Qualification Programme Examination Panelists Report. Module D Taxation (June 2014 Session)

Transcription

1 Qualification Programme Examination Panelists Report Module D Taxation (June 2014 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their performance in the examination.) (I) Section A Case Questions General Comments The case study covered various issues concerning taxability and deductibility of specific income and expenses from a profits tax perspective, computation of salaries tax liabilities, analysis of PRC Individual Income Tax in accordance to the Double Taxation Agreement ( DTA ) between the Mainland of China and Hong Kong SAR, discussion of the field audit process, settlement methodologies, and respective exposure to tax representatives in a field audit exercise from an ethical perspective. The performance of the candidates was generally satisfactory. Specifically, the majority of the candidates were able to provide good and concise answers to the computation question. This is in line with previous examination sessions. However, the performance on specific topics, especially in relation to the analysis of PRC tax exposures, taxability of income from a profits tax perspective as well as the discussion of the exposure to risk for tax representatives from an ethical perspective was less than satisfactory. Candidates are advised to have better preparation on these topics in future in order to achieve a comprehensive understanding of the different issues. Specific Comments Question 1(a) 5 Marks The performance in this question was not satisfactory. Candidates in general did not have a clear understanding of relevant concepts, and accordingly provided irrelevant answers or analysis. Some candidates could not analyze the issue from different perspectives as stipulated in the question. Only a few candidates could elaborate on the exception of the Exemption Order, and applied the concept to the case. Question 1(b) 5 Marks The performance in this question was fair. Some candidates were able to discuss the issue from different perspectives. However, some candidates only mentioned that the income is not subject to tax under s14(1) of the Inland Revenue Ordinance ( IRO ) without providing relevant grounds. Only a few candidates could analyze the issue comprehensively with reference to s15(1)(c) of the IRO. Module D (June 2014 Session) Page 1 of 5

2 Question 2 4 Marks This question required the candidates to discuss the deductibility of MPF annual and special contributions. The performance in this question was satisfactory. Candidates generally were able to address the respective deductibility with reference to specific provisions in the IRO and to compute the amount of deductible expenses accordingly. However, some candidates wrongly discussed the deductibility of MPF from a salaries tax perspective, and provided irrelevant answers. Some candidates were not able to distinguish the tax treatment for annual and special contributions. Question 3 16 Marks The performance in this question was generally satisfactory. The majority of the candidates were able to provide a systematic computation to quantify the salaries tax liabilities. However, some candidates could not correctly compute the rental value assessable to salaries tax, and some candidates used the incorrect amount as the MPF deduction. Question 4 5 Marks This question required the candidates to discuss the PRC Individual Income Tax exposure under the DTA between the mainland China and Hong Kong SAR. The performance in this question was not satisfactory. Only some candidates were able to state the 183 days rule and applied the concept into the case. The majority of the candidates could not analyze the PRC Individual Income Tax exposure along with the 12 months rolling basis with reference to the 18 months ended June Question 5(a) 10 Marks The performance in this question was below expectations with respect to the provision of a clear process for the field audit exercise. Some candidates for this part provided a very brief answer and therefore could not comprehensively identify the whole process. On the other hand, the performance of candidates in discussing the settlement methodologies for the field audit exercise was generally satisfactory. Some candidates, however, could not point out that indirect methodologies would be used when the books and records of the taxpayers have not been kept properly. Question 5(b) 5 Marks This question required the candidates to discuss the exposure to risk for tax representatives in the field audit exercises from tax and ethical perspectives. The performance was again below expectations. Only a few candidates could identify that penalty provisions under the IRO are applicable to both taxpayers and tax representatives. Some candidates did not understand the question and accordingly provided irrelevant answers. Module D (June 2014 Session) Page 2 of 5

3 (II) Section B Essay/Short Questions General Comments The performance of candidates in this section was generally satisfactory. Many candidates were able to provide good answers for Question 7 which required the direct application of tax principles for the basis period and depreciation allowance. Question 8, which required more in-depth analyses of various profits tax, property tax, salaries tax, personal assessment and stamp duty issues, seemed to be more challenging in the light of the candidates performance. Those who did not perform well are advised to familiarize themselves with various tax issues in a crossdisciplined context. They should also give considerable attention to their time management and the content of the questions, which are also vital to their overall scoring in the examination. Specific Comments Question 6(a) 3 Marks This question required candidates to analyze whether A Limited had carried on a business by placing deposits to secure a loan for its share dealing activities in Hong Kong. The relevant authority is CIR v Bartica Investment Limited 4 HKTC 129, which many candidates could identify. However, only a few candidates were able to anaylze whether the activities of A Limited had gone beyond mere passive acquiescence and were sufficient to constitute carrying on business. Some candidates even misunderstood the question and discussed the source of the interest income received by A Limited. Question 6(b) 3 Marks This question tested candidates knowledge about A Limited s exposure to Mainland tax in respect of its dividend income from B Limited. Many candidates did not discuss the tax residency of A Limited in the Mainland but merely stated that the dividend income was subject to Mainland Corporate Income Tax on a withholding basis. As for the tax rate, many candidates could correctly state it as 5%. However, only a few were able to point out that such a reduced rate was applicable due to the safe-harbour rule. Question 6(c) 7 Marks This question required candidates to list out the factors which the IRD would consider in processing a request for the exchange of information from another tax authority. The relevant factors were all listed in DIPN 47, but regrettably many candidates could not describe them properly. Quite a number of candidates even misread the question and discussed how IRD should gather the requested information, the antitax avoidance provisions or other Hong Kong tax administration matters. Module D (June 2014 Session) Page 3 of 5

4 Question 7(a) 7 Marks This question required candidates to determine the basis periods for which D Limited would be assessed for profits tax upon its commencement of business. The performance in this question was very satisfactory. Many candidates could apply s18c(1)(b) of the IRO and apportion the first accounting period of D Limited into the two basis periods for 2010/11 and 2011/12 accordingly. Question 7(b) 5 Marks This question required candidates to compute the depreciation allowance in respect of a lorry purchased on a hire-purchase basis. It was a straightforward question in which many candidates could produce correct computations and scored well accordingly. Only a few candidates failed to adopt the cash price of the lorry, or miscomputed the capital repayment for each of the relevant years and thus arrived at incorrect calculations. Question 8(a) 7 Marks This question was set in the context of a confirmor sale of property and candidates were required to analyze the related profits tax and stamp duty implications. For profits tax, many candidates could point out that E Limited would be regarded as having traded in the shop because of the short period of holding. Just a few candidates mentioned the facts that the company had become dormant after the sale of the shop and that it did not have the financial capability of holding the shop on a long-term basis in their analyses. With regard to stamp duty, many candidates could correctly state that the assignment of the shop was a chargeable instrument and that special stamp duty (SSD) was not applicable to non-residential properties. Question 8(b) 11 Marks This question involved a married couple having sold a residential flat which had been used for letting pursuant to a compulsory sale order. Various stamp duty, profits tax, property tax and stamp duty issues were involved, and the candidates performance was satisfactory. Many candidates could recognize that the agreements for sale were chargeable with stamp duty, and SSD was not applicable because of the compulsory sale order. They were also able to conclude that the sale of the flat was not subject to profits tax. But, as in Question 8(a), many candidates could only state the most apparent reason, i.e. involuntary sale, to support their conclusion without considering other factors such as the letting of the flat before sale and the couple s financial capability to hold the property. As regards to property tax and personal assessment, candidates did not seem to have any difficulty in considering the property tax chargeability and the advantages for personal assessment election. Just a few candidates appeared to have mixed up the deductions of interest payable under personal assessment and home loan interest. In the given scenario where the flat had been used for letting, the couple were not eligible for any deduction of home loan interest. Module D (June 2014 Session) Page 4 of 5

5 Question 8(c) 7 Marks This question was based on a scenario where a residential flat was inherited by Mr. J from his father s estate, and was subsequently sold to Mr. K, who in turn added his nephew, Mr. L, as a joint owner upon taking assignment. The stamp duty implications were rather complicated, whereas many candidates mentioned that the agreement for sale of the flat to Mr. K was not chargeable with SSD. However, many candidates could not correctly state how stamp duty would be charged on the assignment to Mr. K and Mr. L, and did not recognize that SSD was also chargeable on this instrument. As for profits tax and salaries tax, the candidates performance was satisfactory. They were able to conclude that Mr. J would not be chargeable to profits tax in respect of the sale of the flat as the flat was acquired from an estate, and Mr. K and Mr. L would be entitled to home loan interest deduction because of their use of the flat for residence. (III) Conclusion and Recommendation As addressed in the recommendations for previous sessions, candidates should consider and tackle the issues identified in the questions broadly from different perspectives. Candidates should comprehensively prepare a wide coverage of topics for the examination instead of focusing on a few selected topics. During the examination, more time should be spent on understanding the questions and formulating the answers instead of copying materials without a specific analysis of the issues. Module D (June 2014 Session) Page 5 of 5