Tax Lessons Learned Hard
In the property developer's world of revenue and expenses one of the most overlooked areas is tax planning. All too often at the beginning of a project the lion's share of a developer's time is spent with architects, contractors, lawyers and marketing people. In many cases only once they pass the point of no return, when sales are in hand, buildings are rising into the sky and tax bills start coming in do they realize how much money is leaking out of a project on tax payments. By then it's often too late to change business structures and contracts to minimize the tax to be paid – and more often than not it's a costly lesson.
An essential part of starting any new business, in addition to a viable business plan, is assembling a financial model that meets both profit expectations and addresses project risk. This is a long-term projection of what is expected in project expenses and income over the development cycle.
Once this is done a tax planning can be done with accountants, tax professionals and legal advisors, whose aims are to minimize taxes through a well-thought-out company structure and sales-contracting documents. At the same time tax assumptions are applied to the profit and loss projection to produce a clear bottom-line forecast.
Although it sounds complicated, the process allows a business to engineer results and ensure that by the time the buildings are up and units are sold that there's money in the bank for investors and developers alike. It's a step-by-step process that starts when you sit down with your accountant and start looking in detail at expected costs.
Input from quantity surveyors, project management, contractors and architects allow assumptions to be made on overall cost and contingencies. The sales and marketing team will add in expectations on selling prices, take-up rates and the cost of promoting the sales effort. Other key expenses such as company organization and running, legal expenses associated with closing sales transactions and financing costs contribute as significant expenses.
As in any analysis the devil is in the detail and it's most effective to do a zero-basis approach versus applying percentages or lump-sum accounts. List detailed assumptions and build the projection with as much factual data as you can lay our hands on. Often both revenue and expenses can be benchmarked to similar projects and consultants who have worked on other projects will have access to actual costs so that forecasts become more accurate.
By listing these details not only makes this an effective approach to estimate total profit but also provides an operating budget and ongoing management tool to use continually to look at actual versus projected results vis-a-vie the monthly profit and loss statement. With this document in hand, it is best to hire a tax professional to advise on optimizing tax efficiency, which in turn becomes the blueprint for the legal team to create a company structure and set of sales agreements.
Projects in counties such as Thailand need a resource who is well versed in the Thai Revenue Code along with experience in other property developments. Locally in Phuket NAT (Network Advisory Team) are a recognized firm, while in Bangkok Grant Thornton, BDO Richfield, Deloitte and PricewaterhouseCoopers are some of the better-known experts in the field.
Tax planning is a prudent and well-thought-out use of the tax code. It in no way relates to tax evasion, which is most definitely ill-advised. Currently the Thai tax code offers many favorable taxation treaties with the authorities in places such as Hong Kong and Singapore. There is the ability in many instances to efficiently use withholding and VAT (value added tax) credits down the line, thus lowering taxation.
For larger projects the BOI (Board of Investment) has tax holidays for qualifying projects. One of the key advantages of leasehold structures is that it can allow the amortization of revenue for periods of up to 30 years, which reduces ongoing tax exposure.
While this type of advice is costly at the onset of a project it is perhaps the best money you will spend. Going by the numbers in any venture is one of the key fundamentals to success. Tax remains one of the largest overall expense components of any project. With careful planning and attention it can be managed to your advantage and the only surprise at projects end will be just how big the bottom line can be.