Paper P6 (MYS) Advanced Taxation (Malaysia) Friday 5 June Professional Level Options Module. The Association of Chartered Certified Accountants

Transcription

1 Professional Level Options Module Advanced Taxation (Malaysia) Friday 5 June 2015 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 4 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (MYS) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future. 2. Calculations and workings should be made to the nearest RM. 3. All apportionments should be made to the nearest whole month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates, allowances and values are to be used in answering the questions. Income tax rates Resident individual Chargeable income Tax payable Band Cumulative Rate Cumulative RM RM % RM 5,000 5, ,000 20, ,000 35, ,200 15,000 50, ,850 20,000 70, ,650 30, , ,850 Excess 26 Non-resident individual All chargeable income 26% Resident company Paid up ordinary share capital RM2,500,000 More than or less RM2,500,000 On the first RM500,000 20% 25% On the remainder 25% 25% Non-resident company All chargeable income 25% Labuan entity income from a Labuan trading activity All chargeable profits 3% Trust body resident or non-resident All chargeable income 25% 2

3 Personal deductions RM Self 9,000 Self additional if disabled 6,000 Spouse 3,000 Spouse additional if disabled 3,500 Child basic rate each 1,000 Child higher rate each 6,000 Disabled child each 5,000 Disabled child additional each 6,000 Life insurance premiums, approved scheme contributions maximum 6,000 Deferred annuity premiums, private retirement scheme contributions maximum 3,000 Medical expenses for parents maximum 5,000 Medical expenses for serious disease of self, spouse or child, including up to RM500 for medical examination maximum 5,000 Basic supporting equipment for self, spouse, child or parent if disabled maximum 5,000 Educational and medical insurance for self, spouse or child maximum 3,000 Study course fees for skills or qualifications maximum 5,000 Purchase of a personal computer maximum 3,000 Purchase of books, magazines etc for personal use maximum 1,000 Purchase of sports equipment maximum 300 Deposit for child into the National Education Savings Scheme maximum 6,000 Rebates Chargeable income not exceeding RM35,000 RM Individual basic rate 400 Individual entitled to a deduction for a spouse or a former wife 800 Capital allowances Initial Annual rate % rate % Industrial buildings 10 3 Plant and machinery general Motor vehicles and heavy machinery Office equipment, furniture and fittings Agriculture allowance Buildings for the welfare of employees nil 20 Other buildings used in the business nil 10 All other qualifying agricultural expenditure nil 50 Real property gains tax Individuals Individuals All (citizens and (non-citizens) other permanent persons residents) Rate Rate Rate % % % Date of disposal Disposal within three years after the date of acquisition Disposal in the fourth year after the date of acquisition Disposal in the fifth year after the date of acquisition Disposal in the sixth year after the date of acquisition or thereafter [P.T.O.

4 Sales and service tax Rate % Sales tax 10 Service tax 6 Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Rate % For every RM100 or fractional part thereof: On the first RM100,000 1 On the next RM400,000 2 On the excess over RM500,

5 This is a blank page. Question 1 begins on page 6. 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 Yesterday, you and your tax principal participated in a conference call with the senior management of Planet Sdn Bhd (Planet), an investment holding company. Below are extracts from the notes of the conference call and an from your tax principal to you, his tax assistant. Extracts from the notes of the conference call Planet has identified Sun Sdn Bhd (Sun), a Malaysian resident, as a suitable investment. Planet and Sun are currently unrelated. Sun has been manufacturing solar panels for three years and has an accumulated tax loss of RM6 8 million and unabsorbed capital allowances (CA) of RM1 5 million as at the year ended 31 May Apart from the solar panel manufacturing business, Sun does not have any other assets or sources of income. Sun expects to make an accounting profit of about RM8 5 million in the year ended 31 May The negotiated price for Planet either to purchase Sun s shares or take over Sun s manufacturing business (purchase of assets and liabilities) is RM75 million. Whichever alternative is chosen, Planet will finance the acquisition with a loan of RM55 million from its non-resident parent company and RM20 million from a Malaysian commercial bank. The annual interest rates on these loans will be 11 5% and 7% respectively. Planet would like to know what difference there would be from an income tax perspective if it acquired the entire share capital of Sun as compared to acquiring all the business assets and liabilities of Sun s manufacturing business. Extracts from the from your tax principal Please draft a letter to the managing director of Planet regarding the proposed investment in Sun. Consider the two options for the proposed acquisition: Option 1: Planet will acquire 100% of the share capital of Sun for RM75 million; or Option 2: Planet will acquire all the assets and liabilities of the manufacturing business of Sun for RM75 million. The issues you should consider for each option are: (i) (ii) the form of income derived from the investment in Sun by Planet; the deductibility of the interest expense for Planet; (iii) any transfer pricing issue/s; (iv) the treatment of the trade receivables and inventory; and (v) Sun s unabsorbed loss and CA brought forward. 6

7 (vi) Comparative tax computations To demonstrate the differences in the income tax treatment under the two options, I suggest that you supplement your explanations to the client with comparative tax computations of the chargeable income of the Sun business after taking into account the interest expense for the Sun manufacturing business for the year of assessment (YA) For this purpose, you should assume that the tax adjusted income for the business under both options for YA 2016 will be RM9 8 million before taking into account the interest expense; and the current year CA is RM300,000 if the business remains within Sun (Option 1), and RM540,000 if the business is owned by Planet (Option 2). (vii) Tax planning advice/ideas Lastly, assuming that Option 2 is adopted, identify any possible tax planning advice/ideas with regard to the interest rate on the loan from Planet s non-resident parent company and the trade receivables and the inventory to be taken over. Required: Draft the letter to the managing director of Planet Sdn Bhd as requested by the tax principal. The following marks are available: (i) Form of income derived by Planet from the investment. (2 marks) (ii) Deductibility of the interest expense. (4 marks) (iii) Transfer pricing issues. (iv) Trade receivables and inventory. (4 marks) (7 marks) (v) Unabsorbed loss and capital allowances brought forward. (6 marks) (vi) Comparative computations of chargeable income. (5 marks) (vii) Tax planning advice/ideas. (3 marks) Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the letter and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.

8 2 Two months ago, the Inland Revenue Board (IRB) conducted a tax audit on your client, Inovasi Sdn Bhd (Inovasi), a producer of home appliances. Subsequently, the IRB raised an additional tax assessment on Inovasi dated 5 May 2015 which included a 45% penalty for an incorrect tax return. The IRB also issued a letter dated 5 May 2015 listing the tax adjustments made. Both the notice of assessment and the letter were delayed in the post and only received by Inovasi on 30 May Extracts from an from your manager outlining the IRB s adjustments and from the client s file records are set out below. Extracts from the from your manager I am preparing for a meeting with Inovasi tomorrow regarding the additional assessment of tax raised. As you are aware, the IRB raised an additional tax assessment relating to certain tax adjustments made in respect of items in Inovasi s statement of profit or loss for the year ended 31 March I have listed below the items which the IRB have disallowed: (i) (ii) 50% of RM78,000 being catering services The IRB have argued that, as an entertainment expense item, 50% is disallowable. Commission of RM100,000 paid to a non-resident The IRB have argued that, as the withholding tax provisions have not been complied with, this commission is disallowable. (iii) Repair and maintenance of machinery of RM180,000 relating to an engine overhaul The IRB have argued that the substantial amount of this expense indicates that this is capital in nature and thus disallowable; and (iv) Product improvement of RM1,250,000 The IRB have argued that this expense is capital in nature and thus disallowable. In advance of my meeting, I would like you to brief me on the following: (a) (b) (c) Deductibility of the expense items The grounds, with detailed reasoning, in defence against the disallowance of each of the above four expense items and your conclusion on the deductibility of each item; Penalty for incorrect return Your advice on whether or not the 45% penalty included in the tax assessment for YA 2014 is appropriate in light of your conclusions on the deductibility of the expense items in (a); and Valid appeal Whether or not the additional assessment can still be appealed against by Inovasi and the procedure which must be followed for such an appeal to be valid. 8

9 Extracts from Inovasi s file records (i) (ii) Required: The RM78,000 catering services cost represents the catering (food and beverage) expense for the product launch of the latest range of home appliances. The commission was paid to Mr Carlos Santiago of Brazil for introducing customers to Inovasi. Mr Santiago operates a well-known business of sales introductory services in Brazil. He charges a commission for introducing customers to businesses. (iii) The machinery was acquired at a cost of RM5 million two years ago. The overhaul, involving replacement of parts, is recommended once every 24 months to keep the machinery in proper working order. (iv) The RM1,250,000 comprises the cost of testing additional improved features to existing product models in order to maintain the performance of these appliances. Carry out the work as instructed by your manager. The following marks are available: (a) Deductibility of the expense items: (i) Catering services expense; (5 marks) (ii) Commission; (5 marks) (iii) Repair and maintenance; (5 marks) (iv) Product improvement. (4 marks) (b) (c) Penalty for incorrect return. Valid appeal. (3 marks) (3 marks) (25 marks) 9 [P.T.O.

10 Section B TWO questions ONLY to be attempted 3 On 1 June 2015, Best Sdn Bhd (Best), a trading company which makes up its accounts annually to 30 June, was taken over by Excellent Bhd (Excellent). Excellent makes up its accounts annually to 30 September. In 2015, Best intends to change its year end to be coterminous with its new holding company, Excellent. It will apply to the Director General of Inland Revenue (DGIR) to direct its basis period/s. Best s accounting periods are as follows: 1 July 2013 to 30 June July 2014 to 30 September 2015 Thereafter annually to 30 September Best operates solely from Kuala Lumpur, although it imports and exports from neighbouring countries. To expand its business, Best has recruited Miss Rajin (Rajin) to be based in China for 24 months from 1 July 2015 to 30 June Rajin has never left Malaysia for any extended period prior to 1 July While in China, Rajin will actively seek out suppliers and customers for Best s trading business. Rajin will travel extensively within China. She is fully authorised to enter into business contracts on Best s behalf. Best intends to charge all expenses relating to Rajin s deployment in China to its business accounts in Malaysia. Once every three months, Rajin will spend a week in Kuala Lumpur to report her progress to and have discussions with the marketing director of Best. Throughout the whole of the 24-month period, Rajin will continue to derive rental income from her property in Malaysia. Each year, Rajin will remit 50% of her Chinese income back to Malaysia. Rajin plans to spend a month touring China at the end of her 24-month deployment, before relocating back to Malaysia in August The Malaysia China double tax agreement is based on the OECD model double tax agreement and provides for relief for double taxation by credit. Required: (a) (b) (c) (d) Explain how Best Sdn Bhd s basis periods for the years of assessment 2015 and 2016 will be determined, whether by direction by the Director General of Inland Revenue or otherwise, demonstrating how the underlying principles are satisfied. (6 marks) Explain, with reasons, whether Best Sdn Bhd is likely to have a permanent establishment in China from 1 July (4 marks) Assuming Best Sdn Bhd does have a permanent establishment in China from 1 July 2015, explain the income tax implications and treatment for the company for the purposes of Malaysian tax during the 24 months, on the assumption that the profits attributable to the permanent establishment are subject to tax in China. (4 marks) For each of the years of assessment 2015, 2016 and 2017, state, with reasons, Miss Rajin s Malaysian residence status and explain her Malaysian income tax treatment. (6 marks) (20 marks) 10

11 This is a blank page. Question 4 begins on page [P.T.O.

12 4 A famous artist fulfilled a childhood pledge to save the world by setting up a trust (the BnB Trust) to help the homeless. He held an art sale of his works in January 2014 and made sales amounting to RM1 million and immediately transferred this sum to the newly-established BnB Trust. The artist then took a year off to relax, and did not derive any other income at all during the year The artist s two best friends, who are both accountants, were appointed as trustees of the BnB Trust. The trustees invested the RM1 million from the art sale in a shophouse in the inner city and in dividend-yielding shares and placed the remainder of the sum in fixed-term deposits with Malaysian banks. The shophouse is used as a service centre for the homeless. The ground floor of the shophouse has been converted into a soup kitchen to prepare and serve simple nutritious meals once a day at noon for a price of RM1 per serving. There is also a clinic which provides medical attention at RM1 per visit. The upper floor features dormitories and shower cubicles. The BnB Trust provides a clean foldable canvas bed for RM2 per night and a hot shower at 50 sen per person. The two trustees are paid trustees remuneration of RM6,000 per annum each. The trustees spend 80% of their time supervising the running of the centre and coordinating the many volunteers who come to help with cooking, cleaning, treating and counselling at the centre. Three full-time caretakers are employed to ensure the smooth functioning of the centre. The BnB Trust is not an approved institution or organisation. Nevertheless it receives a steady stream of donations from well-wishers and supporters. The BnB Trust s statement of profit or loss for the year ended 30 April 2015 indicates the following: RM Income: Sale of meals and services 328,000 Malaysian dividends 10,000 Interest from Malaysian banks 3,000 Donations 120,000 RM 461,000 Less: Expenditure Cost of meals and services 400,000 Utilities 36,000 Trustees remuneration 12,000 Salary to caretakers 43,200 Depreciation 10,000 (501,200) Net loss (40,200) 12

13 Required: (a) (i) Explain the income tax treatment for the artist for the year of assessment 2014 in respect of the sale of the artworks and transfer of the RM1 million to the BnB Trust. (3 marks) (ii) Explain how your answer in (i) would change if the RM1 million had been transferred to an approved organisation instead of to the BnB Trust. (2 marks) (b) (c) (d) In respect of the receipts from the provision of food and services to the homeless, state the arguments for these being treated as each of the following in the hands of the BnB Trust for tax purposes: income from a business of providing food and shelter; other income [under s.4(f)]; and non-income receipts. (6 marks) State the arguments for and against the donations received by the BnB Trust being treated as income. (3 marks) Assuming that the receipts from the provision of food and services and the donations both constitute business income, and that there are no capital allowances for the year, compute the chargeable income of the BnB Trust for the year of assessment Clearly show any losses to be carried forward. Note: Start your tax computation with the gross income figures. You should label the figures comprising the stages of the computation and indicate, by the use of the word nil, any item shown in the statement of profit or loss for which no tax adjustments are necessary. (6 marks) (20 marks) 13 [P.T.O.

14 5 ABC Sdn Bhd (ABC) was incorporated in Malaysia on 1 February 2012 with an authorised and paid-up share capital of RM2 million held by Miss A (25%), Mr B (30%) and Mr C (45%). Prior to 8 March 2012, the cash of RM2 million from the paid-up share capital was ABC s only tangible asset. On 8 March 2012, the company acquired a piece of land for RM500,000, in cash. ABC completed the construction of a factory on the land on 31 August 2012, at a cost of RM1 million, and commenced the manufacturing of industrial printers on 1 October ABC makes up its accounts annually to 30 September. As business has been profitable, ABC is now ready for expansion. It has commenced construction of a new factory building at a cost of RM3 4 million on the existing land with completion expected no later than 30 June At the same time, ABC plans to install and commission new machinery costing RM5 million by the end of July 2015 so that production may commence in early August ABC is also considering the alternative of leasing (rather than buying) this new machinery for a total cost of RM5 5 million, payable over three years. Miss A is contemplating disposing of her entire 25% shareholding in ABC to a new shareholder, Mr D. Miss A is worried about her exposure to real property gains tax as she fears that ABC may have become a real property company (RPC) at some point in its development. Required: (a) (i) State the conditions which must be fulfilled for a company to be eligible for the reinvestment allowance and explain whether ABC Sdn Bhd fulfills each of them in the year of assessment (7 marks) (ii) Advise ABC Sdn Bhd on what it needs to do or do differently regarding the new factory building and machinery in order to qualify for the maximum available reinvestment allowance claim. Clearly state the relevant year of assessment and qualifying expenditure based on your advice. (5 marks) (iii) Assuming ABC Sdn Bhd qualifies for the reinvestment allowance in the year of assessment 2015, explain the potential consequences if it then sells the manufacturing business in the year (2 marks) (b) Explain whether ABC Sdn Bhd will or will not have the status of a real property company (RPC) at each of the following dates: 1 February 2012; 8 March 2012; 31 August 2012; and 30 June (6 marks) (20 marks) End of Question Paper 14