amount.?This makes it clear that VAT is payable on top.

However, under the NEC3 form, the position is less clear. In a number of the different options under the NEC engineering and construction contract, clause 50.2 states that “Any tax which the law requires the employer to pay to the contractor is included in the amount due”. Although this could be read to mean that VAT is already included in the price, the guidance notes suggest it was intended to mean that VAT is to be added to the price for work/services done to calculate the amount due.

There is also an ambiguity under the NEC3 form because clause 50.2 refers to taxes “which the law requires” the employer to pay.?The law does not require an employer to pay VAT – the obligation is on the contractor / supplier to pay it to the Government.

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Case Law for Tax

How risky it can be to leave the question of VAT whether is included in, or additional to, a price quoted in a contract unreciprocated, can be recognized from the resolution of English case law of E-Nik Ltd v Department for Communities and Local Government(2012). In E-Nik, a supplier of IT services claimed payment under a consultancy agreement at a specific hourly rate (￡850).?The contract did not address the issue of whether VAT was additional to, or included in, the rate.?The supplier claimed that VAT was payable on top of the rate, but the employer disputed this.?The judge Lord Burton, held that there was no agreement, either express or implied, that VAT should be added to the claimant’s fees.

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Adjustment for Changes in Legislation of Tax

Contracts typically include clauses that address the issue of changes that can be agreed by each party. In the case of fixed price contracts, a vendor could be at a loss if the VAT rate increases but the contract does not allow for any pricing changes that result from any change to the VAT rate. To avoid this, it is important to include language that entitles you to an increase in payment for a change in the contract price attributable to an increase in any VAT or other taxes that form part of the price of the contract. FIDIC has protection for the Contractor due to such changes in tax rate as it Sub-Clause 13.7 [Adjustments for Changes in Legislation] provides “The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.” This would entitle the Contractor to compensation where the payments of taxs is increased by changes of law.

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Conclusion

To be concluded, if a contract price is not stated to be exclusive of VAT, or if a contract does not require the employer to pay VAT over and above the contract price, the position may well be (as in E-Nik) that the contractor is – due to its oversight - stuck with the “inclusive” contract price. Moreover, as per the Value Added Tax Act, 2016 of Bangladesh (“the VAT Act”), the price charged by a person registered for VAT is deemed to include the tax whether or not the vendor has included the tax in their price . Therefore, silence is not golden, When it comes to the construal of provisions dealing with VAT for contractors (“Speech is silver, silence is golden" is a proverb extolling the value of silence over speech which modern form most likely originated in Arabic culture). In the absence of a clear and unambiguous term expressly stating that VAT is payable in addition to a quoted price, contractors may find themselves giving their Employers a surprising tax windfall.?