Background

Construction projects can be very expensive. Moreover, they often involve a number of specialist technical service providers, some of whom may not be resident in Trinidad and Tobago (“T&T”), and will not be registered for Value Added Tax (“VAT”).

For unregistered recipients of vatable services, VAT represents a 12.5% uplift on the overall cost of the Project. But make no mistake: registered receipts of vatable services are also affected by upfront VAT costs. Specifically, not only must such costs be financed, which naturally affects cash flow over the course of the project, but the prudent finance manager is cognizant of the deleterious impact of the time value of money ¹ (i.e. that between the date the VAT expense is incurred, and the date a refund of overpaid VAT is received from the Board of Inland Revenue (the “Revenue”), the real value of the money to be refunded will have depreciated).

Tax Planning

Against the background that VAT is a real cost, multinationals seeking to do business in the region will be wise to consider whether opportunities exist to mitigate their exposure to VAT.

In T&T, the VAT Act is replete with opportunities for multi-nationals to limit exposure to VAT. One such provision is Section 12 of the 2^nd Schedule of the VAT Act, Chap. 75:06 (the “VAT Act”), which provides as follows:

“12. Any services which are supplied for a consideration that is payable in a currency other than that of Trinidad and Tobago, to a recipient who is not within Trinidad and Tobago at the time when the services are performed.” [Emphasis Added]

A supply of services falling within Item 12 is zero-rated, and is therefore not chargeable to VAT. The scope of this provision has been considered by the Court of Appeal in Bauhuis Coating International Limited v The Board of Inland Revenue, Civil Appeal No. 187 of 2011 (“Bauhuis”).

The material issue in Bauhuis was whether, in certain circumstances, commercial supplies made by a VAT registrant in T&T for the ultimate benefit of a person who is also within T&T, may nonetheless classify as a zero-rated transaction for the purposes of Item 12 of Schedule 2 of the VAT Act. The “certain circumstances” being the interposition of non-resident persons between the ultimate service provider and ultimate beneficiary in a supply chain of sub-contracted services.

The material facts of Bauhuis are as follows:

British Gas Trinidad and Tobago Limited (“BGTT”), a company resident in T&T, entered into a master contract with Allseas Marine Contractors S.A. Switzerland (“AS”), a company resident in Switzerland, for the procurement (“P”) and installation (“I”) of pipelines in T&T.

AS thereafter contracted with Bauhuis Coating Limited (“BCL”), a Cyprus resident company, to coat (“C”) the pipelines. BCL then subcontracted this responsibility to its wholly owned subsidiary, Bauhuis Coating International Limited (“BCIL”), which was resident in T&T. BCIL thereafter physically executed the pipe coating services within Trinidad in accordance with the contract (the said contract) with their parent Company BCL.

Chart of Service Supply Chain:

BCIL regarded all its commercial supplies performed under the said contract as zero-rated under Item 12 of Schedule 2 of the VAT Act because, pursuant to its contract, it provided services (i) to BCL who was not within T&T at the time of the supply; and (ii) for a consideration that was payable in United States dollars.

During an audit of the value added tax returns the Revenue discovered the numerous contractual linkages in the procurement and installation of pipelines service supply chain, and formed the view that the commercial supplies provided by BCIL were subject to VAT at the then rate of 15%. BCIL filed an appeal against the assessment. Specifically, the Revenue contended that BGTT was the recipient within the meaning of Item 12 and since that is a T&T company carrying on business in T&T, the supply by the Appellant did not qualify to be zero rated.

The Tax Appeal Board, in affirming the assessment of the Revenue, based its decision in its judgement on the ground that the recipient was BGTT for the purposes of Item 12.

Issue:

Ultimately, the decision of the Court of Appeal turned on the definition of “recipient” in the VAT Act.

The Decision

The term “recipient” under the Act does not envisage a third party – i.e. some remote person who between himself and the supplier has no liability for the consideration or the tax, but at some point down the chain of supply may derive a benefit from a supply made higher up the chain. Instead, the recipient is an immediate party and/or counterparty to the transaction in respect of the supply. The counterparty for such purposes can be identified as the person: –

(a) To whom the registered person is [contractually] obligated to provide the commercial supply;

(b) To whom the registered person is obligated [pursuant to the VAT Act] to provide the tax invoice; and

Crucially, the Court concluded that the Revenue was not permitted to ignore the intermediate contracts between BCL and AS as having no commercial or business purpose apart from the avoidance of a liability to tax and hold that there was once single composite transaction between BCIL and BGTT unless there are two findings of fact:

(i) There was a preordained series of transactions, i.e. the single composite transaction (e.g. pre-ordained that BCIL and BGTT will be the supplier and beneficiary); and

(ii) that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage (AS and BCL add no value and were solely interposed in order to derive a tax benefit),

Bauhuis has been more recently applied in the Tax Appeal Board’s decision of T Limited v the Board of Inland Revenue, Tax Appeal Nos. v33 – 40 of 2009.

Implications

The decision affirms the sacrosanct rule of privity of contract² by declaring that the Revenue must consider the immediate commercial arrangements set up between two parties to a contract and the attendant obligation of each party, albeit there are a series of linkages along the supply chain by virtue of several subcontracts.

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CAVEAT

The views expressed in this article are the views of the author(s) only and shared for discussion and information purposes only; they are not intended to constitute legal advice. Readers are encouraged to consult with their professional advisors for advice concerning specific matters.

DISCUSSION FORUM

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The time value of money refers to the observation that it is better to receive money sooner than later. Money that you have in hand today can be invested to earn a positive rate of return, producing more money tomorrow. For that reason, a dollar today is worth more than a dollar in the future. (Gitman, L. J., & Zutter, C. J. (2012). Principles of managerial finance. Harlow: Pearson Education)
The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such.