MDA Law
Understanding Onshore, Offshore, and Umbrella Agreements
In the realm of international projects, particularly within sectors like engineering, procurement, and construction (EPC), the utilization of onshore, offshore, and umbrella agreements plays a pivotal role. These structures facilitate seamless project execution while optimizing tax efficiency and ensuring regulatory compliance.
Let’s delve into each type and explore their implications, including the nuances of splitting EPC contracts for tax efficiency.
Onshore and Offshore Agreements
Onshore Agreements – Primarily focused on activities and contracts executed within the host country, onshore agreements are fundamental in addressing local regulations and tax obligations. In the context of EPC contracts, they encompass local construction, installation, testing, commissioning, and pertinent engineering services. By ensuring compliance with local laws and obtaining necessary permits, onshore agreements pave the way for smooth project operations. In most cases, the onshore element of the work is handled by the contractor’s wholly-owned company that is incorporated in the project jurisdiction. In other areas, a joint venture with a local construction company may be utilized.
Offshore Agreements – These contracts (particularly where there is an EPC split) revolve around the procurement of equipment, materials, and offshore engineering services. The strategic aim is to minimize local tax liabilities on imported goods and services, thereby optimizing project costs and efficiency.
Umbrella/ Indemnity Agreements
Acting as comprehensive contracts that integrate onshore and offshore components, umbrella/ indemnity agreements are instrumental in streamlining project execution. By coordinating responsibilities and liabilities among various contractors (usually of the same group of companies), they provide the project owner with a unified recourse point. This integration ensures that the benefits of a single EPC contract are retained while capitalizing on the tax and regulatory advantages of splitting contracts.
The provisions typically found in an umbrella/ indemnity agreement encompass several key aspects:
- Guaranteeing that the individual scopes of work outlined in the underlying contracts collectively constitute the entire scope of work for the project. This prevents any gaps between the contracts, ensuring comprehensive coverage.
- Establishing a mechanism to determine, either prospectively or retrospectively, which contractor is responsible for each construction activity.
- Setting up administrative procedures to streamline processes, such as specifying that notices only need to be given to one of the contractors and ensuring coordinated handling of change orders.
- Incorporating mechanisms to prevent a contractor from evading liability by attributing responsibility to the other contractor for a particular activity.
Splitting EPC Contracts
The division of EPC contracts into onshore and offshore segments offers notable tax benefits, especially in jurisdictions with intricate tax frameworks. By mitigating exposure to local taxes on imported goods and services, companies can achieve substantial cost savings. However, this approach necessitates meticulous planning and drafting to maintain the contractual integrity and safeguard against adverse tax implications. For instance, splitting EPC contracts facilitates the avoidance of taxes such as VAT, withholding taxes, and import duties on offshore supplies. Additionally, it aids in managing risks associated with currency fluctuations and delays in profit repatriation. Another benefit would be simplified adherence to local regulations and permit acquisitions.
Conclusion
Onshore, offshore, and umbrella/ indemnity agreements are indispensable tools for managing the complexities of international projects in sectors like engineering, procurement, and construction. By strategically structuring contracts and leveraging tax-efficient approaches, stakeholders can optimize project outcomes while mitigating risks and ensuring regulatory compliance. Embracing a holistic approach that considers legal and financial aspects is key to achieving success in today’s interconnected global landscape.
