Fundamentals Level Skills Module, Paper F6 (ROM)

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2 Fundamentals Level Skills Module, Paper F6 (ROM) Taxation (Romania) Section B June 2018 Answers and Marking Scheme 1 Monkey SRL (a) Value added tax (VAT) registration VAT registration threshold: 220,000 lei Sales for June and July 2018 = (28, ,000) = 173,000 lei < 220,000 lei Sales for June to August 2018 = (28, , ,000) = 293,000 lei > 220,000 lei ==> the VAT registration threshold is reached on 31 August Monkey SRL must submit a specific request for VAT registration to the tax authority by no later than 10 September The registration will come into force on 1 October Monkey SRL must start charging VAT on its sales from the day the registration becomes effective, i.e. on 1 October (b) VAT adjustments upon VAT registration On its VAT registration, Monkey SRL may adjust in its favour the input VAT for acquisitions of capital goods and of non-capital goods and services not used/consumed prior to its registration. VAT adjustment for the car acquired in August 2018 The car is a capital good. As the car was bought before Monkey SRL was VAT registered, no deduction would have been made for the related input VAT. On registration, a deduction for the input VAT will be available according to the rules for capital goods. Input VAT on acquisition = (450,000 * 19%) = 85,500 lei Period of adjustment: five years (2018 to 2022) Year when adjustment event took place = 2018 Input VAT deductible on adjustment = (85,500 * 5/5 * 50%) = 42,750 lei 1 VAT adjustment for the legal services On 1 October 2018, three months of the legal services are unused, thus Monkey SRL may deduct the input VAT for the three months of October to December Value of legal services per month = 10,000 lei Input VAT deductible on adjustment = (10,000 * 3 * 19%) = 5,700 lei (c) Output VAT, input VAT and VAT to be paid to/recovered from the State budget for the fourth quarter of 2018 Output VAT = ((80, , ,000) * 19%) = 70,300 lei 1 Input VAT = [((120, , ,000) * 19%) + 42, ,700] = 107,730 lei VAT to be recovered from the State budget = (107,730 70,300) = 37,430 lei Parrot SA (a) Whether the tax adviser s recommendation is in line with the ethical and professional approach required The tax adviser s recommendation is not in line with the ethical and professional approach required, as outlined in the Ethical Code of Conduct issued by the profession s regulatory institution. 1 Advising not to rectify an identified tax error is equivalent to advising the client not to pay the taxes due, which might be considered as tax evasion

3 (b) The application of the statute of limitation to the corporate income tax due for 2016 The statute of limitation is the maximum period in which the tax administration has the right to assess taxes on a taxpayer. The statute of limitation deadline is five years starting from 1 July of the year following the year for which the tax is due. Thus, the initial deadline applicable to the 2016 corporate income tax liability is 30 June However, as Parrot SA filed a new tax return rectifying the corporate income tax due for 2016 on 19 October 2017, the statute of limitation deadline will be extended until 30 June (c) Deadline for filing an appeal against the tax administration s decision The deadline for filing an appeal against a tax decision is 45 days from when the decision was communicated to the taxpayer, i.e. in Parrot SA s case, 2 July (d) Late payment interest and penalties due (i) Late payment interest and penalties due for the additional corporate income tax identified by the tax adviser Days of late payment (26 March to 19 October 2017) = ( ) = 208 days 1 Late payment interest due = (120,000 * 0 02% * 208) = 4,992 lei Late payment penalties due = (120,000 * 0 01% * 208) = 2,496 lei (ii) Late payment interest and penalties due for the additional corporate income tax assessed by the tax inspector s audit Date when the decision was communicated = 18 May 2018 ==> Deadline to pay the additional tax = 20 June 2018 Date of payment of tax = 19 June 2018 ==> a non-declaring penalty of 0 02%/day applies (the non-declaring penalty replaces the standard late payment penalty, but its level is reduced from 0 08%/day to 0 02%/day, as Parrot SA paid the additional tax assessed in due time). Days of late payment (26 March 2017 to 19 June 2018) = ( ) = 451 days 1 Late payment interest due = (18,000 * 0 02% * 451) = 1,624 lei Non-declaring penalties due = (18,000 * 0 02% * 451) = 1,624 lei Panther SRL Corporate income tax due for each quarter of 2017 The special scheme of corporate income tax for very small companies applies to quarters 1 and 2. Quarter 1 Taxable base = 100,000 lei No employees ==> Tax rate = 3% Tax due = (3% * 100,000) = 3,000 lei Quarter 2 Taxable base = 250,000 lei 1 1 employee Tax rate = 1% Tax due = (1% * 250,000) = 2,500 lei The normal system of corporate income tax must be applied for quarters 3 and 4. 18

4 Quarter 3 lei Total revenues 297,000 Total expenses (200,500) Accounting profit 96,500 Non-taxable revenues (0) Non-deductible expenses (W1) 14,750 1 Taxable profit 111,250 Corporate income tax due at 16% 17,800 Quarter 4 lei Total revenues (297, ,000) 648,000 Total expenses (200, ,640) (474,140) Accounting profit 173,860 Non-taxable revenues (10,000) Non-deductible expenses (W2) 14,050 1 Taxable profit 177,910 Corporate income tax due for 1 July to 31 December 2017 at 16% 28,466 Corporate income tax already declared for Quarter 3 17,800 Corporate income tax due for Quarter 4 10, W1 Non-deductible expenses Q3 Limit of deductibility for social expenses = (5% * 25,000) = 1,250 lei Social expenses registered = 6,000 lei Non-deductible social expenses = (6,000 1,250) = 4,750 lei Non-deductible bad debt provisions = 10,000 lei Total non-deductible expenses Q3 = (4, ,000) = 14,750 lei W2 Non-deductible expenses Q4 Limit of deductibility for social expenses = (5% * (25, ,000)) = 3,150 lei Social expenses registered = (6, ,200) = 7,200 lei Non-deductible social expenses = (7,200 3,150) = 4,050 lei Non-deductible bad debt provisions = 10,000 lei Total non-deductible expenses Q4 = (4, ,000) = 14,050 lei 4 Dorin Personal income tax due for each type of revenue in 2018 Dividend revenue Tax due = (5% * 230,000) = 11,500 lei 1 Other revenue Holiday in Greece paid for by Bear SRL is considered as other taxable revenues. Net revenue received = 16,000 lei Tax rate = 16% Net revenue received = Gross revenue Tax due Net revenue received = Gross revenue 16% Gross revenue Gross revenue = Net revenue (1 16%) = (16,000/(1 0 16)) = 19,048 lei 1 Tax due = (16% * 19,048) = 3,048 lei 19

5 Sale of shares revenue Gain/(loss) of the first sale = (500 * (8 10)) = (1,000) lei Gain/(loss) of the second sale = (1,200 * (18 10)) = 9,600 lei Annual net gain/(loss) = (9,600 1,000) = 8,600 lei Tax due = (16% * 8,600) = 1,376 lei Intellectual property revenue Taxable base = (100,000 (40% * 100,000) 2,505) = 57,495 lei Tax due = (16% * 57,495) = 9,199 lei Prize revenue Net revenue received = 1,500 lei Net revenue received = Gross revenue Tax due Tax due = (Gross revenue 600 lei) * 16% Net revenue received = Gross revenue Gross revenue * 16% lei * 16% Gross revenue (1 0 16) = Net revenue received 96 lei Gross revenue = ((1,500 96)/0 84) = 1,671 lei 2 Tax due = ((1, ) * 16%) = 171 lei Florina and Andrei (a) Personal income tax and employee social insurance contributions due by Florina for May 2018 lei Gross employment income 2,550 Gross monthly basic salary 2,200 Present vouchers (( ) + 300) Social contributions on a base of 2,250 lei (W1) (371) 1 Social security contribution (2,250 * 10 5%) (236) Health insurance contribution (2,250 * 5 5%) (124) Unemployment contribution (2,250 * 0 5%) (11) Deductions (550) Personal deduction (W2) (150) 1 Voluntary health insurance (< 400) (300) 1 Union contribution (100) 1 Taxable employment income 1,629 Personal employment tax at 16% W1 Taxable base for social contributions Taxable base = Gross monthly basic salary + present vouchers for Easter 150 lei = (2,200 + ( )) = 2,250 lei The present vouchers received for her birthday are granted according to the collective labour agreement (i.e. they are social expenses to Giraffe SA), so are not included in the taxable base for social contributions. W2 Personal deduction Number of dependent persons = 2 Gross income = 2,550 lei < 3,000 lei ==> Florina is eligible for a personal deduction. Personal deduction = [500 * (1 (2,550 1,500)/1,500)] = (500 * 0 3) = 150 lei (b) Prepayments of income tax due by Andrei for his self-employed activity in 2018 Prepayments of tax = (16% * 40,000) = 6,400 lei Andrei will make equal quarterly prepayments to the State budget. 20

6 The value of each quarterly prepayment = 6,400/4 = 1,600 lei 1 (c) Final income tax due by Andrei for his self-employed activity in 2018 lei Gross revenue 280,000 Deductible expenses (117,275) Materials (25,000) 1 Gross salary for the employee (30,000) Social insurance contributions for the employee (6,675) Depreciation (W3) (3,600) 1 Deductible non-depreciated value of equipment (W3) (52,000) 1 Net income before tax loss 162,725 Tax loss (20,000) Taxable income 142,725 Final personal income tax at 16% 22,836 6 W3 Depreciation and deductible non-depreciation value of equipment Acquisition value = 72,000 lei Depreciation period =10 years Monthly depreciation = (72,000/12/10) = 600 lei Month of acquisition: May 2017; Month of starting the depreciation: June 2017 Number of months of depreciation in 2018 (January 2018 to June 2018) = 6 Depreciation recorded in 2018 = (6 * 600) = 3,600 lei Number of months of total depreciation (June 2017 to June 2018) = 13 Non-depreciated value = (72,000 (600 * 13)) = 64,200 lei Deductible non-depreciated value = min (sale value; non-depreciated value) = min (52,000; 64,200) = 52,000 lei 15 6 Rhino SA Corporate income tax due for 2017 and (lei) (lei) Total revenues 545, ,000 Total expenses (422,950) (628,980) Accounting profit 122, ,020 1 Elements similar to revenues (W1) 20,000 1 Legal reserve (W2) (6,703) (12,551) 2 Tax depreciation (220,800/8) (27,600) Non-deductible expenses 20,387 44,230 Accounting depreciation 22,080 Sponsorship expense 3, Interest expense (W3) 4,687 6,250 4 Corporate income tax expense 12,000 15,000 Taxable profit 135, ,099 Corporate income tax due at 16% before exemptions and tax credits 21,717 41,616 Exemption for reinvested profit (W4) (9,717) 2 Corporate income tax due before tax credits 12,000 41,616 Tax credit for sponsorship (W5) (2,400) (2,200) 2 Final corporate income tax 9,600 39,

7 W1 Elements similar to revenues Interest income at market interest rate = (1,000,000 * 2 5%) = 25,000 lei Interest income (0 5% interest rate), according to the contract with the affiliated party = 5,000 lei ==> Elements similar to revenues = (25,000 5,000) = 20,000 lei W2 Legal reserve Calculation for 2017 Maximum legal reserve = (20% * 100,000) = 20,000 lei Deduction for legal reserve = (5% * (122, ,000)) = 6,703 lei ==> Legal reserve to be deducted in 2017 = 6,703 lei Calculation for 2018 Maximum legal reserve = (20% * 100,000) = 20,000 lei Legal reserve already deducted = 6,703 lei Deduction for legal reserve = min ((5% * (236, ,000)); (20,000 6,703) = min (12,551; 13,297) = 12,551 lei ==> Legal reserve to be deducted in 2018 = 12,551 lei W3 Interest expense Calculation for 2017 Interest computed using the NBR interest rate = (500,000 * 1 75% * 9/12) = 6,563 lei Interest recorded by Rhino SA = (500,000 * 3% * 9/12) = 11,250 lei ==> fully non-deductible interest = (11,250 6,563) = 4,687 lei Debt-to-equity = Average debt/average equity = 250,000/167,025 = 1 50 Average debt = (Debt 1 January Debt 31 December 2017 )/2 = ( ,000)/2 = 250,000 lei Average equity = (Equity 1 January Equity 31 December 2017 )/2 = (100,000 + (100, , ,000))/2 = 167,025 lei ==> deductible interest in 2017 = 6,563 lei ==> interest expense to be carried forward to 2018 = 0 lei Calculation for 2018 Interest computed with the NBR interest rate = (500,000 * 1 75%) = 8,750 lei Interest recorded by Rhino SA = (500,000 * 3%) = 15,000 lei ==> fully non-deductible interest = (15,000 8,750) = 6,250 lei Debt-to-equity = Average debt/average equity = 500,000/349,960 = 1 43 Average debt = (Debt 1 January Debt 31 December 2018 )/2 = (500, ,000)/2 = 500,000 lei Average equity = (Equity 1 January Equity 31 December 2018 )/2 = (224, ,470)/2 = 349,960 lei Equity 1 January 2018 = (100, , ,000 9,600) = 224,450 lei Equity 31 December 2018 = (224, , ,000) = 475,470 lei ==> deductible interest in 2018 = 8,750 lei ==> interest expense to be carried forward to 2018 = 0 lei Tutorial note: Equity is computed according to fiscal rules, not accounting rules. Thus, equity which is taken into account to calculate debt-to-equity has a different value on 31 December 2017 compared to 1 January W4 Exemption for reinvested profit Reinvested profit = min (gross accounting profit, investment) = min (122, ,000); 220,800 = 134,050 lei Exemption = min (16% * reinvested profit; income tax due for quarter 4) = min (16% * 134,050); (21,717 12,000) = min (21,448; 9,717) = 9,717 lei W5 Tax credit for sponsorship Calculation for 2017 Maximum tax credit = min (Sponsorship expense + sponsorship carried from previous years; 20% * corporate income tax; 0 5% * sales revenue) = min (3,700; 20% * 12,000; 0 5% * 545,000) = min (3,700; 2,400; 2,725) = 2,400 lei 22

8 Sponsorship to be deducted in 2017 = 2,400 lei Sponsorship registered in 2017 which may be carried forward = 3,700 2,400 = 1,300 lei Calculation for 2018 Maximum tax credit = min (Sponsorship expense + sponsorship carried from previous years; 20% * corporate income tax; 0 5% * sales revenue) = min ( ,300; 20% * 41,616; 0 5% * 860,000) = min (2,200; 8,323; 4,300) = 2,200 lei Sponsorship to be deducted in 2018 = 2,200 lei Sponsorship registered in 2018 which may be carried forward = 0 lei 23