Professional Level Options Module, Paper P6 (MLA)

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1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2008 Answers 1 Report to: The Directors of Holdco A and Holdco B From: Tax consultant Date: xx December 2008 Subject: The income tax and stamp duty implications arising from the proposed restructuring exercise (a) Article 5(14) of the Income Tax Act grants relief on share transfers involving an exchange of shares upon a reorganisation. The share transfers that are being contemplated by the parties do not involve an exchange of shares since while Mr A and Mr B will be transferring shares to Mr C, they will be acquiring shares from Holdco A and not from Mr C. Therefore, the transfers do not qualify for the relief under article 5(14). Article 5(9) grants relief in the case of a transfer that is made between two companies that are directly or indirectly owned and controlled (whether through a parent subsidiary relationship or not), as to more than 50%, by the same shareholders. The transfers by Holdco A to Mr A and Mr B, and by Mr A and Mr B to Mr C, are not transfers between companies and therefore do not satisfy the condition for this relief. There are no other exemptions or relief provisions that could be relevant to the proposed transfers, and income tax is therefore payable on the gains arising from the transfers. In terms of the Capital Gains Rules, the transfers of shares by Mr A and Mr B are transfers of controlling interests in Opco B, since both Mr A and Mr B own more than 25% of the shares in that company. For income tax purposes, therefore, the gains arising from the transfers will be calculated as provided in these rules and the transfer value is the higher of the consideration and the applicable percentage of the market value of the company. The market value of a company is its net asset value, as resulting from the balance sheet for the year ending in the year preceding the year of the transfer, adjusted as may be necessary to include the value of the goodwill and the market value of immovable property. The value of the goodwill is taken as two years profits calculated as a percentage of the total profits for the last five years. The applicable percentage is the percentage represented by the shareholding or the voting rights, whichever is the higher, of the transferor. The market value of the shares in Holdco A, determined according to the rules outlined above, is lower than the consideration agreed by the parties, and the transfer value for the purpose of calculating the income tax payable on the transfers will, therefore, be the agreed consideration. Because of the different voting rights in Opco B, the market value of the B shares is higher than the market value of the A shares. The result is that the market value of the shares transferred by Mr A is lower than the consideration, and Mr A s tax liability is calculated by reference to the agreed price, whereas the market value of the shares transferred by Mr B is higher than the consideration and the tax will be calculated by reference to the market value. The amount of tax payable by Holdco A on the proposed transfer of the shares in Opco A is calculated at Euro245,000; that payable by Mr A on the transfer of shares in Opco B is calculated at Euro69,912; and that payable by Mr B on the transfer of shares in Opco B is calculated at Euro81,583. The workings are shown in (c) below. The Duty on Documents and Transfers Act provides for an exemption from duty on a transfer of shares from one company to another that takes place upon any restructuring of holdings through a reorganisation within a group of companies. The exemption applies both to an exchange of shares in companies that form part of the same group and to a sale of shares when the seller and the buyer are companies within the same group. The exemption also applies to a transfer by an individual of any shares, held in his own name, in an exchange for shares in companies forming part of a group. The proposed transfers do not qualify as an exchange for reasons explained above. Furthermore, as also explained above, the sale of shares is not being made between companies. Consequently, none of the conditions for exemption would apply. Duty is chargeable on the higher of the consideration and the market value. The market value of a company is in practice determined in a manner similar to that established under the Capital Gains Rules outlined above, except that the Act provides that if the company owns immovable property, any liabilities exceeding the value of the other assets will be disregarded unless they refer to any outstanding bank loan or debt registered in the Public Registry that relates to the acquisition of the property. As Opco A owns immovable property, the unsecured shareholders loans will be disregarded except to the extent of the value of the other assets. The dutiable value is therefore the market value of the property reduced by the bank loan. The market value of the shares in Opco A calculated on this basis is higher than the agreed consideration and duty will therefore be chargeable on the market value. As the value of Opco A s immovable property exceeds 75% of the value of its fixed assets, the rate of duty is 5%. As Opco B does not own immovable property, the market value is determined without any adjustment for liabilities, and the rate of duty on the transfer of the shares in the company is 2%. As the market value in this case is lower than the consideration, duty will be chargeable on the agreed price. On this basis, stamp duty on the transfer of the shares in Opco A will amount to Euro62,500 while stamp duty on each of the transfers by Mr A and Mr B will amount to Euro4,000. The calculations are shown in (c) below. 17

3 (b) (c) If the shares in Opco A are transferred to Holdco B, rather than to Mr A and Mr B, the transfer would be a transfer between two companies (Opco A and Opco B) that are owned as to more than 50% by the same shareholders (Mr A and Mr B owning 66 7% of Opco A and 100% of Opco B). The transfer should therefore qualify for the income tax relief under article 5(9) of the Income Tax Act mentioned above. No income tax would be payable on the transfer of the shares in Opco A, however, those shares are subsequently transferred outside the group, the cost of acquisition for the purpose of calculating the tax on that subsequent transfer will be the cost at which they had been acquired by Opco A. The transfers of shares in Opco B Limited by Mr A and Mr B to a company owned by Mr C would still not qualify for income tax relief, since the transferors are not companies and are not related to Mr C. As stated above, the Duty on Documents and Transfers Act exempts from stamp duty a transfer that is made upon a restructuring of holdings through a reorganisation within a group of companies. Two companies are treated as forming part of a group in the context of the group exemption provisions of the act, if they are directly or indirectly owned and controlled (whether through a parent subsidiary relationship or not) as to more than 50% by the same shareholders. The proposed share transfers are part of a restructuring exercise upon the reorganisation of the four companies in question. Mr A and Mr B own 66 7% directly in Holdco A, 66 7% indirectly in Opco A, and 100% in Holdco B and Opco B. Therefore, the four companies form part of the same group and the restructuring exercise would therefore be an exercise covered by the stamp duty exemption. However, the exemption applies only if there is an exchange of shares or if it is a transfer of shares for consideration between two companies that form part of the same group. The transfer of shares in Opco A to Holdco B would satisfy this condition (as the transfer between two companies that form part of the same group) and would therefore be exempt from stamp duty. The transfer of shares in Opco B by Mr A and Mr B to a company owned by Mr C, however, is neither part of an exchange of shares nor a transfer between companies, and it is therefore not exempt. APPENDIX: Supporting calculations Transfer of shares in Opco A Calculation of income tax (transfer of a controlling interest) Market value of shares in Opco A Limited Euro Net asset value 900,000 Adjustment for goodwill (2 x Euro75,000) 150,000 1,050,000 Tax on transfer of shares in Opco A Limited by Holdco A Limited (transfer of a controlling interest) Consideration: Market value at Euro1,050,000 is lower than the agreed consideration of Euro1,200,000 1,200,000 Cost of acquisition: 500 shares at Euro1,000 per share 500,000 Taxable gain 700,000 Tax at 35% 245,000 Calculation of stamp duty Total liabilities (Euro100,000 + Euro500,000) 600,000 Net assets 900,000 Total assets 1,500,000 Immovable property 1,200,000 Other assets 300,000 Liabilities excluding the bank loan 500,000 Adjustment to the net asset value for disregarded loan 200,000 Market value calculated above 1,050,000 Adjusted by the disregarded shareholders loan 200,000 Real value for the purposes of stamp duty determination Being higher than consideration of Euro1,200,000 1,250,000 Property value exceeds 75% of total asset value therefore duty is calculated at Euro5 of every Euro100 62,500 18

4 Transfer of shares in Opco B Calculation of income tax Market value of shares in Opco B Limited Euro Net asset value 300,000 Adjustment for goodwill (2 x Euro25,000) 50, ,000 Tax on transfer of shares in Opco B Limited by Mr A (transfer of a controlling interest) Consideration: Market value percentage 50% Market value at Euro175,000 is lower than the agreed consideration of Euro200, ,000 Cost of acquisition: 250 shares at Euro1 per share 250 Taxable gain 199,750 Tax at 35% 69,912 Tax on transfer of shares in Opco B Limited by Mr B (transfer of a controlling interest) Consideration: Market value percentage 66 67% (according to the voting rights) Market value at Euro233,345 is higher than the agreed consideration of Euro200, ,345 Cost of acquisition: 250 shares at Euro1 per share 250 Taxable gain 233,095 Tax at 35% 81,583 Calculation of stamp duty Market value calculated above Euro350,000 which is lower than consideration of Euro400, ,000 Duty at Euro2 for every Euro100 transfer of half the shares by Mr A 4,000 Duty at Euro2 for every Euro100 transfer of half the shares by Mr B 4,000 2 AN Accountant Firm s address Board of Directors Gibco Limited Company address 1 December 2008 Dear Sirs Further to your instructions I set out my advice on the Maltese income tax implications for Gibco Limited based on the information you provided. (a) (b) Subject to any specific exemption or relief that may apply in particular circumstances, income arising in Malta is taxable in Malta. The taxation in Malta of income arising outside Malta depends on the domicile and residence of the company: a company that is resident and domiciled in Malta is taxed on its foreign income, while a company that is resident but not domiciled in Malta is taxed on foreign income only to the extent that it is received in Malta. The domicile of a company is the place of its incorporation. Therefore the fact that Gibco Limited (Gibco) is not incorporated in Malta means that it is not domiciled in Malta. A company is resident in Malta either if it is incorporated in Malta or if it is managed and controlled in Malta. Although Gibco is not incorporated in Malta, it is resident in Malta by reason of the place of its management and control. As a company that is resident but not domiciled in Malta, Gibco is subject to Maltese tax on income arising in Malta but on foreign income only to the extent that this is received or remitted into Malta. The Income Tax Act defines a participating holding (PH) as an equity holding in a company that is not resident in Malta and that satisfies any of the conditions listed in the definition. The definition lists a number of alternative conditions. In terms of the information provided, Gibco owns 20% of the share capital of Fixco Limited (Fixco). Thus, the first condition of the definition of PH where the holding exceeds 10% of the equity shareholding of the non-resident company, is satisfied. 19

5 However, this condition is subject to the proviso that where the shares held confer different percentages of entitlement with respect to votes, to profits available for distribution and to assets available for distribution on a winding up, the lowest percentage figure is deemed to be the percentage of shares held. Therefore, given that the percentage of entitlement of Gibco to some of the rights attached to its shares is less than 10%, the holding does not satisfy this condition. Another condition is satisfied if the holding is at least equal to Euro1,164,000. The fact that the investment was acquired for the equivalent of Euro1 5million in itself should satisfy this condition. However, one should also take into account the overriding condition that a PH only exists if the investment is made in equity shares. The law defines equity as a holding of the share capital in a company when the shareholding entitles the shareholder to a right to votes, to profits available for distribution to shareholders and to assets available for distribution on a winding up of that company. The investment in Fixco does not grant Gibco the right to receive assets upon a distribution on the eventual winding up of the company. Consequently, the investment in Fixco does not qualify as a PH. It is to be noted that even if the investment qualified as a PH, the tax benefit linked to a PH (whether in the form of a refund or an exemption) would still need to pass an anti-abuse test given that the investment was acquired after 1 January The main condition is that the investment must be in a company incorporated or resident within the European Union, or in a company that is subject to tax at a rate of not less than 15%, or in a company whose income does not principally consist of passive interest or royalties. If none of these conditions is satisfied other tests may be applicable. Fixco is not subject to tax on its income, which consists of passive interest that has not suffered any foreign tax. But Gibco s investment would nonetheless satisfy the anti-abuse test (if the investment qualified as a PH) by the fact that Fixco is incorporated in a territory forming part of the European Union. (c) The payment of a dividend out of profits that were subject to Maltese tax would normally give the shareholders the right to a refund of part of the tax paid by the company. The right to tax refunds is, however, subject to certain limitations, particularly where income is derived from or linked to immovable property situated in Malta, however, this should not be relevant to Gibco. The standard refund is 6/7ths of the tax paid by the company on the distributed profits. This refund is reduced to 5/7ths when the income of the company consists of passive interest or royalties or dividends from participating holdings that do not satisfy the anti-abuse tests, but this limitation does not affect Gibco. If the profits are distributed out of the foreign income account and the company has claimed double taxation relief, the refund is not 6/7ths but 2/3rds of the company tax before relief, or, where the relief claimed is the flat rate foreign tax credit (FRFTC), 2/3rds of the tax paid by the company in Malta. The 6/7ths refund should be more beneficial than the FRFTC since the net tax leakage after refunds resulting from the application of the FRFTC is 6 75% which is marginally higher than the 5% maximum applicable in the case of the 6/7ths refund. A company resident in Malta is entitled to unilateral relief for tax suffered outside Malta that does not qualify for treaty relief (and provided it does not claim the FRFTC). In such a case, a refund of 2/3rds, calculated on the income before double taxation relief, can be applied. This effectively means that a refund of 23 33% can be allowed to the shareholders of Gibco. After the company has claimed relief on the 10% foreign tax suffered, the net Malta tax leakage on the income from Fixco will be only 1 67%, and this course is therefore more advantageous than a claim for the 6/7ths refund. The income derived from Maltco does not have any effect on the determination of the refund. Net Grossing up for Grossing up Gross income Gross income income imputed tax foreign tax FIA FIA Euro Euro Euro Euro Euro Dividends from Maltco 65,000 35,000* 100,000 Dividends from Fixco 18,000 2,000 20,000 Total taxable income 100,000 20,000 Tax at 35% 35,000 7,000 Tax at source (35,000)* DTR (2,000) Tax payable 0 5,000 Tax refund, 2/3 of Euro7,000 4,667 *Note: The rate of tax chargeable in respect of the dividend from Maltco exceeds the rate of double taxation relief applicable to Maltco s distributed income. Therefore a credit for the full amount of tax (including FRFTC) shown on the warrant, is allowed to Gibco. (d) As Gibco is not domiciled in Malta, it is not subject to tax on foreign income that is not received in Malta. In the event that the above dividend income was to be received in Gibraltar, only the dividend from Maltco would be declarable in Malta since the taxation of Gibco in Malta would be limited to that on income arising in Malta. I trust the above satisfies your requirements, but do contact me further if you require any additional information or clarification. Yours faithfully AN Accountant 20

6 3 (a) The value added incentive scheme (VAIS) may be applied to the printing activity being carried out by Printingspree Limited, since no sales are intended to be made by retail and since the company is not disqualified from benefiting from this incentive as a consequence of any of the other negative tests: viz. spurious assembly, breaking bulk, repair, installation, commissioning of non own-manufactured goods. Subject to the capping proviso below, profits are taxed at reduced rates in terms of the VAIS (regulation 6 (BPR)). The reduced rate is 5% up to the year of assessment 2009, provided there is an increase in value added when compared to a base period and this rate is applied to the profits determined in accordance with the following formula: (% increase in value added divided by % increase in sales) multiplied by (increase in taxable profits). The percentage increases and increase in taxable profits are calculated by reference to the average value added, sales and taxable income in a base period. For the company s first three years there will be no base period and the result of the first part of the formula is deemed to be one. This means that the profits of these years are all taxed at 5%, however, this benefit is only available up to The profits which may be taxed at the 5% rate are furthermore capped at an amount (subject to annual inflation increase) for each equivalent full time employee. The company may also benefit from reduced rates of tax for reinvested profits (in terms of article 6 of the Business Promotion Act). Under this incentive, profits which are set aside for the purpose of financing a project (interpreted by Malta Enterprise as investment in industrial buildings and plant and machinery) approved by Malta Enterprise are taxed at a reduced rate of tax of 15 75% (instead of 35%). Printingspree Limited will invest in plant and machinery during 2010 from profits set aside during Therefore, this benefit would be applicable to the extent of any profits utilised for this investment. Investment aid regulations have been published in terms of the Malta Enterprise Act to provide for the possibility of allowing investment tax credits to a wider base of companies than that contemplated under the Business Promotion Regulations. The printing operation carried out by Printingspree Limited would qualify for such benefit on the grounds that the processing operation is not specifically disqualified in terms of the same regulations. The operation would also seem to satisfy other conditions set out in the regulations, like the fact that the company must not sell by retail. The credits are calculated at 50%, 40% or 30% of the qualifying expenditure on industrial buildings (including land), and on plant and machinery, depending on whether the company is determined to be large, medium or small. Unutilised credits at the end of the year are carried forward as credits for the next period. The amount carried forward is inflated at 5 19% before it becomes available as a credit for the subsequent period. The qualifying expenditure must be made in new assets or in assets that are used in Malta for the first time. (b) Euro Euro Euro Operating profits before depreciation 1,500,000 1,600,000 2,050,000 Initial allowance on buildings at 10% (50,000) Wear and tear allowances buildings (10,000) (10,000) (10,000) Wear and tear allowances motor vehicles (10,000) (10,000) (10,000) Wear and tear allowances others (80,000) (110,000) (160,000) Taxable income 1,350,000 1,470,000 1,870,000 Capping applicable to income taxable at 5% (i) 1,200,000 Tax at 5% on operating profits 60,000 Tax at 15 75% (iii) 78,750 Tax at 35% 52, , ,500 Investment tax credits b/f 591, ,985 Total investment tax credits for the year (ii) 675, , ,000 Absorbed during the year (112,500) (418,250) (488,985) Adjustment for aid intensity (iv) (96,250) Investment tax credits c/f 562, ,194 Tax payable ,515 (i) The per employee capping for the 5% rate applicable for 2008 is computed by multiplying Euro60,000 by 20 employees. (ii) The investment tax credits are calculated at 50% of the investment amounts on the grounds that none of the thresholds for turnover, total assets and number of employees, stipulated for medium sized companies, has been reached. (iii) That part of the total profits for 2009 that was reinvested during 2010 is subject to the reduced rate of tax for the year (Euro500,000 X 15 75%). (iv) Aid intensity rules require that an adjustment for the benefit reaped through the (article 6) reduced rates of tax is to be adjusted from the investment aid (Euro500,000 X (35% 15 75%)). 21

7 (c) Euro Euro Euro Accounting profits 1,420,000 1,490,000 1,895,000 Tax 0 0 (165,515) Distributable profits for the year 1,420,000 1,490,000 1,729,485 Final taxed account (FTA) (i) 1,350,000 1,470,000 1,397,100 Immovable property account (IPA) (ii) 90,000 Maltese taxed account (MTA) 217,385 Foreign income account (FIA) Untaxed account 70,000 20,000 25,000 (i) Profits on which the tax has been released by tax credits is allocated to the FTA. (ii) Calculation of profits that would otherwise be allocated to the MTA or FIA but for the deemed economic rent : Floor area 500 square metres at Euro60 per sq mt = Euro30,000 For three years Euro90,000 4 (a) (i) (1) Given that the disposal of the assets owned by Gonewrong Limited during the liquidation process will not attract any tax, the liquidation process as a whole would not be expected to attract income tax at all, since the company is in a net liability position and no reserves are being distributed. (2) The disposal of the shares in Gonewrong Limited will be considered as a disposal of a controlling interest. Thus, the consideration to be taken in determining any taxable gain is the higher of the market value of the shares or the agreed consideration. The market value of Gonewrong Limited is its net asset value at 31 December 2007 as adjusted for the value of the goodwill. No value for the goodwill is determined since the company made no profits. Other adjustments would be necessary only if the company owned investments in shares and immovable property. Therefore Euro100,000 is the market value of the shares and since this exceeds the agreed consideration it is also the amount to be taken as the transfer value in establishing the capital gain. The cost of acquisition is Euro500,000, being the nominal value of the shares. Therefore a capital loss of Euro400,000 would result from the sale of the shares. (3) The market value of the property is Euro400,000. The tax on property transfers is calculated at 12% of this amount, being Euro48,000. Since the property was acquired within five years of its transfer, Savings Limited could opt to charge the capital gain on the disposal of the property at the standard rate(s) of tax, however, this will not be beneficial in this case. Euro Consideration 400,000 Cost of acquisition: Euro233,000 inflated by index 2007: : ,716 Gain 143,284 Tax at 35% 50,150 (ii) In the absence of any tax liability, the proceeds from the liquidation of Gonewrong Limited should be Euro100,000. The sale of the shares would also not attract any tax given that it would be made at a loss. Therefore, prima facie, the liquidation would seem more rewarding over the sale of the shares, which will only generate Euro80,000. However, the sale of the shares would generate a capital loss of Euro400,000, which can be offset against future capital gains. If such offset can materialise, then the benefit reaped by the realisation of the shares would by far outweigh the liquidation option. If the sale of shares can be organised to be registered before the signing of the contract for the sale of the property, then the capital loss can be utilised and offset against the gain generated by sale of the property. But only if Savings Limited opts out of the final tax applicable on the sale of the property. The final 12% tax on the market value of the property gives a marginally better result when compared to the option of taxing the capital gain. However, when one takes into account the deduction for the loss arising on the disposal of shares together, opting out of the final tax will produce a more tax efficient result: 22

8 Calculation: Euro Proceeds from liquidation 100,000 Proceeds from sale of property: Euro400,000 less final tax of Euro48,000 (12%) 352, ,000 Proceeds from disposal of shares 80,000 Proceeds from sale of property: Euro400,000 (no tax is due since gain can be offset against the loss on the sale of shares) 400, ,000 (b) The attributes for a transaction or a series of transactions to be considered a tax avoidance scheme are provided for in article 51 of the Income Tax Act. These can be summarised as any scheme which reduces the amount of tax payable by any person and which is artificial or fictitious, or any disposition which is not in fact given effect, or any scheme entered into for the sole or main purpose of avoiding, reducing or postponing liability to tax, or obtaining a tax refund. The Commissioner may look at the end result of the proposed share transfer and conclude that the tax payable would be less than the tax that would be due by Goodintentions Limited if it sold the property. However, this is not enough to qualify the transaction as a tax avoidance scheme, since such a determination depends also on the purpose for which the transactions in question are carried out. There is nothing artificial or fictitious in the proposed transaction: Trickyventure Limited was actually set up. It actually acquired the property and started the project, and the proposed share transfer is intended to produce an actual change of ownership of that company. The fact that Goodintentions Limited set up a new company to carry out the project is not in itself a sufficient indication of tax avoidance. If the formation of the new company had been part of a plan for the eventual sale of the shares, it would be possible to argue that Goodintentions Limited had, at the outset, the intention of reducing the tax on the transfer of the property. However, the facts are that the decision to sell the shares, rather than the property, was taken on account of developments that occurred at a later stage, and that were not related to tax considerations. In these circumstances, there are no grounds on which the Commissioner can consider the transactions of Goodintentions Limited as a tax avoidance scheme. 5 (a) (i) The acquisition of immovable property is an exempt without credit supply. The renting of immovable property is also exempt subject to certain exceptions. Azzurra Limited does not incur any value added tax (VAT) when acquiring the property. Any VAT charged to Azzurra Limited on the repair and maintenance works carried out on the property, will be recoverable as input VAT only where the rental of the property is a taxable supply. (1) The renting of immovable property by a limited liability company to a VAT registered person for use in that individual s economic activity, is a taxable supply. VAT is chargeable on the rent at 18% and any VAT incurred on repairs and maintenance is recoverable. (2) The renting of property where such rent requires the premises to be licensed is also a taxable supply. VAT in such cases is charged at the reduced rate of 5% and any VAT incurred on repairs and maintenance is recoverable. (3) The fact that the business premises are rented out to a person who is not VAT registered means that the rent will be an exempt without credit supply. No VAT can be recovered as input tax on the repairs and maintenance of the property, since these would be considered to be directly attributable to the exempt without credit supply. Furthermore, any VAT incurred by Azzurra Limited on other costs which are attributable both to the exempt rental activity and to the taxable activities, will only be partially recovered by applying the partial attribution method. (ii) (1) & (3) The renting out by an individual of any property which is not licensable is an exempt without credit supply. No VAT can be recovered as input tax on the repairs and maintenance carried out on the property, since these would be considered to be exclusively attributable to the exempt supply. Furthermore, the same limitations under the partial attribution method will apply to the VAT registered individual as apply to Azzurra Limited as discussed under (a)(iii) above. (2) The renting of property where such property requires to be licensed is a taxable supply, irrespective of the type of person renting out the property. As for Azzurra Limited, VAT is charged at the reduced rate of 5% and any VAT incurred on repairs and maintenance is recoverable. (b) (i) Two leading principles are followed for the elimination of double taxation by the country of residence of the taxpayer. Under the exemption system the country of residence does not tax the income which may be taxed in the source country in terms of the relative treaty. This system may be applied by two methods. The full exemption method is where the income which may be taxed in the source country is not taken into account by the residence country when calculating the tax of the taxpayer and neither is it taken into account when determining the tax to be imposed upon the rest of the income. The exemption with progression method is where the income which may be taxed in the source country is not 23

9 (ii) taxed in the country of residence, but is taken into consideration when determining the tax to be imposed on the rest of the income. Under the credit system the country of residence calculates its tax on the basis of the taxpayer s total income. It then allows a deduction for the tax paid in the source country. Once again two methods may apply. The full credit method allows a deduction of the total amount of tax paid in the source country, whilst under the ordinary credit method the deduction is restricted to that part of the tax payable in the country of residence that is relevant to that income which may be taxed in the source country. Under the exemption system, the country of residence would not tax the income attributed to the permanent establishment which is being taxed at source. If the rate of tax in the country of residence was lower, then the implication would be that the marginal difference in tax cannot be otherwise relieved. Where the rate of tax is the same, the implications are that the person is simply paying the tax in the country of source that would otherwise have been paid in the country of residence. In these first two scenarios, the results obtained are the same as those applicable under the credit method. If the rate of tax in the country of residence exceeds that in the country of source, the exemption method would provide the taxpayer with the benefit of not having to top up the marginal difference in the tax. Under the credit method, however, the difference is payable in the country of residence. 24

10 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2008 Marking Scheme Marks 1 (a) Why transfers cannot be regarded as an exchange and art 5(14) cannot be considered 2 Why potentially relevant exemption under art 5(9) does not apply 2 Conditions for exemption from stamp duty not satisfied 1 5 Transfers are of controlling interests 0 5 Explanation of how tax is computed 2 Explanation of how stamp duty is calculated 2 10 (b) Reason behind applicability of art 5(9) exemption in transfer of Opco A 1 5 Applicability of exemption from stamp duty in transfer of Opco A 2 Transfer of shares in Opco B remains taxable 0 5 Duty upon transfer of shares in Opco B remains applicable 1 5 (c) Market value of shares in Opco A 0 5 Computation of tax on transfer of shares in Opco A Limited 1 Calculation of stamp duty on transfer of shares in Opco A Limited: Determination of adjusted market value 2 5 Determination of rate and duty payable 1 5 Market value of shares in Opco B 0 5 Computation of tax on transfer of shares in Opco B Limited Mr A 1 Computation of tax on transfer of shares in Opco B Limited Mr B 1 5 Calculation of stamp duty on transfer of shares in Opco B Limited Mr A and Mr B Appropriate format and presentation of the report 1 Effectiveness of communication 1 2 Total marks 26 25

11 Marks 2 (a) Taxation of income arising in Malta 0 5 Taxation of income arising outside Malta 1 Domicile of Gibco 1 Residence of Gibco 1 Remittance basis of taxation (b) Arguments behind not satisfying the 10% conditions for a PH 2 Qualification for a PH on basis of value of holding but for the overriding condition 1 Overriding condition investment to be made in equity shares 1 Definition of equity shares 2 Investment in Fixco fails the overriding test 0 5 Satisfaction of anti-abuse test still required if Fixco satisfied PH test 1 Conditions of the anti-abuse provisions 1 5 How Fixco would have satisfied the anti-abuse test 1 10 (c) Limitations on refunds in connection with owning property in Malta not applicable 1 Indentification of 6/7ths refund basis 1 Circumstances where 6/7ths is reduced to 5/7ths and non-applicability 2 Consideration of FRFTC and 2/3rds refund 1 5 Explanation of why 6/7ths refund normally more beneficial 1 Application of 2/3rds refund to Fixco most beneficial 2 Calculation: grossing up for imputation credit for Maltco dividend 0 5 Grossing up of foreign income 0 5 Application of imputation credit and why no reduction was made 1 5 Application of credit DTR 0 5 Available refund (d) Consequence of receiving income in Gibraltar 2 Appropriate format and presentation of the letter 1 Effectiveness of communication 1 2 Total marks 30 26

12 Marks 3 (a) Identification of VAIS qualification 1 Explanation of the VAIS benefit 2 Identification of benefit for reinvested profits 1 Explanation of the reduced rate of tax benefit 1 Identification of the investment aid benefit 1 Explanation of the investment aid benefit 2 8 (b) Initial allowances on industrial buildings 0 5 Full year s allowance during year of acquisition 0 5 Wear and tear allowances 0 5 Applicability of 5% rate (2008) 1 Employee capping applicable to profits subject to 5% rate 0 5 Calculation of reinvested profits 1 Reduced rate applicable to reinvested profits (2009) 0 5 Tax on non-qualifying profits at 35% 0 5 Determination as a small company 1 Investment tax credits at 50% 1 Aid intensity adjustment 1 Unutilised credits inflated at 5 19% when carried forward 1 9 (c) Allocation of profits relieved by credits to the FTA 1 Amount allocated to FTA calculations 1 Untaxed account calculations 1 Calculation of economic rent and allocation to IPA 1 5 Net of tax income allocated to the MTA Total marks 22 4 (a) (i) Tax implications of liquidation process 1 5 Disposal of share is of a controlling interest 0 5 Determination of capital loss on disposal of shares 2 Determination of final tax on transfer of property 1 Option to tax gain at standard rate five year rule 1 Calculation of tax on gain 1 7 (ii) Liquidation seems more beneficial at the outset 1 Argument for sale capital loss available to be set off against future capital gains 1 Arguments for opting out of final tax 2 Recommendation for sale of shares to precede sale of property 1 Calculations backing the arguments 2 7 (b) Artificial or fictitious transactions 1 5 Sole or main purpose that of obtaining a tax advantage 1 5 That sale of shares results in less tax is not in itself enough 1 Arguments against CIR arguing that this is a tax avoidance scheme 3 5 Conclude Total marks 22 27

13 Marks 5 (a) (i) Exempt acquisition of property no input VAT 1 Recoverability of VAT on works when supply is taxable and when exempt 1 Company renting to a registered person for use in his activity taxable 1 VAT rate 0 5 Company renting property requiring a licence taxable 1 VAT rate reduced 1 Company renting to a non-registered person exempt 1 Partial attribution method 0 5 Recoverability of VAT directly attributable 1 8 (ii) Unless rental of premises by individual requires a licence exempt 1 Restriction on recoverability of VAT 1 Individual renting property requiring a licence 1 3 (b) (i) The exemption system 0 5 Explaining full exemption method 1 Explaining exemption with progression method 1 The credit system 0 5 Explaining the full credit method 1 Explaining the ordinary credit method 1 5 (ii) Effect of a lower rate of tax in residence country under both systems 2 Effect of the same rate of tax in residence country under both systems 2 Effect of a higher rate of tax in residence country under both systems 2 6 Total marks 22 28