Section B. Marks. 1 OOO Ostrog

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2 Section B Marks OOO Ostrog () Loan from Forest Ltd The loan from Forest Ltd will be treated as a controlled loan since Forest Ltd s ownership of OOO Ostrog exceeds 25%. Total assets:,078,000,000 Total liabilities: (882,000,000 26,60,000) = 855,50,000 Net assets: (,078,000, ,50,000) = 222,60,000 Net assets* = 667,80,000 Loan at March 207: (,000,000*77) = 770,000,000 Interest calculations: February: (,000,000*7%*75*(28 )/65),595,890 ( for correct days, for correct exchange rate) March: (,000,000*7%*77*/65),577,808 ( for correct exchange rate) Total interest for Q 8,7,698 Loan plus + total interest for Q: (770,000, ,7,698) = 778,7,698 Net assets* < loan plus accrued interest, i.e. thin capitalisation rules apply. Coefficient: 778,7,698/(667,80,000*76%) =,52 Deductible interest: 8,7,698/,52 = 5,27,66 Deemed dividends: (8,7,698 5,27,66) = 2,86,07 Withholding tax: (2,86,07*5%) = 26,906 (2) Loan from Mountain Ltd The loan from Mountain Ltd would be considered a loan from a sister company, since Mountain Ltd is 20% owned by Green Ltd. However, since Green Ltd s indirect ownership in OOO Ostrog is less than 25%, Mountain Ltd will not be treated as a related party and the loan will not be treated as controlled. Therefore the thin capitalisation rules do not apply. ( for mentioning new 25% criterion; for recognising the loan is not controlled) Hence, all of the loan interest of 8,7,698 will be deductible. () Loan from AO Canions bank The loan from the Russian bank meets both criteria, because: () the bank is not affiliated to Ostrog or to any of the other group companies. (2) the loan agreement will not provide any provision for the redemption of either the principal amount or the interest by either Forest Ltd or any its affiliated companies. Therefore, the loan will be treated as uncontrolled and all of the interest of 8,7,698 will be deductible for profits tax purposes. ( for reference to two criteria, for 0% deductible interest) 22

3 Marks 2 (a) Vladimir Insurance contributions for the year 207 Total salary (25,000*2),500,000 Annual voluntary medical insurance for himself (exempt) 0 Annual voluntary medical insurance for his sister 2,000 Reimbursement of his reallocation expenses to Sochi (exempt) 0 Reimbursement for his unused vacation 5,000 Reimbursement of his business trip to St Petersburg (non-taxable) 0 Reimbursement of 50% of his motorbike driving course 7,000 Reimbursement of his professional training for lawyers (non-taxable) 0 Total base for insurance contributions (IC),6,000 IC payable: Pension fund (PF) (876,000*22% + (,6, ,000)*%) 269,20 Social insurance fund (SIF) (755,000*2.9%) 2,895 Federal medical insurance fund (FFOMI) (,6,000*5.%) 8,79 75,8 7 Tutorial note: The inclusion of the annual voluntary medical insurance for Vladimir s sister is the correct treatment in accordance with Tax Code Article 22 p.5. However, if candidates excluded the insurance from their computation, the same credit should be awarded, provided a reason is given for the exclusion. (b) Reporting deadline should be 0th of the month following the calculating (reporting) period. Insurance contributions should be submitted to the tax authority. Calculating period is a calendar year. Reporting period should be treated st quarter, first six months, nine months of the calendar year. (a) Anastasiya Personal income tax liability (PIT) for the year 207 Tax base at % Salary (65,000*2) 780,000 Annual medical insurance for herself (exempt) 0 Annual gym membership 20,000 Sale of coins (520, ,000) 270, ,000 < 250,000, so use of 250,000 more beneficial Taxable base,070,000 PIT at % 9,0 Tax base at 5% Employer loan imputed interest April (,500,000*(2/*5% 5%)*(0 8))/65),52 ( for 2/, for correct CBR rate, for correct days) May to December (2/ CBR rate < 5% effective rate) 0 Taxable base,52 PIT at 5%,582 Total PIT (9,0 +,582) 0,

4 Marks (b) Dmitriy Personal income tax (PIT) tax base liability for the year 207 Business income (29,500,000*0/8) 25,000,000 Employees salaries (2,000*2*5) (,920,000) Insurance contributions on employees salaries (8,000*(22% + 2.9% + 5.%)*5) (576,000) Coffee machine: One-off 0% deduction (,29,000*0/8*0%) (5,000) ( for net of VAT, for 0%) Depreciation (,29,000*0/8*70%*9/6) (8,750) ( for 70%, for correct months) Total taxable base 22,005,250 (a) OOO Lemongrass (i) Value added tax (VAT) for Quarter 2 (Q2) 207 Output VAT Sales revenue (89,600,000*8/8) 29,600,000 Sales of Myata debt (,05,660 0,28,000)*8/8) 29,660 Sales of Estragon debt at a loss (no VAT) 0 Part waiver of Polyn s debt (no VAT) 0 Claw-back of prepayments paid to suppliers in Q (69,920,000*8/8*90%) 2,28,000 Input VAT Goods purchased with the VAT invoices (as above) (2,28,000) VAT liability 0,029,660 (ii) The two main requirements for the recovery of VAT on prepayments made to suppliers are: The agreement with the supplier should contain an obligation on the buyer (customer) to make a prepayment. A VAT invoice for the prepayment should be issued in compliance with the Tax Code. (b) OOO Kaleva and OOO Marvell (i) Value added tax (VAT) liability for Quarter (Q) 207 OOO Kaleva Input VAT For the goods (0,56,000*8/8*90%) 5,50,00 For the fixed assets (29,68,000*8/8*70%),62,600 For the reimbursement of transportation (2,82,920*8/8) 0,920 For the reimbursement of certification (,6,20*8/8) 26,20 On commission fees (,98,0*8/8) 60,0 Recoverable VAT,020,600 OOO Marvel Output VAT On commission fees (,98,0*8/8) 60,0 2

5 (ii) Marks The reporting deadline for the Q VAT return is 25 April 207. Therefore, provided that Kaleva receives the VAT invoice for the commission fees on 26 April 207 (i.e. after this deadline), it would not be able to include this invoice in its Q VAT tax return and so recover the VAT in Q, i.e. the invoice will have to be included for recovery in its Q2 VAT tax return. 5 Yana Personal income tax (PIT) for the year 207 (a) (b) PIT to be withheld at source by AO Lotos Tax at % Gross salary ((50,000*2) + (*72,000)) 2,020,000 Children allowance (her income exceeds 50,000 in March): ((2*,00) +,000)*2 (,600) ( for,00, for,000, for correct months) Imputed interest income on mortgage loan (note) 0 Interest actually paid on mortgage loan during the year 207 (5,000,000*%*( )/65) (6,97) ( for %, for correct days) Educational deduction for her son (maximum) (50,000) Taxable base before housing allowance,79,27 Housing allowance (maximum 2,000,000 ) (,79,27) Taxable base at % rate 0 Note: Explanation of tax treatment of mortgage loan interest Since Yana has: never used a housing allowance managed to receive entitlement for her housing allowance from the tax authorities before the year end and provided it to her employer before the year end, no imputed interest income should be accrued. Housing allowance unused at source: (2,000,000,79,27) = 205,57 No income taxable at 5% tax rate. Tutorial note: Interest on the mortgage loan should be deducted as a part of the housing allowance based on the amount actually paid in 207 (i.e. interest for the fourth quarter which is unpaid as at December 207 is not deductible). Final settlement of PIT Tax at % Taxable base (from part (a)) 0 Sale of inherited apartment (ownership period < years) 5,000,000 Property deduction (,000,000) Birthday gift received from a close relative (exempt) 0 ( for exemption, for the reason) Utilisation of housing allowance unused at source (,87) Taxable base,898,26 Tax at %,806,756 Withheld at source 0,806,756 25

6 Marks (c) The deadline for Yana to submit her annual PIT return for 207 is 0 April 208. The deadline for her to pay the PIT due to the budget is 5 July 208. Note for markers: Since 5 July 208 is a Sunday, this deadline will be transferred to the next working day, i.e. 6 July; if candidate mentions this fact, the same mark should be given. 5 6 (a) OOO Shokon Corporate profits tax taxable base for the year 207 Revenue: Sales to Russian customers (296,80,000*0/8) 25,000,000 Confirmed exports 25,0,000 Dividends received from Russian subsidiary company (excluded) 0 Total revenue 276,0,000 Direct expenses: Completion ratio: (20,72,600*0/8)/276,0,000 = 6.6% Tutorial note: Alternatively, the completion ratio could have been calculated in the following way: (20,72,600*0/8)(276,0, ,72,600*0/8) = 5.98%. Equal credit was given if candidates calculated the ratio this way. Direct purchased materials ((27,70,000*0/8)*(0 6.6%)) 22,00,60 ( for net of VAT, for correct adjustment) Direct salaries (250*28,000*2*(0 6.6%)) 78,65,20 ( for total gross salaries, for correct adjustment) Direct depreciation (Note ),08,775 Total direct expenses,677,75 Indirect expenses: Indirect salaries (20*2,000*2) 2,880,000 Indirect annual medical insurance (maximum deductible out of 6,000,000) (6%*(78,65,20 + 2,880,000),892,05 ( for 6%, for adjusted direct salary, for indirect salary) Business entertainment expenses (Note 2) 720,000 Total indirect expenses 8,92,05 Non-sale expenses: Penalties paid to the tax authorities (non-deductible) 0 Taxable base 5,90,7 Note : Depreciation NBV at January 207 (885,000*0/8*70%*( 5.6%)^ = 278,57 ( for net of VAT, for 70%, for correct months in the formula) NBV at December 207 (278,57*( 5.6%)^2) = 9,8 Depreciation: (278,57 9,8)*0 =,90,600 (,90,600*(0% 6.6%)) =,08,775 Note 2: Business entertainment expenses Limited to (78,65,20 + 2,880,000 +,892,05)*% =,57,052 Official lunch (5,000*0/8) 00,000 Cost of external translators 00,000 Taxi from the hotel to the meeting venue and back (2,600*0/8) 20,000 Accommodation in the hotel (non-deductible) 0 Deductible subtotal (within % limit) 720,000 26

7 (b) Marks The following cross-border transactions should be treated as controlled under the transfer pricing tax law provisions: Related party transactions, no minimum threshold. ( for related party, for no minimum threshold) Third party transactions involving the sale of certain mineral commodities. Transactions with any parties in blacklisted offshore tax jurisdictions