Globalization of the B.O.T. System and Its Taxation Problems

Article excerpt

Build, operate, transfer (BOT) system and its variations are gaining global recognition as finance schemes to design, construct, operate and manage revenue-producing large scale infrastructure projects by private foreign and national investors at no or minor costs to governments. Currently, the new BOT sector lacks special legislative Act and regulatory provisions, as well as accounting and auditing standards and taxation rules.


In today's global economy, the governments of many countries, especially of emerging economies, have resorted to build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) schemes to promote private, foreign and national investors to finance, design, construct, and operate large-scale infrastructure and development projects. In return, they are granted the right to generate revenues from the facilities for an agreed period of time, the concession period (usually between 10 to 40 years), to recover their invested capital and earn a fair return on investment. At the end of the payback period, the assets of the BOT project are transferred in a good condition to the ownership of the government or local authority which granted the concession [3,6,9].

For a decade now, BOT concessions have become popular financing schemes for developing countries as foreign aid funds for infrastructure projects have continuously declined. Some governments resort to BOT concessions for a variety of reasons and benefits, as discussed later. Private participation is granted in almost all public projects, such as power generation and distribution, water supply and sewage facilities, highways, ports and airports, bridges and tunnels, mass rapid transit system, and telecommunications, among others. The BOT system and its variations benefit host countries by infusing more foreign investors and lenders, and providing modern infrastructure facilities and technology-transfer at no or minimum cost to the governments. However, BOT concessions carry serious risks--there have been failed and aborted projects as well as successful ventures. While successful BOT projects have benefited their stakeholders (investors and lenders, the governments, politicians, workers and employees, and the population), other BOT projects have caused painful experiences for investors and lenders, who wasted their economic resources, return on their investments, energy and time. Many governments had experienced political consequences for wasting economic resources, such as land and sources of tax revenues, and for introducing opportunities for bribery and corruption. Experiences of governments and stakeholders involved in real-life BOT systems reveal a host of successes and rewards, failures and losses, and political consequences.

BOT projects represent a new sector in the national economies of developing countries, most of which have not promulgated special legislative statutes to regulate the different aspects of BOT concessions or set up special accounting and auditing standards and taxation rules for the new BOT sector. A BOT project is a privately owned and managed economic entity which has a stipulated economic life (agreed payback or concession period), during which project sponsors are permitted to generate revenues and other income from operating the projects commercially. The question is whether profits earned by project sponsors are tax-exempt, and whether periodic amortization (financial depreciation) of invested capital (operating assets) is non-taxable. Another question concerns whether profits and gradual amortization of invested capital remain tax free beyond the concession period. The literature on BOT is noticeably short of information on individual country taxation treatment of BOT projects. Generally, tax authoritie s in most countries refer to the initial BOT concession contracts and/or the country's special investment laws to decide whether particular BOT projects are tax-exempt entities or are foreign investment companies entitled to tax incentives and free custom duties

The primary objective of this article is twofold. …