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Construction Law/clause 13.7 Change in Legislation

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QUESTION: During course ofFederal Government revised the applicable Withholding Tax from 6% to 7%.  Contractor's Noticed the Employer under clause 13.7 of FIDIC 1999 for compensation.  Engineer's contention is that an increase in the withholding tax rate will not affect the Contractor in the performance of its obligations under the Construction Contract as there is no direct impact of such change on the Contractor’s performance, execution and delivery under the Construction Contract; rather tax change has a direct impact on the net amount of the Contract Price paid to the Contractor.  Furthermore, country law

Contractor's viewpoint is that withholding tax rate has been revised and the Employer is going to deduct Withholding Tax at higher rate from the Contractor which will reduce the Contractor's Net receivables.  Country Laws (Pakistan) Sales of Goods Act, 1930 clause 64-A also states that "In the event any tax on any goods being increased after the making of any contract...... the seller shall be entitled to be paid the net increase.."

SARWAR

ANSWER: Dear Sarwar

Sub Clause 13.7 entitles the Contractor to be reimbursed any increase in the taxes promulgated after the Base Date as defined in the Contract. Here only the rate of withholding tax has been increased. As I understand from your question that there is no change in the rate of tax on the total income. This supports the point of view of the Engineer that only the deduction of withholding tax has increased and not the liability of the Contractor. However the Contractor is justified in his statement that deduction of withholding tax at higher rate will disturb its cash flow.

I will advise, keeping in view the spirit of the sub Clause 13.7 of the Contract, that the Employer should deduct 7% withholding tax but reimburse the additional 1% of the withholding tax to the Contractor for the time being in order not to disturb his cash flow. However the Employer may deduct all the reimbursed withholding tax from the final Payment of the Contractor to fulfill the legal requirement. In this way the Contractor's cash flow will not be disturbed, the Employer will finally receive the amount 1% withholding tax which he had deposited with the Tax authorities on behalf of the Contractor and the Contractor will fulfill its obligation of complying with the applicable law.

I hope the question is answered.

Regards

Abdul Majid Khan

---------- FOLLOW-UP ----------

QUESTION: Dear Sir:

Thanks for your response, however, I would appreciate your opinion after considering the following in conjunction with the above:

1.  The Contractor's cash flow as well as Net receivables shall be reduced by 1% since the withholding tax shall be the full and final tax liability u/s 153(c)(3) of Income Income Tax Laws; which is not adjustable in any manner at the end of financial year.

SARWAR

Answer
Dear Sarwar

Thanks for the follow up. This has clarified that the deduction of withholding tax at the rate of 7 % is full and final settlement of the contractor's Income Tax liability. In this case the Employer will, in accordance with applicable law, deduct 7% withholding Tax from each monthly invoice of the Contractor but reimburse 1% to the contractor to satisfy the requirement of Sub Clause 13.7 which puts the liability of any increase in Tax due to subsequent legislation on the Employer.

In short the Contractor is liable for deduction of W.H.Tax at the rate of 6%, being the rate at the Base date. Any additional Tax will be the liability of the Employer.

I hope this answers the question.

Regards

Abdul Majid Khan

Construction Law

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Abdul Majid Khan

Expertise

I am interested in questions related to time Extension, Liquidated Damages,variations, price adjustments,payments, disputes and Dispute Board under FIDIC IV, FIDIC 1999 and FIDIC 2006 Harmonized Documents.

Experience

I have been heading the Construction Management Division and Contract Divisions of National Engineering Services Pakistan (PVT) Limited, NESPAK, the largest Consulting Engineering Firm in Pakistan, for more than seven years and two years respectively. I have also worked as "The Engineer" on a number of projects. I have been working in Saudi Arabia for about seven years on a road projects. Additionally I worked as Arbitrator and am member of few Dispute Boards in individual capacity on Asian Development Bank funded projects.

Organizations
Inland and in Middle East. I have worked with National Engineering Services Pakistan (Pvt) Limited (NESPAK)as my Employer for more than 27 years in Pakistan. In Saudi Arabia I worked for Rashid Engineering, Consulting Engineers during 80s. After retirement I provided advisory services to NESPAK on technical and contractual matters to its various divisions and lately I was appointed as Advisor to Managing Director NESPAK on Technical and Contractual matters. Currently I work as Free Lance Contract Specialist on Fidic Form of Contracts.

Education/Credentials
I am a graduate with a B.E (Civil Engineering) degree. My year of graduation is 1970.

Awards and Honors
A few appreciation Letters and Honorariums during my service in NESPAK. I remained member of Administrative Committee and Board of Management of NESPAK. I had been part of the Management Committee in the absence of Managing Director.

Past/Present Clients
Most of the Clients used to be Government Departments, Corporations and Authorities. In Saudi Arabia the Client was Ministry of Communications. As Arbitrator and Dispute Board (DB) member, I provide services to various Government Departments and Contractors.

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