The Chartered Tax Adviser Examination

Transcription

1 The Chartered Tax Adviser Examination November 2015 Taxation of Major Corporates An Advisory paper developed as part of the Joint Programme with the ICAEW leading to the ACA and CTA TIME ALLOWED 3 ¼ HOURS plus 15 minutes reading time You should answer all SIX questions. Start each answer in a new answer booklet. At the end of the examination put all answer booklets used in the envelopes provided. Ensure your candidate number appears on all answer booklets used and on the front of the envelope. All workings should be shown and made to the nearest month and pound unless the question specifies otherwise. Marks are specifically allocated for presentation. Candidates who answer the law elements in this paper in accordance with Scots law or Northern Ireland law should tick the appropriate box on the front of each answer folder. Unless otherwise indicated by the provision of additional table information, you may assume that 2014/15 rates and allowances continue to apply for 2015/16 and future years. Candidates referring to actual or pending rates and allowances for 2015/16 and future years will not be penalised.

2 1. You are the Tax Manager at Paper plc, the parent company of a quoted UK trading group operating in the printing industry. At a recent meeting with the Finance Director of Paper plc you were informed that the group has decided to focus on its profitable London based business and to dispose of its Scottish operations. Paper plc has two wholly owned subsidiaries operating in Scotland, Paper (Aberdeen) Ltd and Paper (Edinburgh) Ltd. An offer has been received for the trade and some of the assets of Paper (Aberdeen) Ltd as follows, with all other assets, cash, debtors, creditors to be transferred at net book value: Freehold property (Aberdeen House) Stock Goodwill 15 million 4 million 11 million An offer of 50 million has been received for the shares in Paper (Edinburgh) Ltd. If accepted the disposals will occur during The entire proceeds of disposal will be used by Paper plc to purchase a freehold property in the London area to be used for manufacturing purposes. You are provided with the following information: 1) Paper (Aberdeen) Ltd commenced trading in 2000 on the acquisition of its business from a third party. It paid 100,000 for trading stock and 6 million for goodwill. Shortly thereafter it acquired a freehold property, Aberdeen House, for 10 million. 2) On 1 January 2008 the group expanded by acquiring an Edinburgh based business. Paper plc paid 8.5 million for a freehold property, Edinburgh House, and 10 million for goodwill. On 1 January 2012 the trade was hived down to a newly formed subsidiary, Paper (Edinburgh) Ltd. At that date the market value of the freehold property was 12 million and the goodwill 13 million. 3) Historically, the group amortised goodwill over 20 years but on 1 January 2015 all group companies adopted International Accounting Standards and the amortisation of goodwill ceased. The net book value of goodwill remained unchanged. 4) Paper plc is the representative member of a VAT group, which includes both Paper (Edinburgh) Ltd and Paper (Aberdeen) Ltd. Options to tax both Aberdeen House and Edinburgh House have been exercised. 5) The group has no non-trading assets. All companies prepare accounts to 31 December. 6) No election has been made to write down the cost of an intangible fixed asset for tax purposes at a fixed rate. Prepare a memorandum to the Finance Director of Paper plc setting out the consequences for the group of accepting the above offers in relation to: 1) Corporation Tax. (10) 2) VAT. You should ignore Indexation. (5) Total (15) Page 2 of 7

3 2. You are the Tax Adviser to Aire plc, the parent company of a UK trading group. Aire plc is in the process of acquiring Wharf Ltd, a non-trading UK holding company with three trading subsidiaries: Thames Ltd (tax resident in the UK), Seine SA (tax resident in France) and Amstel BV (tax resident in The Netherlands). Following the acquisition and to facilitate further expansion in Europe, Aire plc is considering the following reorganisation: 1) Wharf Ltd will transfer its holdings in Thames Ltd, Seine SA and Amstel BV to Aire plc. The consideration will be their book value and will be left outstanding on interest bearing intercompany account. The book value of the investments is below their market value. 2) A new holding company tax resident in The Netherlands, Europe Boats BV, will be set up as a wholly owned subsidiary of Aire plc. Aire plc will sell its shares in Seine SA and Amstel BV to Europe Boats BV, the consideration being an issue of new shares to Aire plc. The in-house Tax Manager of Aire plc believes that this will be more tax efficient than a direct transfer by Wharf Ltd to the new Dutch holding company. 3) Aire plc will set up a new UK tax resident company, Boats UK Ltd. Shares in all UK subsidiaries will be transferred by it to Boats UK Ltd in exchange for an issue of shares by Boats UK Ltd to Aire plc. 4) Thames Ltd has two distinct trades, boat manufacturing and a fish farm trade. The manufacturing trade will be retained, however Aire plc wishes to sell its fish farm trade. The fish farm trade will be hived down to a newly formed subsidiary of Thames Ltd, Thames Fish Ltd. All the shares in Thames Fish Ltd will then be sold as quickly as possible. 5) Wharf Ltd will be liquidated. Its remaining assets, the intercompany debts resulting from 1) above, will be distributed in specie to Aire plc. The in-house Tax Manager of Aire plc, Kevin Clift, has approached you for advice on the tax analysis of the proposed reorganisation. The group has no non-trading assets. All the trading companies have been trading for many years and all the subsidiary companies are 100% owned. A tax advantage is not the main purpose or one of the main purposes of the proposed reorganisation. Write a letter to Kevin Clift, the in-house Tax Manager of Aire plc, setting out the: 1) Corporation Tax consequences of the reorganisation. (13) 2) Stamp Duty consequences of the reorganisation. (2) You should NOT comment on any overseas tax implications. Total (15) Page 3 of 7

4 3. You are the Tax Manager of Garment plc, the UK parent company of a multinational group, which manufactures and sells clothing. The group turnover is 550 million and it has 3,000 employees. You recently met with the new Finance Director who has asked for your advice on transfer pricing. He told you the following: 1) Most of the group s sales are in the UK and Australia. Garment plc owns a retail brand name Dress It which is popular in both locations. A head office team in the UK control the clothing that is manufactured and sold under this brand name. 2) All of the group s manufacturing is undertaken by a subsidiary of Garment plc, Makeit Pvt, based in India. This location enables the group to make significant savings on labour costs. Makeit Pvt was acquired by the group in 2012 from a third party. The design of the clothing, type of fabric used and timetable are all at the discretion of the head office team of Garment plc. The fabric is purchased locally by Makeit Pvt. All finished clothing is immediately purchased by Garment plc. 3) Distribution Australia Pty, tax resident in Australia, purchases clothing from its parent, Garment plc, which it sells to local retailers who then on-sell the clothing through their retail outlets in Australia. Distribution Australia Pty only purchases clothing to satisfy orders from these retailers and does not hold stock for any length of time. The majority of clothing it sells is shipped directly from Makeit Pvt in India to Distribution Australian Pty but periodically it buys clothing directly from third parties. All distribution costs are borne by Distribution Australia Pty. 4) Head office functions including legal, accounting and human resources, are carried out in the UK on behalf of all wholly owned subsidiaries. These costs together with a proportion of the salary and associated costs of the Garment plc Board of Directors are recharged to the subsidiary companies. 5) Garment plc provides loan finance to its subsidiaries when necessary. Lending is done on the same terms as external borrowing in Garment plc. You should assume that Double Tax Treaties in line with the OECD model treaty are in place with India and Australia. Write a memo to the Finance Director discussing: 1) The UK transfer pricing implications of the transactions between Garment plc and its subsidiaries, including appropriate pricing methods. (15) 2) The rules and procedures to obtain an Advance Pricing Agreement. (5) You should NOT comment on withholding tax. Total (20) Page 4 of 7

5 4. You are a member of the London branch of the Chartered Institute of Taxation and have volunteered to give a presentation at the next meeting to the other members on key aspects of the General Anti-Abuse Rule. Write notes to be distributed at the meeting on the key aspects of the General Anti- Abuse Rule. (15) 5. You are a partner in an accountancy firm. Your client, H-to-O plc, is considering refinancing two of its UK subsidiaries, Water Ltd and Aqua Ltd. The Finance Director of H-to-O plc, Nick Nash, has contacted you in connection with the following proposed arrangements. Water Ltd is to be provided a loan by the National English Lending Bank plc, a UK bank. This will take the form of an interest bearing revolving credit facility of 50 million over a 10 year term. Sac d Argent S.A., an unconnected Luxembourg non-bank lender, will also provide finance to Water Ltd over several years. The final terms have yet to be agreed, including whether the lending would be from Luxembourg or through Sac d Argent S.A. s London branch. Aqua Ltd wants to expand its operations by acquiring the shares in Engine Ltd (described below). To enable this purchase, it has obtained a three year financing package from Money Bags Ltd, an unconnected Cayman Islands lender. The terms give Aqua Ltd the ability to capitalise its interest payments (i.e. to roll up and defer payment of the interest), and ultimately to issue shares in itself in satisfaction of payment of the interest. The shares in Engine Ltd are to be acquired from two individuals (Michael and Frank Engine). Due diligence has revealed that there are existing loan agreements between Engine Ltd with each of Michael and Frank, which are each for a term of nine months and repayable on demand. Nick is concerned by a gross-up clause (i.e. a clause obliging an additional payment to be made by Engine Ltd in the event a payment is subject to tax) in both those loan agreements. Write a letter to Nick Nash, the Finance Director of H-to-O plc, explaining: 1) The UK Withholding Tax obligations of the matters described above. (13) 2) The differences between the warranty and indemnity protection that Aqua Ltd could request from Michael and Frank Engine in the share purchase agreement. (2) Total (15) Page 5 of 7

6 6. You are a Tax Manager at an accountancy firm and you are assisting a partner in relation to the tax affairs of a new client, the Potion plc group. The group structure is shown below. Potion plc 100% Black Cat Ltd 100% 85% Cauldron Ltd Simmer Ltd 90% Wizard Ltd 30% Broomstick Ltd You have been supplied with the following information in relation to the companies, which are all UK tax resident. The Tax Manager at Potion plc has recently joined and he has not yet been able to locate full records, hence the information below is somewhat limited. You may however assume that Potion plc and Simmer Ltd have no taxable income and that no shares are held as trading stock. Black Cat Ltd Results for the year ended 30 June 2013: Trading loss (8.0) All the shares in Black Cat Ltd were acquired by Potion plc on 1 March 2013 from a third party. On 1 July 2013, all the assets of Black Cat Ltd were transferred to another group company and Black Cat Ltd ceased trading. Cauldron Ltd Results for the year ended 31 December 2013: Trading profit 11.0 Qualifying charitable donation (1.0) At 1 January 2013, Cauldron Ltd had trading losses brought forward of 5 million and had a non-trading loan relationship deficit brought forward of 9 million. Results for the year ended 31 December 2014: Trading profit 13.0 Non-trading loan relationship deficit (10.0) Chargeable gains 0.5 Cauldron Ltd does not wish to relieve its non-trading loan relationship deficit in the year ended 31 December 2014, but will carry it forward. Wizard Ltd Results for the year ended 31 December 2014: Trading loss (3.0) In August 2014, the directors of Potion plc agreed with a third party to sell Wizard Ltd, subject to contract. The heads of terms specified that the sale should be completed by 31 December 2014 but the sale aborted; the buyer had concerns relating to the unusually high interest rate contained in Wizard Ltd s debt facility agreement. Continued Page 6 of 7

7 6. Continuation Broomstick Ltd Results for the year ending 31 December 2014: Trading loss (6.0) Property business loss (0.8) CFC apportioned profits 0.2 Chargeable gains 0.5 Broomstick Ltd is a trading company and has nine other shareholders. No shareholder holds less than 5% of the share capital. Write a report for the Tax Partner discussing the operation of the group relief rules for Potion plc group for all relevant periods, using supporting calculations where appropriate. You are NOT required to discuss any filing obligations. (20) Page 7 of 7