Taxes are a cost for the project company. The project company that houses the renewable energy investment is just an ordinary company like any other, and they pay taxes in exactly the same way as any other corporation. Let's distinguish though between different sorts of taxes. The first VAT value added tax in some countries called GST, Goods and services tax. This is a temporary cash flow only. We'll look at an example of this in a moment. Distinguish that from sales taxes or maybe more commonly customs duties. These are a permanent extra amount of cash payment by the company. They are an increase in the cost of buying goods required for the project company. And thirdly, taxes on profits. We need to work out how much profit the company has made and then work out an amount of tax payable at the country's tax rate on that profit. So profits times by the statutory tax rate. Let's think firstly about VAT in the example on the VAT slide. We have sales of a hundred and purchases of 60, which gives a net margin of 40. But to each of those VAT, at the rate of the UK rate of 20% has been added. So the total amount the customer pays is not 100, it's 120, and the total amount we pay to the suppliers is not 60, it's 72. So what's the real margin that's been earned? Has the company made 40 or has it made 48 in profit? The trick here is that although the cash account has gone up by 48, 120 in from the customer, 72 out to the supplier, that includes VAT of 20 from the customer and 12 paid to the supplier. That 20 and that 12 are just temporary cash flows. The customer gives us 20 as part of the payment of the invoice, but we need to pay that 20 on to the tax department. We paid 72 to the supplier, but we can claim back 12 of that when we do our next VAT return. So that 20 and that 12 are just temporary flows of cash. 20 comes in, but we need to pay it over to the tax department. We pay 12 out, but we can claim that 12 back from the tax department. So the real margin here is 40. The 20 and 12 coming in and out are just temporary cash flows that will settle up with the tax department the next time VAT is due. From a project point of view, most of the time we can afford to ignore this VAT. Yes, it will be charged on our purchases, but we will get that money back. We will need to charge VAT to our customers, but it isn't really our cash. We receive it, hold it, and then pay It over to the tax department. Customs duties. Let's contrast that with VAT. Custom duties commonly apply to imported components from certain countries. The rate of duty depends on what the component is, where it has come from, and what the rate is that's then applied to that. Let's say the project has imported something from the USA. Let's say it costs $1,000 at the exchange rate of 1.21. That is a cost of 826 pounds. When that item arrives at the wharf or the airport, if it's air freighted, it has a customs duty applied, let's say 10%. We cannot clear it out of customs and use it in our project without paying that customs duty. If that's 10%, that's an extra £82.64. So the true cost to the project of buying that component is £909 That's 1,000 converted at the exchange rate, plus a customs duty of 10%. And we don't get that money back. The real cost is 909. So customs duties act as an increase in our procurement costs.
