Fundamentals Level Skills Module, Paper F6 (CYP)

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2 Fundamentals Level Skills Module, Paper F6 (CYP) Taxation (Cyprus) Alexis and Maria Pambos June 203 Answers and Marking Scheme Marks Capital/(net worth) statement for the period January 2007 to 3 December 202 January 3 December Assets Bank deposit account with local bank (note ) Bank deposit account with foreign bank (note 2) Trade debtors (note4) Immovable property (note 3) (working 3) W3 Investments (note 5) (50,000 shares at each) Motor vehicles (note 3) Total assets Liabilities Loan account (note 3) (20.000/3) (70.000) Net assets Less net assets at January 2007 ( ) Capital increase for the period Add: Loss on sale of motor car (note 4) Social insurance and cohesion fund contributions (note 9) ( ) Income taxes (note 9) Capital gains tax (note 3) Defence tax on interest (note ) (workings, 2) ( ) Provisional tax paid for the year 202 (note 8) Defence tax on rents (note 8)(( x 2 years x 75%) x 3%) Income tax on rents for the year 20 (note 8) (working 4).900 W4 Transfer fees of main residence (note 7) Renovations cost of main residence (note 7) Immovable property tax of main residence (2008 to 20) (note 7)(,000 for 4 years) Broker and stock exchange fees (note 5).000 Repayment of joint loan (note 3) ( x 2/3) Living expenses (note 9) Total assets and expenses Deduct: Donation from Alexis s father (note 7) (Immovable property tax for 200 and 20) (2.000) Business income (note 9) ( ) Rental income (note 8) (24 x 3,000 per month) (72.000) Interest income from local banks (note ) (working ) (30.000) W Interest income from foreign banks (note 2) (working 2) (39.000) W2 Sale of plot no 5 (note 3) ( ) Total undeclared income for the period Working (note ) For the period January 2007 to 30 August 20 (8.000 x 00/90) For the period 3 August 20 to 3 December 202 (8.500 x 00/85)

3 Marks Working 2 (note 2) For the period January 2007 to 3 August 20 ( ) For the period September to 3 December 202 ( ) Working 3 (immovable property) /3 share in plot no 4 (note 3) (50.000/3) Main residence (note 7) Shop (note 8) Disposal of plot no 5 (50.000) Working 4 (personal income tax paid by Maria for 20) Rental income 2 months at per month % allowance on rental income (7.200) Taxable income Income tax liability at 0% at 20% at 25% 200 Tax payable

4 2 Pambourinio Ltd Marks Corporation tax computation for the year ended 3 December 20 Net profit (per question) Add: Legal fees to collect business trade debtors (note 4) 0 Legal fees in defending the title to a fixed asset (note 4) 0 Legal and other fees in connection with the acquisition of fixed asset (note 4) Fees in connection with obtaining a bank loan to finance the purchase of an investment (note 4) Valuation fees on the property to be used as a security for the bank loan (note 4) Mortgage expenses for a bank loan (note 4) Loss on revaluation of shares Bonus paid to employees (note 5) (fully allowable expense) (tutorial note) 0 Provisional corporation tax paid (note 2) Depreciation (note ) Balancing addition (note 3) (working) W Loss on sale of saloon car Less: Unrealised exchange gain Profit from the revaluation of fixed assets Profit from a permanent establishment abroad Gain on the sale of a building which was considered to be a fixed asset Gain from the sale of land which was considered to be a business asset 0 Gross interest on bank deposits (taxed under SDC) (7.000 x 00/85) Profit for sale of motor van (note 3) Capital allowances: Office premises (note ) (3% x ( )) Application software acquired January 2008 capital allowances fully used by 3 December 200 (note ) 0 Capital allowances on computer hardware acquired January 2007 (note ) ( x 20%) Capital allowances on laptop acquired January 2009 (note ) (5.000 x 20% x 75%) (25.250) Taxable income Corporation tax at 0% Provisional tax (40, ,000) (60.000) Additional tax 0% (75% of is greater than ) Corporation tax payable Tutorial note: From 202 onwards the amount of the bonus not declared for social insurance purposes will not be a tax allowable expense. Due date: August 202 Working Motor van Calculation of sale proceeds Cost Depreciation per question (6.000) Accounting net book value Profit on sale Sale proceeds

5 Marks Balancing statement Cost Capital allowances per question (7.500) Tax written down value Sale proceeds (as calculated above) Balancing addition Airoza Limited (a) Capital gains tax on sale of office premises on June 202 Sale proceeds June Less: Cost of acquisition October Indexation allowance September 2000 to May 202 ( x 20,49/87,88) Renovation cost January Indexation allowance December 2004 to May 202 ( x 20,49/00,5) Interest Legal fees Transfer fees Indexed cost (.8.466) Capital gain Capital gain s tax at 20% No indexation on interest, legal fees or transfer fees. 8 (b) Balancing statement on sale of office premises on June 202 Cost of building ( x 4/5) Renovation cost Total cost Less: Wear and tear ( ) (23.000) Net book value at the date of sale Market value of the building at the date of sale Profit on sale of building Balancing addition restricted to allowances claimed (c) Capital gains tax payable on sale of shares by Karlitos Limited on June 202 Valuation as at June Less: Indexed cost (as in part (a)) (.8.466) Profit from sale of shares Capital gains tax at 20%

6 (d) Marks In the case of the sale of an asset, the gain is realised in the company, and thus results in a potential double charge to tax because of the need to pay a dividend in order for the shareholders to extract the gain from the company. An individual shareholder who is a Cyprus tax resident pays special contribution for the defence (SDC) at the rate of 20% on any dividends received. SDC is not levied on dividends received by companies. 5 Further, if the gain is not actually distributed as a dividend, the company will be liable to pay SDC on a deemed dividend if the overall level of distributions is less than 70% of after tax accounting profits. No double charge to tax can arise on a sale of shares because the gain is realised in the hands of the shareholders, not the company (a) Voluntary registration for value added tax (VAT) (i) Actual and intending traders A trader who makes taxable supplies (an actual trader) but whose taxable turnover is less than the compulsory registration threshold may register voluntarily for VAT, in which case the VAT Commissioner will register the trader from the date of the application for voluntary registration, or from a mutually agreed earlier date. 2 A trader who carries on a business and intends to make taxable supplies in the future (an intending trader), who is not liable to register under the future registration provisions because his/her turnover does not exceed the registration threshold, is eligible for voluntary registration in the same way as an actual trader. 2 4 (ii) Traders making supplies outside Cyprus A trader making supplies outside Cyprus who is not liable to be VAT registered may register voluntarily, provided he/she satisfies the Commissioner that he/she: () makes supplies outside Cyprus which would be taxable supplies if made within Cyprus; or (2) is carrying on a business and intends to make such supplies in the course or furtherance of that business; and (3) (in either case) is a person who has a business establishment in Cyprus or whose usual place of residence is in Cyprus and does not make and does not intend to make taxable supplies. 5 For this purpose, a person carrying on a business through a branch or agency in Cyprus is treated as having a business establishment in Cyprus, and usual place of residence in relation to a body corporate is the place where it is legally constituted. 2 5 (b) (i) Trader A should not register for VAT voluntarily because, if he does so, he will have to charge VAT on his sales. As Trader A s customers are individuals who cannot recover the VAT charged, he will possibly suffer a fall in sales because of this increase in prices or have to absorb all or part of the VAT cost himself. 2 (ii) (iii) Trader B should voluntarily register for VAT because doing so will enable him to recover the input VAT suffered on his purchases. As 50% of Trader B s sales are zero rated, this should result in refund of some of the VAT suffered, which is currently a cost to his business. 2 Trader C should voluntarily register for VAT because by doing so, he will be able to reclaim the VAT on the equipment purchased earlier than he might otherwise have done and so improve his short-term cash flow position

7 Marks 5 (a) XYZ Partnership trading goodwill Andreas: The 50,000 payment made by Andreas for his share of the partnership s trading goodwill must be carried forward. It cannot be deducted as a trading expense, either in the year of payment or in any future year, but can only be deducted from any amount received by Andreas from a future sale of trading goodwill in the XYZ Partnership, i.e. from the same business. 2 Peter: All of Peter s 25,000 (50,000/2) share of the payment for goodwill made by Andreas will be chargeable to income tax in the year 202, as costs incurred in respect of internally generated goodwill are not deductible. 5 Paul: The 2,000 Paul paid Peter for his share of the partnership s trading goodwill in 2003 can be deducted in full from his share of the payment for goodwill made by Andreas, so only 3,000 (25,000 2,000) will be chargeable to income tax in the year (b) (i) Trading loss incurred by a partnership A partnership loss is allocated between the partners in the same manner as profits would have been shared. Relief for their share of the loss is then given to each of the partners on an individual basis according to their personal circumstances/income: against any other income of the same year; and carried forward and offset against income of future years, indefinitely. 3 (ii) Pre-trading expenditure Provided the expenditure would have been allowed as a deductible expense if trading had already started, pre-trading expenditure of a revenue nature is deemed to have been incurred on the first day of trading