The Importance of executing Master Services Agreements and Statements of Work for Tax Planning Purposes
Parent companies which have subsidiaries in the Philippines are usually looking for ways to avoid incurring costs on the payment of taxes. For efficient tax planning purpose, parent companies can use as a strategy the execution of the Master Services Agreement.
What is a Master Services Agreement?
A Master Services Agreement is a generic contract that specifies most but not all of the terms and conditions between the client and a supplier. Its purpose is to lay down basic conditions like the payment terms, delivery requirements, intellectual property rights, warranties, limitations, dispute resolutions, and confidentiality. It is done with the intention that the parties will execute subsequent contract like the Statement of Work which specifically describes the service to be rendered, the due date and the agreed price.
How does a Master Services Agreement help for tax planning purpose?
It is highly recommended for companies especially for service providers to execute Master Services Agreement and Statements of Work for the purposes of achieving an efficient tax planning that will lead to saving a considerable amount which is supposed to be paid as taxes.
For most companies, the MSA is usually being entered into by the parent company. The reason for this is that MSA does not speak of certain taxable fees/ revenues. Since the provisions of the MSA are very general, MSA will not create any tax liability on the part of the parent company. Taxes will be incurred in the SOWs that the parties may enter into pursuant to MSA.
How does a Statement of Work help for tax planning purpose?
Tax savings will come in since the SOWs will be entered into not by the parent company but by its subsidiaries that were usually incorporated in tax haven jurisdictions. Therefore, the parent company will not be liable to pay tax for the income or revenue that is derived by its subsidiaries in entering into a SOW with the client. Apart from this, since the subsidiaries are organized and existing under tax haven jurisdictions, the corporate income tax may be minimal or nothing at all.
Through this contracting structure, the tax savings may be used by the company as its working fund for its day to day business operations or possible business expansion.
Your take
How does your company engage in tax planning? Share your tips below
