Industries that require significant investment in infrastructure and machinery, such as the oil and energy sectors and large government projects, tend to contract foreign companies to carry out Engineering, Procurement, Construction and Commissioning (EPCC) projects. These contracts, which can be worth hundreds of millions or even billions of dollars, include a range of large-scale activities.
Tax strategies in EPCC contracts
Traditionally, in order to minimize the tax burden in countries such as Malaysia, multinational companies would fragment these contracts into different parts, assigning a significant portion of the profits to foreign entities. However, tax administrations have now set their sights on these types of practices.
Response from the tax authorities
Tax authorities worldwide have identified these practices as aggressive tax planning. They are tackling these strategies from various perspectives, including:
- Transfer Pricing: Assessing whether the profits declared in the country comply with the arm’s length principle, that is, whether the remunerations are consistent with the functions, assets and risks faced by the various companies.
- Anti-Avoidance Rules: Questioning whether the profit split has a valid commercial justification.
With access to reports such as Country-by-Country Reporting (CbCR), tax authorities can obtain a complete overview of the operations of a multinational group and compare the level of profits declared in each jurisdiction. In addition, tax treaties allow for the exchange of information between countries, facilitating more effective taxation.
Implications for multinational companies
Given the increasing scrutiny, it is essential that multinational companies review their tax strategies related to EPCC contracts. They must ensure that their transfer pricing practices accurately reflect the creation of value in each jurisdiction and that the documentation supports the profit allocations made.
Conclusion
Fragmenting EPCC contracts is no longer a viable strategy for tax avoidance. Tax authorities are equipped with tools and international agreements that allow them to identify and challenge aggressive tax planning practices. It is imperative that multinational companies adopt transparent tax practices and comply with the regulations in force in each country where they operate.
TPC Group: Your partner in Transfer Pricing
At TPC Group, we understand the complexity of international tax regulations and the importance of proper tax planning. Our team of experts is prepared to advise your company on the implementation of transfer pricing strategies that comply with current regulations and optimize your tax position. Contact us today for a personalized consultation and ensure the compliance and success of your global operations.
Source: The Sun