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1.2.11 Other Costs – Taxes

The risk of the taxation framework changing during the course of a contract is generally borne by the private partner when referring to taxes that are part of the common business environment, with exceptions.

In some contexts, a value-added tax (VAT) may be an exception to the general rule, and payments under the PPP contract will be adjusted to reflect the impact of a change in the tax. The private partner in the PPP may otherwise be unable to pass the impact of a change in the tax on to its customer (the government), unlike other businesses that can (and are expected to) pass on the impact of a change in the tax to their customers.[8]

One specific area of concern is when there is material uncertainty as to what is the tax treatment for a specific project in relation to some potential taxable events, and the requirement or demand by many investors and lenders for a binding tax ruling. As stated in some international guides (for example, Victoria Partnerships), it is uncommon that tax authorities provide for a binding tax ruling in advance of the project contract being executed. This risk may be mitigated by the procuring authority asking for a non-binding ruling or encouraging and supporting bidders in doing so.

In some projects around the world, it can be seen that authorities assume the risk of a change in the tax ruling. This is an area where, as in a number of others, there is not a consensus on what is the right allocation, as the authority is not in control of the tax-setting body, and even the latter may not belong to the same government (for example, municipal taxes in a central government project or supra-national tax rules that affect some countries, for example, certain European Union [EU] regulations on EU members).

[8] See Risk allocation and
Contractual Issues
(Victoria Partnerships, 2001), section 15.10 “Particular
Areas of Law”.

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