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Construction Law/Personal income tax & VAT issue


Respected Sir,
The Contractor has contract for the construction of a hydropower project, which is totally tax-exempted under the terms of the Contract for the imported goods, material and services and personal income tax for the expatriate staff (clearly stated in the particular Conditions of Contract). However nothing clear is mentioned for the local workers earnings in the Contract (particular conditions of Contract).
My first question is related to the Contractors liability for the income tax of the local workers in the country of Works of the Project:
In the Contract documents, there is one page titled as Contract Value for Project which is summary of the BOQ items, mentioning in the form of a NOTE at the bottom of the page ALL THE PRICES MENTIONED ABOVE DO NOT INCLUDE ANY OF TAXES, DUTIES, LEVIES, FEES AND SURCHARGES IN THE COUNTRY OF WORKS. We understand as the local manpower is also the cost component of works and a part of each BoQ item (and all BoQ items collectively make the CONTRACT VALUE), therefore there shall be no personal income tax for the local workers and shall be exempted.
Secondly we have acquired security services from a local security company, who are providing s only manpower and we have a Contract Agreement with that company (a certain rate per hour per security guard). Nothing is mentioned in that agreement about the taxes. However the Company with each invoice claim a certain %age of the invoice price as VAT. (please note that (i) security services is also a BoQ item in the Contract Value and as stated above that these BoQ items do not include any taxes and (Ii) additionally there is a Sub-Clause in the Particular Conditions of Contract, mentioning that Exemption is not available for any element of duty or tax, inherent in the price of goods or material, equipment, plant or services procured in the country, which shall be deemed to be included in the Accepted Contract Amount, if not described otherwise.
My second question is that the Contractor is not liable to pay the VAT for the security services, based on the above two provisions of the Contract. AM I CORRECT.?  In other case, If the concerned security company pays this VAT, should we ask them to provide us the receipts of these VAT amounts paid to the tax department ensure the payment and then we can claim this amount for the Employer of the project as mentioned in the Contract?    
Other supplementary and related question to the VAT for the security services, can this company claim VAT, whereas their scope of liability is only to provide manpower. I mean does the security services are also covered by the VAT or these services are subject to personal income tax.
Looking forward to your valuable opinion on all above queries separately and in detail. Reagrds.

Dear Muhammad,

You do not mention the form of contract nor the applicable law, so the following comments will be general in nature.  This question is related to tax law rather than construction law.  

Often there are clauses in the contract which are incompatible with the local laws, because the drafter of the Contract has not ensured consistency.  For example, the local law states that all companies must pay VAT, but the contract states that the Contractor is exempt from VAT.  The solution is to ask the Engineer for a determination and, perhaps, to make a claim against the Employer for the unexpected costs.  It is quite possible that the local workers are liable for income tax, but the Contractor is not liable to reimburse them; likewise with the security company.  

I suggest that you need experienced legal advice with local knowledge.  

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Peter M. Elliott


First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol before submitting a question.


Value . . .
It's unwise to pay too much, but it's unwise to pay too little. When you pay too much you lose a little money, that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying a little and getting a lot. It can't be done. If you deal with the lowest bidder, it's well to add something for the risk you run.
And if you do that, you will have enough to pay for something better.
. . . John Ruskin (1819 - 1900)
"We are too poor to buy something cheap"
.Romanian Proverb 2002
A lean compromise is better than a fat lawsuit. George Herbert (English poet 1593-1633)
I said it in Hebrew, I said it in Dutch,
I said it in German and Greek:
But I wholly forgot (and it vexes me much)
That English is what you speak!" Hunting of the Snark - Lewis Caroll
Match your presentation to the reader!
The joy of food lasts but an hour, of sleep but a day, of a woman, but a month, but the joy of a building lasts a lifetime. Syrian proverb.
Comments and observations leading to improvements in the translation of FIDIC Red & Yellow books into Romanian prior to approval by FIDIC (reference 'Preface to the Romanian edition')

Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

B Sc(Hons) in Civil Engineering

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