International Construction Law Review
SPLITTING UP IS HARD TO DO: HOW TO MANAGE FISCALLY CHALLENGED TURNKEY CONTRACTS
JEFF DELMON
Allen & Overy, London 1
Turnkey construction contracts provide an effective method of managing risk within a construction project and imposing construction risks on the construction contractor. They place on one contractor responsibility for the design, procurement, installation, construction and commissioning of the whole of the works. The employer benefits from the single point responsibility of one contractor for the whole of the works, at a more or less fixed price and within a more or less fixed time for completion.
However, in some jurisdictions, turnkey contracts performed in that country have the unfortunate habit of increasing the tax liabilities of the construction contractor and consequently increasing the overall cost of construction.2
Also, the performance of one turnkey construction contract on works that straddle several jurisdictions can have unfortunate tax implications, exposing the construction contractor to tax liability on the combined value of works in different jurisdictions and causing problems in the taxation of asset management.
In such circumstances, the parties may wish to consider splitting the single turnkey construction contract into a number of separate construction contracts, with work performed by separate companies in the various jurisdictions rather than by branches of a single construction contractor.3
This split would be implemented so as to manage the risks related to tax exposure and other costs while maintaining the “turnkey” nature of the construction arrangements. The split structure is not simple to formulate and can require a significant amount of time and effort to implement.
This article discusses some of the most important issues which arise in relation to splitting turnkey construction contracts, introducing the types of contracts which may need to be split, the advantages of a turnkey contract which can be lost in the process of a split, the mechanics of splitting turnkey
1 The author would like to thank His Honour Judge Humphrey LLoyd, QC, David Wightman, Pat Dugdale, and Roy Freke for their advice and assistance.
2 See also, Scriven, Pritchard and Delmon (Eds.), A Contractual Guide to Major Construction Projects
(1999), Chap 9.
3 The performance of works by branches located in different jurisdictions or subcontracted to companies in those jurisdictions will not achieve the desired effect. It is the use of a single contract for these different works that attracts the adverse tax treatment.
Pt 1]
Managing Fiscally Challenged Turnkey Contracts
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