ADVANCED STAGE EXAMINATION

Transcription

1 MICPA EXAMINATION TERM 1, 2012 (MAIN) Questions and Unofficial Suggested Answers ADVANCED STAGE EXAMINATION Taxation Published by MACPA STUDENTS SOCIETY 1

2 This booklet contains the questions, unofficial suggested answers for TAXATION of ADVANCED STAGE EXAMINATION for the Term 1, 2012 Main examination session. The unofficial suggested answers were prepared by the MACPA Students Society and are not purported to be the official positions of The Malaysian Institute of Certified Public Accountants (MICPA). While every care has been taken to anticipate and satisfy the examiners requirements in the preparation of the suggested answers, these should not be regarded as the only solutions. Some of the answers set out are considerably more substantial than even the best candidate could achieve in the time available in an examination. It is felt, however, that longer, more detailed answers can be great help for study purposes and that shorter answers would not always be as helpful. ALL RIGHTS RESERVED : NO PART OF THIS PUBLICATION MAY BE TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL PHOTOCOPYING, RECORDING OR OTHERWISE, WITHOUT THE PRIOR PERMISSION OF THE MACPA STUDENTS SOCIETY. 2

3 THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA) TERM TAXATION Main Examination 1. Time allowed: 3 hours (plus 15 minutes reading time). 2. This open-book examination consists of FOUR questions totalling 70 marks. 3. This paper contains 10 pages (including this page). 4. Answer ALL questions. 5. Any reference to "the Act" means the Income Tax Act, 1967 (as amended). 6. Workings that support the answer should be submitted with your answer The Malaysian Institute of Certified Public Accountants The Malaysian Institute of Certified Public Accountants in Malaysia is the owner of the copyright for the material. The contents may not be reproduced or copied in whole or in part, in any form or by any means without the prior written consent of the Institute 3

4 Question 1 (a) Tastylicious Sdn Bhd, a Malaysian tax resident company, is engaged in the business of manufacturing and selling of condiments and seasonings. The Company started operations in the year 2005 and carries on the manufacturing activities in a factory located in Sabah. It owns the Tastemore brand name which is patented in Malaysia and overseas. Tastylicious Sdn Bhd prepares its accounts to December 31 annually. During the year ended December 31, 2010, the Company embarked on a 3-year expansion programme with the view to increasing its production of condiments and seasonings for export. The Company s Statement of Comprehensive Income for the year ended December 31, 2011 is as follows: Note Sales 10,000 Less: Cost of sales Opening stock 1,000 Cost of goods manufactured 1 6, ,000 Closing stock (2,000) -- (5,000) ---- Gross profit 5,000 Interest income Less: Administration expenses Auditors remuneration 40 Bank charges 2 50 Consultants expenses Depreciation of property, plant and machinery 90 Repair and maintenance expenses 4 40 Salaries, bonuses and allowances Utilities 100 (900) Selling and distribution expenses Advertising and promotion expenses Allowance for doubtful debts Freight and insurance expenses Salaries, bonuses and allowances Travelling and entertainment expenses (3,000) Financial expense Interest expense 10 (1,100) Other expenses Loss on disposal of property, plant and machinery 11 (150) -- Loss before taxation (100) ====== 4

5 Notes 1. Cost of goods manufactured includes: (i) Purchases of raw materials 3,000 (ii) Depreciation of land and building 700 (iii) Depreciation of property, plant and equipment 2,000 (iv) Discount received from suppliers (850) (v) Insurance premium paid to a Malaysian insurance 100 company for import of raw materials (vi) Provision for slow-moving stocks 1, Bank charges include: (i) Fees paid to bank to process monthly payroll 6 (ii) Stamp duty on new loan facility Consultants expenses include: (i) Payment for export market research 45 (ii) Payment to consultant to assist in obtaining halal certification. The certificate was issued on March 31, (iii) Payments to legal firms for the following purposes - to obtain new loan facility 20 - to recover trade debts 25 (iv) Payment to tax agents to assist in a tax audit Repair and maintenance expenses include the following renovation costs: (i) General electrical installation 9 (ii) Lighting 4 (iii) Sanitary fittings 7 5. Salaries, bonuses and allowances include: (i) Provision for bonus 250 (ii) Allowances paid to the marketing director to defray expenses incurred to entertain customers 120 (iii) Leave passage to the managing director - for travel within Malaysia 30 - for travel outside Malaysia 35 (iv) Annual family day attended by employees and immediate family members 85 (v) Payment for post graduate course in information technology and communication to develop the employees technical skills 60 5

6 6. Advertising and promotion expenses include: (i) Expenses incurred on participating in trade exhibitions 200 held outside Malaysia (approved by the authority) (ii) Expenses for the registration of trademark in overseas 10 (iii) Expenses to advertise the Tastemore brand name overseas 110 (iv) Costs incurred to prepare tender to supply goods to prospective customers outside Malaysia 90 (v) Gifts to customers - Tastemore products 15 - cash contribution 5 (vi) Donations to an approved institution - 2 computers 6 - cash 4 7. Allowance for doubtful debts comprises the following: (i) General provision 350 (ii) Specific provision ====== 8. Freight and insurance expenses include: (i) (ii) Freight charges incurred to ship finished goods to Port Klang in Peninsular Malaysia 130 Payments to Sure Insurance (M) Berhad, a company incorporated in Malaysia, to insure finished goods that were exported to Indonesia: - Insurance premium 47 - Service tax 3 9. Travelling and entertainment expenses include: (i) Expenses incurred to entertain existing customers 180 (ii) Expenses incurred by the sales director and sales manager to conclude a contract with a customer from Indonesia. - air fare (business class) 20 - accommodation 6 - subsistence 1 (they left Malaysia on August 22, 2011 and returned to Malaysia on August 26, 2011) 6

7 10. Interest expense includes: (i) (ii) Interest expense on money borrowed to provide interest-free advances to a related company 300 Interest expense on money borrowed to finance the expansion project The Company disposed of a sorting machine on which reinvestment allowance at the rate of 60% was claimed. The asset was purchased on July 1, 2010 and the cost of the asset was RM400,000. The disposal price was RM200, Interest income comprises the following: (i) interest income from deposits with a Labuan bank 20 (ii) interest income from deposits with a Malaysian bank in Sabah === 13. Other information (i) Current year capital allowances on fixed assets acquired prior to January 1, 2011 amounts to RM1,000,000. (ii) (iii) Fixed asset additions during the year: (i) Plant and machinery for an additional production line 10,000 (ii) Computer equipment (used in the administration office) 500 There was no unabsorbed reinvestment allowance brought forward from the previous year. Required: Compute the chargeable income of Tastylicious Sdn Bhd for the year of assessment 2011, showing all relevant tax adjustments. (18 marks) (b) Hopemore Sdn Bhd (HSB) is in the business of manufacturing household gloves and surgical gloves. HSB has a subsidiary company, Planmore Sdn Bhd (PSB), which was in the business of manufacturing surgical gloves. PSB had ceased business operations 5 years ago and had remained dormant since. PSB has unabsorbed losses carried forward of RM1 million. Currently, HSB intends to transfer the business operations of manufacturing surgical gloves to PSB in order to manage better the business of manufacturing surgical gloves. Required: State your arguments whether the transfer of business operations of manufacturing surgical gloves from HSB to PSB is regarded as a tax evasion. (2 marks) (Total: 20 marks) 7

8 Question 2 (a) YL Resorts Group (M) Sdn Bhd (YL Resorts) which is involved in the hospitality business is proposing to construct and operate a 3-star hotel in Kota Kinabalu. It has received confirmation from the Malaysian Investment Development Authority that the project qualifies for either pioneer status or investment tax allowance under the Promotion of Investments Act 1986 for a period of 5 years. The projected adjusted business income/(loss), capital expenditure and capital allowances due to YL Resorts over the first 5 years of operations are as follows: Year ending 31 December Adjusted income/ (Adjusted loss) Land Hotel building Fixture/ Fittings & equipment Capital allowances 2013 (400) 6,000 2,000 10,000 4, (3,000) 0 0 3,000 2, , ,000 1, , , , ,700 Required: (i) Compute YL Resorts Group (M) Sdn Bhd chargeable income and the amount to be credited to its tax exempt account for each of the years of assessment from 2013 to 2017 if it is granted: (i) (ii) pioneer status investment tax allowance (7 marks) (ii) Based on your computation in (i) above, state (with reasons) whether you would advise YL Resorts to apply for pioneer status or investment tax allowance. (3 marks) (b) SL Mining Co Sdn Bhd (SLM) is engaged in tin mining operations. In order to gain access to tin ore reserves pursuant to a lease signed with the Government, SLM is required to relocate a bridge which ran across the leased land. SLM incurred RM10 million for the design and construction of the alternative bridge. Required: State your arguments for and against the deductibility of the expenditure incurred by SL Mining Co Sdn Bhd. (4 marks) 8

9 (c) Bright Institute Sdn Bhd (BI) is in the business of providing private tertiary education. In 2011, it acquired a building for RM10 million and spent an additional RM800,000 on the following capital expenditure to enable it to be used as a building for an educational institution: Installation of air-conditioning system 500 Electrical wiring 200 Signages 100 Required: Advise Bright Institute Sdn Bhd, with reasons, whether the purchase price of the building and the additional capital expenditure qualifies for capital allowances. (4 marks) (Total: 18 marks) Question 3 (a) Safety Insurance Malaysia Berhad is a Malaysian resident insurance company. The following information has been extracted from its accounts for the year ended December 31, 2011: Life Fund Shareholders Fund General Fund Gross premiums 25,000-10,000 Dividend income 3, ,500 Interest income Rental income Gross proceeds from sale of 3, shares Gross proceeds from sale of 8, building Net claims incurred - - 2,800 Commissions 1, Management expenses 5,000-1,550 Cost of shares sold 1, Cost of building sold 2, Reserve fund for unexpired risks as at December 31, ,500 Surplus transferred from Life Fund to Shareholders Fund 1,

10 Other information: Marine, aviation & transit policies Fire, motor & other policies 1. Premiums Gross premiums 6,000 4,000 Reinsurance premiums payable to insurer in Malaysia Reinsurance premiums payable to insurer outside Malaysia All dividends are single-tier dividends from Malaysian companies except for foreign dividends of RM50,000 received by the Life Fund. Assume there are no expenses attributable to the single-tier and foreign dividends. 3. Reserve fund for unexpired risks as at December 31, 2011 as determined by the relevant authority regulating the insurance industry 2, Reserve fund for unexpired risks as at December 31, 2010 for tax purposes was RM1,500, Capital allowances for the year of assessment 2011 in respect of life insurance business and general insurance business amounted to RM900,000 and RM600,000 respectively. 6. The amount available as a set-off against the tax charged on actuarial surplus transferred from the Life Fund to the Shareholders Fund under Section 110B of the Act is RM75,000. Required Compute the tax payable by Safety Insurance Malaysia Berhad for the year of assessment (11 marks) 10

11 (b) Encik Hamdan entered into the following transactions: December 1,2009 July 1, 2010 Purchased a bungalow for a consideration of RM4 million. Purchased a piece of land in Shah Alam at a price of RM2.5 million. September 1, 2010 Purchased 10,000 shares in M Sdn Bhd, a real property company, at the price of RM6.50 per share. July 1, 2011 Transferred the land acquired in July 2010 to H Investment Sdn Bhd at a value of RM3.3 million. The market price of the land at the date of transfer of the land is RM3.5 million. Encik Hamdan holds 70% of the shares in H Investment Sdn Bhd. 80% of the consideration for the transfer of the land was settled by the issuance of shares to Encik Hamdan and the balance in cash. September 1, 2011 Sold 5,000 shares in M Sdn Bhd at a price of RM8.00 per share. M Sdn Bhd ceased to be a real property company on February 1, December 20, 2011 Transferred the bungalow by way of a gift to his son. The market value of the bungalow at the date of the transfer was RM4.8 million. Required: (i) (ii) State the real property gains tax (RPGT) implications to Encik Hamdan on the above transfer of properties and sale of shares. Compute the RPGT payable arising from the above transactions, if any. (5 marks) (Total: 16 marks) Question 4 (a) The group structure of Odessi Bhd and its subsidiaries (Odessi Group of Companies) is as follows: Odessi Bhd (OB) 100% Odessi Manufacturing Sdn Bhd (OMSB) Odessi Engineering Sdn Bhd (OESB) 100% 100% Odessi Marketing Sdn Bhd (OMktgSB) Odessi Parts Sdn Bhd (OPSB) 11

12 All the companies in the Odessi Group have a December 31 year-end and a paid-up capital in ordinary shares of more than RM2.5 million except for OPSB which has a paid-up capital in ordinary shares of RM100,000. OB is principally an investment holding company listed on Bursa Malaysia Securities Bhd falling within the ambit of Section 60FA of the Act. It provides corporate support and management services to its subsidiaries but the fees charged to the subsidiaries are insufficient to recover the costs incurred in providing these services. OB obtained significant borrowings from banks to fund the operations of OMSB, OESB and OPSB but the rate of interest charged to these subsidiaries was lower than the rate of interest charged by the banks. The low management fees and interest charged to the subsidiaries were compensated by high dividends paid by the subsidiaries. OB s investment in OESB was financed by bank borrowings. OMSB is engaged in the manufacturing of automotive components for the local and export markets. It is a highly profitable company and has been claiming reinvestment allowance for the past 10 years. It has a Section 108 balance of RM4.5 million as at December 31, It has been paying large amounts of dividends to OB over the years. OMktgSB markets the products manufactured by OMSB and third parties and has set up sales offices in China and Indonesia. It has been incurring losses for the past 5 years. OESB provides engineering and technical services to the companies in the Odessi Group and to third parties. Its fees are charged based on cost plus markup of 10%. It has been making significant profits for the past 8 years due to the strong demand for its services. It has a Section 108 balance of RM3 million as at December 31, 2011 and has been paying dividends to OB by way of setting off against the amount owing to OB. OPSB was set up 3 years ago to manufacture brake discs and pads not already produced by OMSB. Due to stiff competition from other producers, it has been making losses annually and requires financial support from OB in the form of interest-free loans. This resulted in an amount of RM2.5 million owing by OPSB to OB as at December 31, Required: Advise how the Odessi Group of Companies may be reorganised to achieve greater tax efficiency. (12 marks) (b) Ace Ltd, a company resident in the United Kingdom engaged in the trading of specialised hardware products, is proposing to market and sell its products in Malaysia and is exploring various options to operate in Malaysia. Required: (i) (ii) State four (4) factors which could indicate that Ace Ltd is trading in Malaysia. State four (4) activities which may be undertaken by Ace Ltd in Malaysia without giving rise to a permanent establishment in Malaysia. (4 marks) (Total: 16 marks) 12

13 Question 1 TERM EXAMINATION SUGGESTED ANSWERS TAXATION (a) The chargeable income of Tastylicious Sdn Bhd for the year of assessment 2011 is computed as follows: Tastylicious Sdn Bhd Note Loss before taxation (100) Add/(Less) Depreciation (700+2,000+90) 2,790 Insurance premium (import)(double deduction) (100) Provision for slow-moving stocks 1,000 Stamp duty on new loan facility 40 Payment for export market research (double deduction) (45) Payment to consultant to assist in obtaining halal certification 35 Payments to legal firm (to obtain new loan facility) 20 Payment to tax agents to assist in a tax audit 40 Repair and maintenance expenses (9+4+7) 20 Provision for bonus 250 Allowances paid to the marketing director (50% deductible) 60 Leave Passage ( ) 65 Payment for post graduate course (double deduction) (60) Expenses incurred on participating in trade exhibitions (double deduction) (200) Expenses for the registration of trademark overseas (double deduction) (10) Expenses to advertise the Tastemore brand name overseas (double deduction) (110) Costs incurred to prepare tender (double deduction) (90) Gifts to customers (cash contribution) 5 Donations to an approved institution (2 computers) / cash (6+4) 10 General provision for bad and doubtful debts 350 Freight charges incurred to ship finished goods to Port Klang (double deduction) (130) Insurance premium (export) (double deduction) (47) Expenses incurred to entertain existing customers (50% deductible) 90 Double deduction for promotion of exports - accommodation (2x5xRM300) (3) - subsistence (2x5xRM150 limited to RM1,000) (1) Interest expense on money borrowed to lend to related Company (interest free advances) 300 Interest income (separately assessed) (50) Loss on disposal of property, plant and machinery 150-4,379 Adjusted Income 4,279 Less: Capital allowances 1 (4,614) -- Statutory Business Income 0 Add: Reinvestment allowance withdrawn (60% of RM400,000) 240 Less: Reinvestment allowance utilised (240) 0 Add: Interest income 30 Less: Approved donation (limited to 10% of aggregate income) (3) -- Chargeable Income 27 ===== 13

14 Notes (1) Capital allowance Qualifying Initial Annual Total Cost Allowance Allowance Existing Assets: Current year capital allowance 1,000 New Assets: Plant and Machinery 10,000 2,000 (14%) 1,400 3,400 Computer equipment (10%) Total 4,550 Less: Disposal of sorting machine Qualifying cost 400 Less: CA claimed [400x(20%+14%)] (136) TWDV 264 Sale Proceeds Balancing allowance* 64 * As the disposal was within 2years, an alternative treatment would be withdraw capital allowances granted of RM136,000 via a balancing charge if there is no commercial basis for the disposal. - CA available for set-off 4,614 ===== (2) Reinvestment allowance (RA) claim (i) Plant and machinery 10,000 ===== 60% : RA available for set-off 6,000 Less: RA utilised (240) RA c/f 5,760 ===== (b) Tax Evasion It could be perceived that there is a deliberate alteration of the incidence of tax and if proven so, then the transfer would be considered a tax evasion scheme. The transfer of business may be artificial / fictitious and if proven so, then the transfer would be considered a tax evasion scheme. The transfer of business has no commercial substance. Not Tax Evasion There is no deliberate alteration of incidence of tax by creating fictitious transactions The transfer of business has commercial substance Legitimate steps are taken to arrange the tax affairs of the companies in a legal way There is no violation of tax legislation The transfer of business is a bona fide transaction 14

15 Question 2 (a) YL Resorts Group of Companies (i) Pioneer Status (Exemption of 100% of Statutory Income as hotel is located in East Malaysia):- YA 2013 YA 2014 YA 2015 YA 2016 YA 2017 Total Adjusted Income/ (Adjusted Loss) (400) (3,000) 4,000 5,000 7,000 Less: Capital Allow ance (CA) 0 0 (4,000) (5,000) (2,800) Statutory Income ,200 Less: Pioneer loss b/f (3,400) Pioneer Income Exempt from Tax / Exempt Income Account Unabsorbed business loss c/f 400 3,400 3,400 3,400 0 CA b/f 0 4,300 6,500 4,400 1,100 Current year CA 4,300 2,200 1,900 1,700 1,700 Less: CA utilised 0 0 (4,000) (5,000) (2,800) CA c/f 4,300 6,500 4,400 1,100 0 (ii) Investment Tax Allowance (ITA) YA 2013 YA 2014 YA 2015 YA 2016 YA 2017 Total Statutory Income (x) ,200 Less: ITA absorbed (100% of x) ,200 Chargeable Income Unabsorbed Loss b/f 400 3,400 3,400 3,400 3,400 Credited to Exempt Income ,200 4,200 ITA 100% as hotel is located in East Malaysia:- Hotel Fixture/Fittings & Equipment Total YA ,000 10,000 12,000 YA ,000 15,000 YA ,000 16,000 Less: Amount absorbed in YA 2017 (4,200) Unabsorbed ITA c/f 11,800 15

16 YL Resorts should apply for the ITA incentive for the following reasons:- (i) (ii) (iii) The exempt income account for the ITA incentive is RM4.2 million as opposed to RM800,000 for the pioneer incentive. The balance of ITA not utilised of RM11.8 million at the end of the fifth year can be carried forward for offset against the statutory income of YL Resorts of the same business for subsequent years of assessment. The unabsorbed business loss of RM3.4 million can be carried forward for an indefinite period of time for set-off against future business income of YL Resorts. (b) SL Mining Co. Sdn Bhd (SLM) Deductible for Tax Purposes SLM is in the business of tin mining operations. By incurring such an expenditure, mining operations would be permitted. Otherwise it would have been prohibited pursuant to the Lease Agreement. Such expenditure is regarded as wholly and exclusively incurred in the production of SLM s gross business income from mining activities. The expenditure was to remove an obstacle to enable SLM to have access to the tin ores which are otherwise inaccessible. Such an expenditure is a necessary expenditure in operating a tin mining business. The expenditure was not incurred in setting up or establishing an entity structure or organisation. It is simply an additional cost of operating the business. Not Deductible for Tax Purposes SLM had to incur the expenditure before it could have access to the tin ore reserves. Such initial expenditure are regarded as pre-operating in nature and thus not deductible for tax purposes. The expenditure was to improve SLM s asset, namely, the lease for tin ore reserves and hence it is capital in nature. The expenditure was incurred to ensure the continued existence of an asset of an enduring nature, i.e. to enable SLM to continue its tin mining operations. Such expenses can be regarded as capital expenditure not deductible for tax purposes. (c) Bright Institute Sdn Bhd Purchase Price of Building Qualify as an industrial building under Paragraph 42B Schedule 3 if the building is approved by the Minister of Education or Minister of Higher Education. Electrical Wiring Does not qualify as qualifying plant expenditure but will qualify as part of the cost of the industrial building if the building is approved by the Minister of Education or Minister of Higher Education. Installation of Air-Conditioning System / Signages Qualify as plant as it serves an active purpose in the business and are regarded as apparatus used in carrying on a business. 16

17 Question 3 (a) Tax payable by Safety Insurance Malaysia Berhad for year of assessment 2011: Life Shareholders General Fund Fund Fund Gross premiums ,000 Add: Dividend income 50 Interest income Rental income Gross proceeds from sale of shares 3, Gross proceeds from sale of building 8, Reserve fund for unexpired ,500 Actuarial surplus transferred from the Life Fund 1,000 Less: Net claims incurred - - 2,800 Commissions Management expenses - - 1,550 Cost of shares sold 1, Cost of building sold 2, Reinsurance premiums in Malaysia - - 1,200 Reinsurance premiums outside Malaysia (95%x800) Reserve fund for unexpired ,035 (25% x ( ) +800) Adjusted income/ (Adjusted loss) 8,250 1,300 3,305 Less: Capital allowances Statutory income = Chargeable income 7,350 1,300 2,705 Tax rate 8% 25% 25% Tax payable Less: Tax set-off under Section 110B 75 Net tax payable Total net tax payable 1,514 ==== (b) (i) Transfer of land to H Investment Sdn Bhd For the transfer of land held by an individual (Encik Hamdan) to a company controlled by the individual (H Investment Sdn Bhd,), the disposal price is deemed to be equal to the acquisition price. (Para 3(b), Schedule 2, RPGT Act). Hence there is no gain/loss for RPGT purposes. Sale of 5,000 shares in M Sdn Bhd Even though M Sdn Bhd has ceased to be a real property company (RPC) from 1 February 2011, its shares remain as RPC shares to Encik Hamdan. Hence RPGT is chargeable on any gains resulting from the sale of the shares. 17

18 (ii) [Both methods of computation of RPGT payable Methods 1 & 2 below are acceptable though Method 1 is the strictly correct approach to calculate the RPGT)] Method 1 RM Disposal price (RM8.00 x 5,000) 40,000 Acquisition price (RM6.50 x 5,000) 32,500 - Chargeable gain 7,500 Less: Exemption under RPGT (Exemption)(No. 2) Order 2009: 30%) 5%) x 7,500 30% = (2, )/2,250 x 7,500 = 1,875/2,250 x 7,500 6,250 1,250 30% (disposal within two years) 375 Method 2 RM Disposal price (RM8.00 x 5,000) 40,000 Acquisition price (RM6.50 x 5,000) 32,500 - Chargeable gain 7, % 375 Transfer of bungalow by way of gift to son As this is a gift by parent to son, Encik Hamdam is deemed to have received no gain and suffered no loss on the disposal (Para12, Schedule 2, RPGT Act) Question 4 (a) In order to achieve greater tax efficiency for the Odessi Group of Companies, the following can be considered: 1. Odessi Bhd (OB) to charge management fees to its subsidiaries at market rates for corporate support and management services provided, including OPSB which is loss making. Management fees would be deductible to the subsidiaries. Loss making subsidiaries would have higher tax losses carried forward but they can be utilised for set-off against future profits. If not done, a permanent loss in the form of a tax leakage arises in the books of OB. 2. OB is to charge interest to OMSB, OESB and OPSB based on the interest rates it borrows from the banks, i.e. on a back-to-back basis. The interest expenses would be deductible to the subsidiaries. Loss making subsidiaries would have higher tax losses carried forward but they can be utilised for set-off against future profits. If not done, a permanent loss in the form of a tax leakage arises in the books of OB. 3. OB should avoid being an investment holding company under Section 60FA of ITA by actively providing corporate and management services to its subsidiaries so that the fees derived are a business source of income under Section 4(a) of ITA. OB should also manage the large amounts of dividends received from OMSB and OESB annually to avoid its investment income making up more than 80% of the total income each year. 18

19 4. OB should capitalise the amount of RM2.5 million owing by OPSB so that OPSB will now have a paid-up capital in ordinary shares of RM2.6 million (RM100,000 + RM2.5million). OPSB would then qualify for group relief by surrendering its current year losses (up to 70%) to OESB. OPSB cannot surrender it losses to OMSB since it is claiming reinvestment allowance. 5. OESB should utilise its Section 108 Balance to pay dividends in cash to OB so that OB can set-off its interest expense against the franked dividends from OESB, which could result in a tax repayable position for OB. However, OESB cannot pay dividends to OB by setting off the dividends against the amount owing to OB as this would be regarded as single tier dividends rather than dividends with Section 108 credits. 6. OMSB should transfer the manufacturing of some of the automotive components from OMSB to OPSB so that the profits from the manufacturing of these components can be set-off against the current year and brought forward losses of OPSB. Commercial substance can be established as OMSB and OPSB are both engaged in manufacturing automotive parts and synergy in operation can be achieved. (b) (i) Trading in Malaysia 1. Conclusion of sales contracts in Malaysia 2. Title to the goods passes in Malaysia 3. Stocks of goods are maintained in Malaysia 4. Proceeds of sales proceeds are received in Malaysia (ii) Permanent establishment in Malaysia 1. Use of facilities solely for the purpose of storage, display or delivery of the goods 2. Maintenance of stock of goods solely for the purpose of storage, display or delivery 3. Maintenance of a fixed place of business solely for the purpose of purchasing goods or for collecting information 4. Maintenance of fixed place of business solely for the purpose of carrying on any other activity of a preparatory or auxiliary character such as advertising, market research, etc 5. Appointing an independent agent to market its products 19