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FEATURES OF TAXATION OF CONSTRUCTION COMPANIES IN FOREIGN
COUNTRIES AND THEIR USE IN OUR COUNTRY.
Abishov Muxammed Sarsenbaevich
PhD., Karakalpak state university.
Mamutova Amina Rahkmetovna
assistant, Karakalpak state university.
https://doi.org/10.5281/zenodo.10645271
Abstract. This article provides ideas and recommendations on the introduction of tax
incentives for construction projects that provide for an increase in future tax revenues at the
expense of construction works aimed at the construction and development of infrastructure in the
regions through the TIF mechanism, which has been effectively used in developed countries for
several years.
Key words: TIF mechanism, value added tax, "rollback" mechanism, tax base, sales tax
and tax credits.
ОСОБЕННОСТИ НАЛОГООБЛОЖЕНИЯ СТРОИТЕЛЬНЫХ КОМПАНИЙ В
ЗАРУБЕЖНЫХ СТРАНАХ И ИХ ИСПОЛЬЗОВАНИЕ В НАШЕЙ СТРАНЕ.
Аннотация. В статье представлены идеи и рекомендации по введению налоговых
льгот для объектов строительства, предусматривающих увеличение будущих налоговых
поступлений за счет строительных работ, направленных на строительство и развитие
инфраструктуры в регионах через механизм ФТИ, который имеет уже несколько лет
эффективно используется в развитых странах.
Ключевые слова: механизм TIF, налог на добавленную стоимость, механизм
«отката», налоговая база, налог с продаж и налоговые кредиты.
In the foreign practice of taxation of construction companies, there is no special tax regime
for those engaged in this activity, like all taxpayers, they pay taxes based on the land, water
resources, property and activities and financial results used. However, it is still possible to
encounter specific tax cases in accordance with the characteristics of the construction work. For
example, in the UK, a refund mechanism can be cited in the calculation of value added tax, which
has been in effect since 2017 in order to conceal taxes in the construction sector and reduce the
risk of misuse. In the UK, businesses with an annual turnover of more than £ 85,000 will be
required to register as construction companies and VAT payers in general. Typically, construction
companies are taxed at standard 20 percent rates. In calculating the value-added tax, the amount
of the difference between VAT (outgoing VAT) levied on the customer for the construction work
performed and the VAT paid (input VAT) on the purchased construction materials will be required
to be paid to the budget. In case of import of construction materials, the amount of input VAT is
indicated by indicating the increased amounts of VAT, or in cases where construction materials
purchased from privileged enterprises (less than 85.0 thousand and not registered as VAT payers)
are not specified in the invoice In order to eliminate the cases of submission of reports by reducing
the value-added tax payable to the budget by artificially increasing, from 2017 introduced a
mechanism of "refund" of value-added tax. In such cases, not only the supplier, but also the
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construction companies were held liable, and the VAT, which was not paid to the budget, was
fined and "refunded".
In China, an urban development support tax has been introduced to continuously support
urban development and improve financial provision. This tax was introduced on December 1, 2010
and applies to foreign enterprises established on the basis of foreign capital. In this case, the tax
base is calculated on the basis of value added tax, which must be paid to the budget and is classified
according to the location of enterprises:
Table 1
Urban construction support tax rates in China
№
Taxpayer's address
Tax rate
1.
In the cities
7 %
2.
County level towns, settlements
5%
3.
Other regions
1%
Due to the fact that construction work in the United States (US) is carried out at a very high
rate, the income of construction companies is high, and it is most important to address the problems
in calculating the sales tax when taxing them.
Because in some U.S. states, construction
companies pay sales tax based on the volume of construction work, in other states they do not pay
such tax. In Connecticut, for example, sales tax is levied on construction work for industrial and
other commercial use. Similarly, in some U.S. states, construction companies pay sales tax on
purchased materials, while in some states construction companies pay sales tax on materials
purchased as intermediaries without transferring sales work to the final consumer. In most states,
tax exemptions apply to construction materials that are exempt from sales tax, such as church
construction work, and the same applies to materials purchased and the amount of work done. In
this case, a certificate confirming the release of the construction work will be required.
In the developed countries of the world, the issue of increasing the volume of construction
work as a guarantee of sustainable economic development in the current situation of budget
shortages and instability of the macroeconomic environment, the creation and modernization of
infrastructure that will provide tax revenues in the future. Because the global mortgage crisis in
recent years has increased the risk of directing funds for this type of construction, which in turn
has led to the emergence of a special direction of financing construction work carried out at the
expense of the budget. Today, there are many potential sources of social infrastructure
development, and these resources are used to some extent for infrastructure development, but the
results of their use are not significant enough for economic development. One of the problems in
the practical use of many resources for infrastructure development is the distribution of risks of all
participants in the investment process, the projects are not linked to the economic development of
1
Taxation in the construction industry. Antony Seely. Commons Library Briefing, 9 September 2019. P. 37-39.
http://researchbriefings.files.parliament.uk/documents/SN00814/SN00814.pdf
3
It is known that the United States has introduced a sales tax and there is no value added tax.
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the regions and
can not fully
realize
the
benefits
based
on the principles
of
increasing
additional
tax
revenues
from
economic
growth. As a
result,
the
construction of
infrastructure
does not take
precedence
in
the development
of the regions
and increase tax
revenues. To solve this problem, the developed countries of the world use various mechanisms of
infrastructure development, which provide for the construction of these facilities from the current
taxes and levies, the use of future benefits in the form of benefits, such as investment multiplication
and future budget revenues. This mechanism is known worldwide as the Tax Increment Financing
(TIF), which is also part of the investment mechanism to increase construction work to increase
tax revenues in the future. In recent years, this mechanism has aroused great interest in developing
countries, as well as in developed countries.
Prospective tax revenue growth financing ( TIF) is a model for financing the construction
of infrastructure by increasing future tax revenues from planned improvements in the region. To
implement an infrastructure project financed using TIF, the competent authorities allocate a
specific area ( TIF-area), which, in addition to the infrastructure facilities to be built, also includes
residential, commercial or industrial real estate.
At the beginning of the project, the amount of tax revenues (real estate taxes, land taxes,
taxes on business activities operating in the region) will be calculated in advance and the forecast
will be determined. The implementation of infrastructure in the region is expected to increase the
value of real estate and land in adjacent areas, increase tax revenues without changing tax rates. In
order to reduce the cost of construction work in the TIF-area and reduce the cost of financing the
project, the practice of tax exemption for construction work performed in the area can be applied
in some cases. In order to provide such tax benefits to construction companies, local authorities
must have the authority to provide tax benefits.
5
Strickland, T. (2013) The Financialisation of urban development: Tax increment financing in Newcastle upon-Tyne,
Local Economy, 28(4), 384-398.
As a result of the TIF project, along with the expansion of the
source of income, there will be other socio-economic benefits: new
jobs will be created, the quality of services provided to the
population will increase, and so on. This in turn serves socio-
economic development.
Of the TIF project
beginning
TAX R
EVE
NU
ES
Of the TIF project
finish
Tax receipts before the project is launched
Increased at the expense of the TIF project
incoming income
Ta
x a
s a
r
esul
t of the
proje
ct
PERIOD OF PROJECT IMPLEMENTATION
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Figure 1. Stages of implementation of the construction project to finance the growth of
future tax revenues.
Subsequent implementation of the project may lead to an increase in revenues from sales
taxes or value added tax, an increase in the number of jobs, but these factors are considered
secondary factors, the main factor is the increase in land and property taxes due to infrastructure
development. increase is considered. The term of the TIF project is predetermined and is usually
20-25 years. When the project is completed, all the high revenues will go back to the budget.
This tool is mostly used by local authorities to finance the construction of certain infrastructure
facilities or complex development projects in certain areas. The reasons for considering the
possibility of using the TIF mechanism for this in the complex development of individual regions
can be divided into global and regional (local) reasons. Global (goal - higher socio-economic
development based on existing and developed infrastructure) reasons:
• Counteract the decline in economic development of the regional structure, including the
decline in tax revenues;
• Stimulation of population flow to the regions;
• Attracting private investment to the city;
• Facilitate the development of the regional structure within the framework of previously
defined comprehensive development plans.
Territorial (goal - to develop infrastructure in a particular area) reasons:
• Reconstruction of the district due to its obsolescence;
• Reconstruction of the district due to a change in the purpose of its use (for example, the
transformation of a residential area into a business center);
• expansion of the district;
• the need to build the district from scratch;
• Improving the environmental aspects of the district (relevant for former industrial areas).
The practice of using the TIF mechanism in the United States.
One of the key features
of the proliferation and application of the TIF mechanism in the United States is that these
processes are not regulated by law at the federal level. Due to the high level of regional and
municipal autonomy, the spread of TIF in the U.S. in the legislative, budgetary, and taxation
processes has historically occurred at the level of states and municipal structures. The concept of
shaping the TIF mechanism was developed in the early 1940s. In 1945, the necessary legislative
framework for the establishment of TIF-districts in California was formed, in 1951 the state tax
legislation was amended, and in 1952 it became the first state to allow the use of the TIF-
mechanism to finance infrastructure projects.
Following California, similar legislation was passed in Rhode Island (1956), Nevada
(1959), Oregon (1960), and in the late 1960s in two other states. By 2003, the TIF regulatory
framework appeared in all 50 states and the District of Columbia (the last being Massachusetts),
6
Compiled by the authors
7
It should be noted that a number of sources point to Tennessee as the first state to allow ISTOM (TIF) legitimacy.
Indeed, in Tennessee, as early as 1945, legislation was enacted that allowed the use of an ISTOM-like mechanism to
finance infrastructure development.
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but currently 48 of them (with the exception of Arizona and California) have project management
through TIF.
The practice of applying the TIF mechanism in the UK.
In England and Wales, the legal framework for the application of the TIF mechanism
was established at the national level: the LocalGovernmentFinanceAct was adopted in 2012 and
entered into force in April 2013, extending to England and Wales, expanding the tax authorities
of local governments. Prior to the enactment of this legislation, local governments did not control
the distribution of local taxes on commercial real estate (BusinessRate or Non-domesticRate):
this tax went to the central government and was then distributed in the form of targeted grants
(RevenueSupportGrant). The new legislation introduces a system of withholding tax revenues to
finance construction work from the value of commercial real estate. The legislation provides for
two mechanisms for withholding tax revenues in favor of local authorities:
• Regular withholding of 50% of all tax revenues from commercial real estate in
accordance with the basic tax base, as well as withholding of up to 50% of tax revenues related
to the increase in taxes on commercial real estate;
• Establishment of special districts where it is possible to deduct 100% from the growth
of tax revenues from the value of commercial real estate.
The first of the above mechanisms cannot be interpreted as a traditional TIF mechanism,
as it is a measure aimed at increasing the level of decentralization of local authorities and
reducing their financial dependence on the central government. However, the introduction of the
principles of TIF mechanisms is a necessary basis for the transfer of a portion of taxes levied on
commercial real estate located in an area controlled by the local government to the control of
local authorities (district or city authorities).
Previously, all tax revenues of this type were controlled by the central government and
distributed to the regions in the form of targeted grants to cover the cost of servicing municipal
structures, with the required expenditures determined by the Community and Local Government
(Departmentfor Communities, Local Government). In this situation, municipal structures were
not encouraged to develop the commercial sector and attract private investors, because regardless
of financial performance, they were financed from the center, and the increase in the tax base did
not affect the municipal budget.
Since April 2013, municipalities in England and Wales have
moved to a mixed financing system, under which 50 percent of commercial real estate tax
revenues are still controlled and distributed by the central government, while the other half
remains at the disposal of local governments, giving some freedom in allocating budget funds
locally gives.
An important feature of this situation is that the tax base of municipalities will
remain at the level of 2013 ("frozen" level), in the event of an increase in the tax base, this
difference will be transferred to the municipal budget. It is assumed that municipalities will
require a certain amount of funding. In the transition to a mixed system of tax distribution, local
governments will have to cover all costs independently from the tax revenues received, and the
8
Rewiring public services: business rateretention, Local Government Association, December 2013.
9
Local government Finance Act 2012 Guide, Local Government Information Unit.
10
Business Rates Retention. Technical consultation, 2012.
11
A guide to the local government finance settlementin England, 2013.
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local government will provide grants when these funds are lacking. In the transition to such a
system, municipalities do not have the resources to develop cities independently. To provide such
an opportunity, the practice of freezing the tax base is applied, from which the increased tax
revenues can be directed to the implementation of infrastructure projects. In addition, the
legislation allows local governments to borrow for infrastructure development, which is provided
by the potential growth of the debt tax base.
It should be noted that the "fixed" level of the tax
base will be periodically revised. In particular, the tax base is currently set at 7 years, and it is
planned to recalculate it in 2020, after which it will be revised every 10 years. There are also a
number of restrictions at the current stage of the mechanism, which serve to maintain a balance
between the financial flows of municipalities, but this issue is primarily related to the allocation
of budget funds for the daily needs of municipalities. Under the Accelerated Development
Zone
, the central government can grant special tax status to any region that needs the necessary
infrastructure changes to support business development. In such a status, the increase in taxes on
commercial real estate will be fully (100 percent) directed to local governments to assist in
infrastructure development. There is no open source information on how to assess the need for
special zones, but the following can be said in this regard:
• The right to organize territories is vested in the central authorities, in particular, this
issue is within the competence of the Secretary of State for Communities and Local Self-
Government (Secretary of State for Communities and Local Government);
• local authorities have the right to apply for the establishment of accelerated development
zones;
• municipal structures can submit joint applications for the establishment of special zones
and develop projects within the general budget;
• the validity period of accelerated development zones is limited to 25 years;
• There may be a limited number of areas of rapid development at the same time, the total
amount of funding for which may not exceed a certain amount.
At the time of the audit, the maximum limited number of regions was not set by law, the
total funding was limited to £ 150m in 2013, the maximum allowable amount of funding is set
by the central government budget.
Also in 2010, the regulatory framework of TIF was adopted
in Scotland. As part of its inspection, the authorities decided to launch 6 pilot TIF projects.
Territorial authorities do not currently have the right to organize TIF-territories independently,
they must submit projects to central authorities for consideration. In 2014, 3 projects were
approved.
In Canada, the use of the TIF mechanism has only recently begun, as in the United States,
at the regional level: to date, TIF legislation has been enacted in only three provinces, the first
of which was Ontario (2001), where municipal authorities was granted the right to receive.
Relevant legislation was passed by the Manitoba Provincial Government in 2002, but the
first TIF projects in the province were only launched in 2009. TIF-legislation was also adopted
12
The Local Retention of Business Rates Scheme, Helen Burkhalter, Principal Advisor, APSE, 2013.
13
InvestmentandDevelopmentPortfolioReport, NewcastleCityCouncil, 2014.
14
Local government Finance Act 2012 Guide, Local Government Information Unit.
15
Local Government Finance Act 2012 – Non-domesticrates, Mark Upton, LGIU Associate.
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in the province of Albert in 2006, the same year a pilot project for the introduction of the TIF-
mechanism was implemented by the Toronto authorities (under the legislation of the province of
Ontario). In India, in 2012, the Municipal Corporation of Greater Hyderabad
to use the TIF mechanism to develop the city (the terms of the TIF mechanism were also
developed as part of these plans, as such practice did not exist in India or Telangana). In February
2014, the Department of Municipal Administration and Urban Development issued a document
on the use of the TIF mechanism in 800 urban areas. Thus, the TIF mechanism is less widespread
in the world, which is explained by the financial risks associated with the abstraction of TIF-
based revenues, as well as certain difficulties in adapting the existing regulatory environment to
the implementation of TIF. First, the introduction of the TIF mechanism requires changes in the
budget and tax legislation (British experience), in related areas of urban planning, land law,
administrative and civil law, legislation on tariffs. Second, because the mechanism is designed
to be used at the municipal level, it is necessary to change the regulatory framework at several
levels of government. In addition, the use of the mechanism implies that municipal authorities
have the right to regulate taxes and land relations, or are granted such rights. This is confirmed
by the fact that TIF has only been introduced in the countries of the Anglo-Saxon legal system,
which is more adapted to the use of this mechanism, as local governments have more
independence. Expert discussions have shown that the implementation of TIF requires not only
high autonomy of local budgets, but also special institutions that realize the potential of
autonomy. For example, in the US, the municipal bond market, which is one of the main financial
instruments in the implementation of TIF projects, is much easier to regulate than the corporate
bond market, which gives municipal authorities a greater advantage in terms of underwriting
costs. In addition, income from municipal bonds is not taxed and their purchase by large financial
institutions is restricted, which increases their attractiveness to individuals, individuals who are
residents of the areas where TIF projects are implemented (de facto). Often, institutions become
more important because the goals set by TIF can be achieved through other instruments. In
Germany, for example, until recently, municipal banks played a major role in financing social
infrastructure (as in France). In Sweden, a private loan agency purchased municipal bonds, thus
providing revenue for infrastructure financing without the use of a complex mechanism such as
TIF. It should be noted that in the United States, too, the role of municipal mechanisms of
infrastructure financing, including the TIF mechanism, is beginning to be recognized as
insufficient. The U.S. Treasury said in a report in September that local resources were in short
supply and that federal programs, including programs to encourage the use of corporate (not
municipal) bonds, were being developed. The TIF mechanism and similar construction financing
and tax incentives for construction companies participating in this project through modern taxes,
which will allow the socio-economic development of the project area, as well as the recovery of
lost taxes in the future.
The following scientific proposals and practical recommendations for the application of
foreign experience in the implementation of infrastructure construction work in the country,
16
In the countries of the Anglo-Saxon legal system, a special form of city administration with the right of a legal entity
managing large urban settlements.
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aimed at taxing the surveyed construction companies and financing the increase in future tax
revenues, are put forward. First of all, it is expedient to apply the refund mechanism in the
calculation of value added tax, introduced in the UK in order to hide the taxes in the construction
industry and reduce the risk of abuse. It is known that according to the tax legislation, “the
inclusion of value-added tax on the invoice in the sale of goods (services) by non-payers of value-
added tax - entails a fine for suppliers in the amount of twenty percent of the amount of value-
added tax. In this case, the supplier must pay the amount of tax specified in the invoice to the
budget. However, there is no financial liability for construction companies to deduct VAT from
invoices from construction materials suppliers
. In our opinion, based on the experience of the
United Kingdom, it is advisable to apply financial penalties both to companies that supply
construction materials, and to construction companies that receive materials through such
invoices. Because it is possible to determine whether a company supplying construction materials
is registered as a VAT payer through the value-added taxpayer registration software introduced
in the country. Secondly, in order to support the development of the construction industry in our
country, to encourage local investors and improve the financing of construction in cities and
districts, it is necessary to introduce special mandatory payments by local authorities to
construction companies based on foreign experience. In this case, the income from construction
activities can be taken as a tax base, and the rates can be stratified depending on the level of
development of cities and districts. Third, it is expedient to introduce tax incentives for
construction projects that provide for an increase in future tax revenues through construction
work aimed at building and developing infrastructure in the regions through the mechanism of
financing future tax revenues ( TIF), which has been used effectively for several years in
developed countries.
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