Partnership In Construction Industry And Tax Audit

Legality of partnerships

Partnerships are a form of joint-venture between private individuals and legal entities which is obliged to know, execute and act in compliance with the requirements of the Law “On VAT”, the Law “On income tax”, the Law “On collection of social and health insurance contributions”, and the Law “On local tax system” in order to be able to exercise a temporary joint activity for profit purposes.

Legal requirements for partnerships function in the same way as for all other taxpayers subject to the above-mentioned laws and they are not exempted unless such exemption for partnerships is the result of an inter-governmental agreement, ratified by their respective parliaments.

Partnerships of investors and owners in construction

Investors or owners of a construction project often have difficulty to finance their project due to the lack of sufficient capital, human resources or technical equipment to implement it. By establishing a joint-venture as a union of private individuals and legal entities to exercise a temporary, joint and for-profit activity, construction project investors and owners often manage to overcome difficulties and accomplish their goals. Although not separate legal entities, such joint-ventures have their advantages and disadvantages. However, they are necessary for construction investors and their quality development.

Partnerships of construction contractors

Construction projects may be implemented by joint ventures of contractors, which are considered partnerships from the perspective the Law “On income tax”. Usually partnerships are created for a specific purpose (project, contract, work) and a limited period of time. Partnerships created for implementing similar construction projects are registered and subject to the same laws that apply to partnerships of investors and owners.

In cooperation with interest groups and other public administration institutions, at the end of each year the Ministry of Finances presents instructions and rules relative to changes in taxes administered by tax authorities.

In order to gain juridical capacity, a partnership between two or more private individuals or legal entities, which can register with the tax administration without a decision from the NRC, will simply complete the required steps described in the Law “On tax procedures”.

Partnerships have the obligation to prepare financial balance sheets presenting financial indicators of their activity. Although they may not be registered as entities with special juridical capacity, according to fiscal legislation, they are obliged to declare closure of their activity and complete relevant closure procedures with the Tax Office, and simultaneously with the NRC, which has issued the certificate for exercising their activity.

Auditing Investors’ partnerships

During audits of partnerships created for financing construction projects, it is important to take into consideration issues relative to creation, activity and liquidation of partnerships. Each partner brings individual resources in a partnership and can be compensated in different ways. Auditors should get acquainted with plenty of specific information, especially information made known to the partners by the Administrative Council. Such information specifically relates to:

– Fairness of information provided to partners;
– Management report;
– Contracted construction project;
– Respect of equality between partners based on their contribution;
– Movement of partnership members;
– Modification of partnership accounting presentation and assessment;
– Irregularities, errors and violations identified;

Review of fairness of information provided to partners is made:

– On one hand, by reviewing the Administrative Council management report and annexes, whether they are mandatory or not, and;
– On the other hand, by checking all documents on partnership’s financial situation and accounting that are addressed to partners.
Audit of a partnership’s balance sheet is conducted in the same way as described above.

Auditing contractor partnerships

Tax auditors auditing partnerships created for implementing construction projects should be aware of the specific issues relative to their creation, activity and liquidation. Each partner brings individual resources into the partnership and can be compensated in different ways. Parties should be considered independently.

Such perspective often leads to potential questions and problems, such as:

– What resources (fixed assets, capital, services, etc.) has each party contributed into the partnership?
– What is the value and basis of property each of them has contributed?
– Which of the partnership members has more active contributions?
– Which are the partnership profit, loss and distribution rates?
– Have there been changes in the property structure inside the partnership?
– Has the partnership distributed liquidities?
– What type of property has been distributed and who are the beneficiaries?
– How is the construction company compensated for its work (in Lek, capital growth, etc.)?
– How does the construction company allocate direct costs in the partnership project?
– What impact does project implementation have on the contract between parties?

Audit of a partnership’s balance sheet and its activity declarations is similar to audits of other juridical forms exercising similar activity, despite their form of organization.

Requests for information from partnerships

According to these construction industrial notes, the history of partnership incomes is very important in calculating their tax obligations and conducting transparent tax audits and assessments, in compliance with the specific legislation for this sector. Incomes indicate the tendency of transactions.

– Costs incurred (deductible or non-deductible) are another important factor for crosschecking the situation of economic activity. Such costs have already been explained in details in the fiscal legislation.
– It is important to have an understanding of labor force in terms of its distribution by types of activity, its share in production and evasion, in terms of zones and employment rates, etc.
– Actives of an economic activity are another significant criterion for the activity of a partnership.
– Loans and obligations of a particular economic activity observed at the moment of tax audits represent a substantial indicator in terms of the assessment of their activity progress and potential abuses with obligations. A breakdown of this group (partners’ accounts, 1-year loans, etc) reveals analytic indicators and shows the importance of the above criterion.

All the above would be insufficient to complete the framework of information on partnerships. In any case, the situation should be carefully studied in advance and this can help to frame the questions to be answered.

Why You Need a Construction Contract, and an Attorney

If you are a contractor, either residential or commercial, it may not have taken you long to decide that a contract with your customers, subcontractors, and suppliers is in your best interest. And even if you don’t want a contract, many customers give preference to contractors who will work within the structure of a contract so that they have peace of mind.

You may also know that a poorly constructed contract can cause just as many legal problems as no contract at all. While there are many do-it-yourself forms available for contractors to construct a contract, the best way to ensure a specifically tailored, quality contract is to work with an attorney who specializes in construction law. Though the cost of an attorney’s services may seem prohibitive, the upfront cost of an attorney’s assistance can save you from larger financial headaches down the road.

Often times an attorney can help you with a contract that you can use as a general template for future jobs-reducing the overall cost.

A construction law attorney can help you in various ways with a construction contract:

  • Formulation: A construction law attorney can help you construct a solid contract that protects your business interest and gives your customer peace of mind. As mentioned above, an attorney can often help you draft a contract that you can eventually tailor to fit other contracting jobs
  • Review: If you’ve already drafted a contract, an attorney can help you review your contract to see if there are any legal loopholes that you’ve overlooked or if you’re missing any important contractual components that could cause problems for you later on.
  • Negotiation: An attorney can help you negotiate contracts with your customers, subcontractors, and materials suppliers. Your attorney will help you secure the fundamentals of your contract while knowing how much to give in the negotiation process on less important facets of the construction process.

Once you have entered into a contract, a construction law attorney can continue to provide you support. Your attorney will be able to help you in the administration, enforcement, documentation, and possible defense of your contract:

  • Administration: In order for you to stay within the confines of your contract, you will need to be able to properly administrate from the contract. An attorney can make sure that you understand all the “fine print” of the legal contract that you entered into so that you can properly execute the agreement.
  • Enforcement: An attorney can assist you in properly enforcing your contract, particularly if you are a contractor who has entered into agreements with subcontractors and large materials purveyors. An attorney can consult you on how to enforce your contractual agreements with these parties so that you can maintain your contractual agreements with your customer.
  • Documentation: To ensure that you are following contractual guidelines and to protect you in the case of legal action, your attorney can help you make sure that you properly document all of your progress, administration, and enforcement attempts.
  • Contract Defense: When a customer legally retaliates against you, your attorney will be able to help you defend your contractual obligations or lack thereof.

Contracts help set forth clear guidelines in a wide variety of circumstances, but they can be especially helpful in the contracting business- both for the contractor and the customer. An attorney who specializes in construction law can help ensure that this contract works to protect both of these parties.

Construction Document Management Services and Its Purpose

Typical Construction documents contain all critical information such as bidding papers, building plans, specifications and related documents required for the construction of a building or structure. These documents are used for various purposes. They help explain the needs of the owner into a buildable format that can be unanimously understood within the architectural and structural community. They also help the owner to put the project out for bid and to get necessary approvals from regional authorities. At last, they impart complete instructions to the contractor as to how the project should be executed.

Generation of a set of construction documents begins with the developer. The architect drafts different sets of building plans, which the builder revise and approve at each step before the construction is carried further. The conclusive set of plans is commonly referred to as 100% construction documents (CDs).

This final set is divided into three components. The major component is the set of building plans or drawings. These may contain everything from floor plans to architectural drawings. Plans for any project are generally divided into many different sections. The plans will begin with architectural drawings followed by mechanical, structural and electrical drawings.

Second component is the specifications manual book. It includes information regarding materials and methods to be used for construction. People who are new to the construction field often ignore the manual and concentrate only on the drawings. This is not the best practice since the manual often contains details not found on the building plans.

The third component is made up of the revisions made by the architect, structural engineer or the owner during the design phase. Official changes are published in the form of supplemental instructions, directives or bulletins. These written changes are included as an official part of the construction documents.

Once a completed set of construction documents is ready it is sent to prospective contractors for bidding and finding cost estimation of the project. Since they form a part of the legal construction contract, it is very important to provide accurate and comprehensive details. Each document should serve to a specific purpose so that the retrieval of information is simplified and the possibility of contention is considerably reduced. Each team member should benefit from this standardized approach of placing information within the documents.