Contracting for Forest Carbon : Elements of a Model ... - Forest Trends

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3.5 Payment Mechanics. On or before the Payment Due Date, the Buyer shall transfer the Statement Amount, plus any amounts payable to the Seller Representative under clause 4.1 (VAT Taxes) and 4.2 (Other Taxes), in US Dollars and by direct bank transfer or equivalent transfer of immediately-available funds, into the account specified in Annex 3. 3.6 Advance Payments. The Buyer shall make advance payments according to the Advance Payment Schedule in Annex 3 (“Advance Payments”). Advance Payments directly offset the Buyer’s payment liability for delivered VERs. 3.7 Sufficient Funds. The Buyer shall maintain sufficient funds to fulfill its obligations under this agreement, and shall make audited financial reports available to the Seller Representative upon the Seller Representative’s reasonable request. 3.8 Transfer of Title. No property interest in the VERs will pass to the Buyer until delivery and payment are complete in accordance with the terms of this agreement. Upon such completion, all rights, title and interest in and to the VERs, will transfer to the Buyer. Transfer of VERs does not transfer eligibility for tax credits or other direct third-party subsidies for the operation of the Project. These sample price and payment clauses, however, represent only one simplified way of dealing with the issues described above, and they omit several additional issues entirely. Omitted issues, including the three discussed below, can add substantial complexity if used. First, payments in-kind, in the form of equipment, raw materials, technology, or training, may be desirable for both the buyer and the seller. The form, feasibility, and valuation of in-kind payments depend entirely upon the circumstances. Second, particularly where the project involves complex payouts to various sellers and supporting entities, or significant prepayment by the buyer, it is common to use an escrow account to transfer payments for VER from the buyer to the seller. Procedures for disbursement of funds from the escrow account would be outlined in a separate agreement between the account holder (a financial institution), and sellers and supporting entities, if applicable, and must be in accordance with project governance and benefit sharing arrangements. Third, if sellers are concerned about the risk that the buyer will not have the money to pay when required, sellers can require the buyer to maintain a letter of credit, or sufficient funds, or some other form of performance assurance. However, performance assurance can be expensive and may be hotly contested. Taxes The agreement must address which party is responsible for taxes assessed in connection with the agreement. One common tax that must be addressed is the value-added tax (VAT), which is charged when a good or service is transferred and is based on the value of the good or service. The sample agreement provides that the buyer is responsible for paying VAT. If VAT is chargeable to the sellers’ representative, then the buyer must pay the sellers’ representative the value of the tax. Note that where a “Reverse Charge Rule” is part of the VAT law in the buyer’s country, the buyer is responsible for calculating and paying VAT directly to the foreign government entity that charges the tax and therefore need not pay the sellers’ representative. Contracting for Forest Carbon | 8
Box 5. Sample VAT and Other Tax Clauses Article 4. Taxes. 4.1 VAT Taxes. All amounts referred to in this agreement are exclusive of any value-added taxes (“VAT”) properly chargeable on goods or services transferred under this agreement. (a) VAT applicability and treatment will be determined pursuant to the law of the jurisdiction where a transfer subject to VAT is deemed to take place. (b) On the Payment Due Date, the Buyer shall pay to the Seller Representative an amount equal to the VAT, if any, properly chargeable in the Seller Representative's jurisdiction for transfers under this agreement; provided, however, that (i) such amount need not be paid until the Seller Representative provides the Buyer with a valid VAT invoice in relation to that amount and, (ii) the Buyer is under no obligation to make any payment to the Seller Representative in respect of VAT which the Buyer must self-assess and pay under the “reverse charge” rule or any similar system in the Buyer's jurisdiction. (c) Each party shall, to the extent permitted by law, provide the other with any additional valid VAT invoices as required for the purposes of this agreement and, to the extent required by law, shall correctly account for any VAT properly due in its jurisdiction. 4.2 Other Taxes. (a) Subject to each party's obligations relating to VAT, each party shall cause all royalties, taxes, duties and other sums (including any stamp duty, other documentary taxes, climate change levy or other environmental tax or levy) legally payable by that party arising in connection with this agreement to be paid. (b) In the event that the Seller Representative is required by law to pay any tax which is properly for the account of the Buyer, the Buyer shall promptly indemnify or reimburse the Seller Representative in respect of such tax. In the event that the Buyer is required by law to pay any tax which is properly for the account of the Seller Representative, the Buyer may deduct the amount of any such tax from the sums due to the Seller Representative under this agreement and the Seller Representative shall promptly indemnify or reimburse the Buyer in respect of any such tax not so deducted. In the sample agreement, taxes other than the VAT are allocated to the party to whom they are properly chargeable. This is a simple solution, though many will prefer to negotiate a different allocation of taxes and other costs. Representations Representations are statements of fact that are made by each party to an agreement in order to remove uncertainties and induce the other party or parties to enter the transaction. For example, each party typically represents that it is legally authorized to enter into, and perform its obligations under, an agreement. Representations should be limited to statements of fact, and should not contain forward-looking statements or obligations (which are usually referred to as “covenants” and dealt with separately). In a project involving multiple sellers, the sellers may want to represent that the project’s governance mechanisms facilitate full, prior, and informed consent, enhance transparency or equity, or increase the likelihood of project success. If a party’s representations turn out not to have been true when made – known as a failure of that party’s representations – then the other party will have rights and remedies as specified Contracting for Forest Carbon | 9
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