Paper F6 (MLA) Taxation (Malta) Thursday 8 December Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

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1 Fundamentals Level Skills Module Taxation (Malta) Thursday 8 December 2016 Time allowed: 3 hours 15 minutes This question paper is divided into two sections: Section A ALL 15 questions are compulsory and MUST be attempted Section B ALL SIX questions are compulsory and MUST be attempted Tax rates and allowances are printed on pages 2 4. Do NOT open this question paper until instructed by the supervisor. Do NOT record any of your answers on the question paper. This question paper must not be removed from the examination hall. Paper F6 (MLA) The Association of Chartered Certified Accountants The Malta Institute of Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest 2. All apportionments should be made to the nearest month unless stated otherwise 3. All workings should be shown in Section B TAX RATES AND ALLOWANCES The following tax rates and allowances for 2015 (year of assessment 2016) are to be used in answering the questions. Individual income tax Resident individual tax rates Married couples joint computation Other individuals Rate Rate 0 to 11,900 0% 0 to 8,500 0% 11,901 to 21,200 15% 8,501 to 14,500 15% 21,201 to 60,000 25% 14,501 to 60,000 25% 60,001 and over 35% 60,001 and over 35% Parents maintaining a child/paying maintenance Rate 0 to 9,800 0% 9,801 to 15,800 15% 15,801 to 60,000 25% 60,001 and over 35% Non-resident individuals Rate 0 to 700 0% 701 to 3,100 20% 3,101 to 7,800 30% 7,801 and over 35% Note: In the case of non-resident EU/EEA individuals who do not derive at least 90% of their worldwide income from Malta, the tax liability is capped as follows: Malta chargeable income Worldwide income x Tax charge if worldwide income is charged at the applicable resident individual tax rates Corporate income tax Standard rate 35% Value added tax (VAT) Standard rate 18% Reduced rate general 5% Reduced rate accommodation in premises required to be licensed in virtue of the Malta Travel and Tourism Services Act 7% 2

3 Capital allowances Industrial buildings and structures Initial allowance 10% Wear and tear allowance 2% Plant and machinery Wear and tear allowance as indicated in the question where applicable Minimum number of years over which items of plant and machinery are to be depreciated: Computers and electronic equipment 4 Computer software 4 Motor vehicles 5 Furniture, fixtures, fittings and soft furnishings 10 Equipment used for the construction of buildings and excavation 6 Catering equipment 6 Aircraft airframe or engine 6 Aircraft engine or airframe overhaul 6 Aircraft interiors and other parts 4 Ships and vessels 10 Electrical and plumbing installations and sanitary fittings 15 Cable infrastructure 20 Pipeline infrastructure 20 Communication and broadcasting equipment 6 Medical equipment 6 Lifts and escalators 10 Air conditioners 6 Equipment mainly designed or used for the production of water or electricity 6 Other machinery 5 Other plant 10 Capital gains index of inflation Capital gains [P.T.O.

4 Applicability of increase for inflation Cost of acquisition/improvements x index(yd) index(ya) 1 index(ya) Where: Index(yd) is the index for the year immediately preceding that in which the transfer is made; Index(ya) is the index for the year immediately preceding that in which the property in question had been acquired or completed, whichever is the later, or, when it relates to improvements, for the year immediately preceding that in which the cost of carrying out the improvements was incurred. Annual market rent (tax accounting) The annual market rent of immovable property situated in Malta owned and used by a company for the purpose of its activities (excluding property which is rented by the said company to other parties) is calculated by multiplying the aggregate surface area in square metres of all floors of such premises so owned and used by 250 per annum. Car fringe benefit rates Vehicle use Percentage of vehicle value Vehicle not more than six years old 17% Vehicle more than six years old 10% Fuel value Vehicle value not exceeding 28,000 3% Vehicle value exceeding 28,000 5% Maintenance value Vehicle value not exceeding 28,000 3% Vehicle value exceeding 28,000 5% Private use percentages Car value From To 0 16,310 30% 16,311 21,000 40% 21,001 32,620 50% 32,621 46,600 55% 46,601 and over 60% 4

5 Section B ALL SIX questions are compulsory and MUST be attempted Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet. 1 Circle Holding Limited (CHL) is a company registered in Malta. CHL is wholly owned by Anna Berg, an individual who is neither ordinarily resident in Malta nor domiciled in Malta. CHL owns all of the share capital of Circle Trading Limited (CTL), which is also a company registered in Malta. During its first financial year ended 30 June 2015, CTL derived the following streams of income: 1. Income from local retail operations within Malta and Gozo. The chargeable income from this source of income was 75, Income from retail operations conducted outside the Maltese Islands, which is attributable to a foreign permanent establishment. The chargeable income (gross of foreign tax) from this source was 112,000. This income suffered foreign tax at the rate of 25%. Evidence of the foreign tax paid is available, and double taxation relief is to be claimed in relation to this income. 3. Income from retail operations conducted outside Malta which is not attributable to a permanent establishment situated outside Malta. The chargeable income (gross of foreign tax) from this source was 62,000. This income suffered foreign tax of 2,400, for which double taxation relief is available and is to be claimed. 4. Foreign source passive interest income of 15,000, in relation to which no relief for double taxation is to be claimed. The distributable profits of CTL for the year ended 30 June 2015 were equal to its chargeable income after tax, and CTL distributed all of its post-tax profits for that year by way of dividend to CHL. CTL does not own any immovable property situated in Malta. It does not derive any income from immovable property situated in Malta, whether directly or indirectly. Required: In respect of each of Circle Trading Limited s streams of income (1) to (4): state the tax account to which the chargeable income after tax will be allocated; calculate the tax payable in Malta; and calculate the income tax refund claimable by Circle Holdings Limited as a result of the dividend distribution. Note: You should deal with each stream of income separately, and unless otherwise indicated, select the most beneficial method of taxation, taking into account the combined position of the company and its shareholder. (10 marks) 9 [P.T.O.

6 2 Esperti Limited (EL) is a company established in Malta which is engaged in the provision of professional marketing services to clients based in Malta and overseas. EL is registered for value added tax (VAT) purposes under Article 10 of the Value Added Tax Act. The following information relates to EL s VAT period from 1 September to 30 November All amounts in this question are stated exclusive of VAT. Note Turnover Marketing services to local retail customers 2,400 Marketing services to local business customers 12,750 Marketing services to foreign EU retail customers 3,200 Marketing services to foreign EU business customers 14,780 Marketing services to non-eu retail customers 1,650 Marketing services to non-eu business customers 9,860 Total turnover for the VAT period 44,640 Purchases of computer equipment for business use (capital goods) Intra-EU acquisitions 12,900 Imports (1) 1,100 14,000 Local overhead expenditure Goods at standard VAT rate (2) 1,120 Utilities (all supplied by the public authority) Water 230 Electricity 665 Premises insurance premium charges 120 2,135 Outsourced marketing services (3) Received from foreign firms established in the EU 1,550 Received from foreign firms established outside the EU 1,210 2,760 Total expenditure for the VAT period 18,895 Notes: (1) VAT at the standard rate was paid to Malta Customs on the imported computer equipment before the goods were released into free circulation. EL was issued with a document of importation evidencing the importation VAT paid. (2) Local overhead expenditure on goods includes an amount of 650 (exclusive of VAT) spent on an antique item bought at auction to decorate the company s office premises. (3) The outsourced marketing service providers are registered for VAT or equivalent tax in their respective countries of establishment, but are neither established nor registered for VAT in Malta. Required: Calculate Esperti Limited s total output tax and total input tax for the value added tax (VAT) return period ended 30 November Clearly identify any components of turnover which are not subject to Maltese VAT, and any items of expenditure to which input tax does not apply or otherwise is not deductible. (10 marks) 10

7 3 Silvia is an unmarried individual who was born in Malta and who formerly resided in Malta. Since 2005, Silvia has been working and residing overseas and envisages that she will continue to do so for the foreseeable future, albeit she expects to return to Malta in the distant future. The following information relates to Silvia s income and capital transactions in respect of the year ended 31 December 2015: 1. Salary of 75,500 derived from her overseas employment, which was received into her personal bank account in her country of residence. No part of this income was remitted to Malta. 2. Interest received on her bank account balances, as follows: Interest on bank accounts in her country of residence not remitted to Malta 950 Interest on bank accounts in Malta 125 1, Rental income totalling 12,000 received from the long-term letting of her former residence in Malta, which she still owns. She incurs annual interest of 7,500 on the outstanding balance of a bank loan she took out in Malta, in order to finance the purchase of this property. In 2015, she also incurred ground rent amounting to 250 and maintenance expenses of 975 in relation to this property. The income was received directly into, and the expenses were paid from, her personal bank account outside Malta and no part of the income was remitted to Malta. 4. Capital gains from the sale of marketable securities, as follows: (i) (ii) Required: A surplus of 2,500 from the sale of ordinary shares in a non-listed foreign company, which was remitted to her bank account in Malta; and A surplus of 1,450 from the sale of ordinary shares listed on the Malta Stock Exchange, which was received directly into her bank account in Malta. (a) State the basis on which Silvia will be chargeable to tax in Malta for the year of assessment (2 marks) (b) Assuming that Silvia selects the most beneficial method of taxation, calculate her income chargeable to tax and tax payable in Malta in respect of the year of assessment Clearly identify and give reasons why any items of income or gains referred to in the question are not subject to tax in Malta. (8 marks) (10 marks) 11 [P.T.O.

8 4 Charles, an unmarried individual who is ordinarily resident and domiciled in Malta, used to own 50% of the shares in Irons Limited (IL), a private company registered in Malta. The other 50% of the shares in IL were, and still are, owned by David. Both Charles and David had subscribed for their shares in IL at par, when IL was incorporated on 15 August As Charles wished to retire, he agreed to sell all of his shares in IL to David, for a consideration of 176,500. Charles and David had been business partners for many years, but are otherwise unrelated. The date of the share transfer was 15 October Each of the shares in IL has an equal 1 nominal value and confers equivalent percentage rights in the profits available for distribution to the ordinary shareholders. However, each share originally subscribed for by Charles confers three times the voting rights of each share subscribed for by David. Prior to 15 October 2015, there had been no changes in the shareholding of IL. IL s audited financial statements as at 31 December 2014 show the following balance sheet position: Immovable property asset at historical cost 120,000 Other tangible assets 95,000 Working capital 4, ,600 Share capital (1,200 shares of 1 each) 1,200 Retained earnings 218, ,600 Additional information: 1. The immovable property asset was acquired by IL during 2004, and was valued by an architect at 335,000 as of 15 October IL does not hold any investments in other companies. 3. IL s average annual profits before tax between 2010 and 2014 are 25, Charles marginal rate of income tax is 35%. Required: Calculate the tax payable by Charles on the sale of his 50% shareholding in Irons Limited. (10 marks) 12

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10 5 Monica Graham and her husband, James Graham, are resident outside the European Union. Between them, the couple own all of the shares in Graham Enterprises Limited (GEL), a private limited liability company domiciled in Malta and managed and controlled in Malta. The objects of GEL are to own and manage the overseas investment and business interests of the Graham family. As at 1 January 2015, GEL owned the following assets: 1. A 7% equity shareholding in Anglia Limited (AL), a non-maltese trading company domiciled and tax resident in the European Union which operates a chain of restaurants. The equity shares confer full voting rights and a full right to profits available for distribution, but carry no rights to assets available for distribution on an eventual winding up of the company. The investment in AL was made on 15 May 2013 at a cost of 1,245, A 95% equity shareholding in Orient Limited (OL), an investment company domiciled and tax resident outside the European Union. The shares confer full equity rights. The income of OL consists entirely of passive interest which does not suffer any foreign tax because OL benefits from a full tax exemption in its country of residence. The investment in OL was made on 30 June 2011 at a cost of 795, A small office situated in Malta having an area of 55 square metres. The office was acquired on 15 February 2013 at a cost of 195,000 and is used wholly and exclusively for the purposes of providing management services to AL. During the year ended 31 December 2015, GEL derived the following: 1. Net dividend income from AL of 124,400. This dividend was declared on 30 June 2015 and received by GEL on 15 July No withholding tax was suffered on this dividend, which was paid out of profits which had suffered underlying corporate tax at the rate of 25%. 2. Management fee income totalling 44,500 in respect of the provision of management services to AL during A capital gain arising from the sale on 1 August 2015 of a 50% shareholding in OL, for a consideration of 525,000. No foreign tax was suffered on this gain. 4. Dividend income from OL of 32,600. This dividend was declared on 31 October 2015 and received by GEL on 30 November No withholding tax was suffered on this dividend. During the year ended 31 December 2015, GEL incurred outsourced consultancy costs for the services of an advisory company based in Malta of 13,500 and office maintenance costs of 3,200. These costs were incurred exclusively in the production of the management fee income. GEL had no other income or expenditure in the year ended 31 December Additional information: 1. None of the companies (GEL, AL and OL) are property companies. 2. GEL has not made an election to allocate any Maltese taxed account or foreign income account profits to the immovable property account. 3. The memorandum and articles of association of GEL do not contain an express clause empowering GEL to receive income which specifically falls to be allocated to the foreign income account. 4. GEL applies the participation exemption where available. GEL does not have any distributable profits brought forward from previous years, and will distribute all of its distributable profits for the year ended 31 December 2015 by way of a dividend to its shareholders, who have been duly registered with the Inland Revenue for the purpose of making tax refund claims. 14

11 Required: In respect of Graham Enterprises Limited (GEL) for the year of assessment 2016: (a) (b) Compute the chargeable income, the tax charge, if any, and the distributable profits arising from each of the company s four sources of income and gains. In the case of any source you treat as exempt, clearly identify the reason for the exemption. Note: You should use the most beneficial method of taxation, taking into account the combined position of the company and its shareholders. (9 marks) Allocate the distributable profits to the appropriate tax accounts and calculate the income tax refunds claimable by the company s shareholders, if any, when the profits are distributed by way of dividend. Note: Ignore deferred taxation. (6 marks) (15 marks) 15 [P.T.O.

12 6 Theresa and Maria are two unmarried sisters who are both ordinarily resident and domiciled in Malta. They live together in the family home, and do not have any children. Since 1 February 2015, they have carried on the business of a fine arts shop, jointly, in partnership, sharing profits and losses equally. The partnership has not elected to be treated as a company for tax purposes, and constitutes the sole source of income for both Theresa and Maria. The summarised statement of profit or loss of the partnership for its first financial period ended 31 December 2015 is as follows: Note Turnover 457,600 Cost of sales (235,340) Gross profit 222,260 Less: Administration, selling and distribution expenses: Bad debts written off (1,400) Increase in provision for doubtful debts (2,100) Depreciation 1 (2,600) Surplus on disposal of shop furniture 2 2,200 Unrealised loss on exchange (400) Utility costs (2,010) Wages and salaries 3 (70,000) Social security contributions 4 (3,350) Other expenses (all tax deductible) (4,860) (84,520) Operating profit 137,740 Finance income 5 2,151 Finance expenses 6 (1,235) 916 Net profit before tax per financial statements 138,656 Notes: (1) Depreciation represents the accounting depreciation on the shop furniture and fixtures, which were purchased by the partners on 15 February 2015 at a cost of 25,000. (2) An item of shop furniture, which had been bought on 15 February 2015 at a cost of 4,000 (included in the 25,000 referred to in note 1, above), became surplus to requirements. Maria and Theresa were fortunate in that they were able to sell this on 30 November 2015 for a consideration of 6,200, which is in excess of the amount originally paid for it. (3) Wages and salaries comprise the partners salaries and drawings, as follows: Salaries Theresa 25,000 Maria 25,000 50,000 Drawings Theresa 7,500 Maria 12,500 20,000 70,000 16

13 (4) Social security contributions represent the amounts paid in respect of the partners Class 2 contributions, as follows: Theresa 1,675 Maria 1,675 3,350 (5) Finance income consists of the following: Local bank interest income (gross) subject to the investment income provisions 975 Interest received from the Value Added Tax (VAT) Department on an overdue VAT refund 1,176 2,151 (6) Finance expenses consist of the following: Interest payable to the partners Theresa 665 Maria Interest paid to a supplier in respect of the late payment of a trade debt 250 1,235 Required: (a) Calculate the chargeable income derived from the partnership for the year of assessment Note: You should start the computation with the net profit before tax figure of 138,656 and list all of the items referred to in the question, indicating by the use of zero (0) any which do not require adjustment for tax purposes. (9 marks) (b) Show the allocation of the partnership s chargeable income between Maria and Theresa, and calculate their individual chargeable incomes and income tax charges for the year of assessment (6 marks) (15 marks) End of Question Paper 17