Fundamentals Level Skills Module, Paper F6 (RUS)

Answers

Fundamentals Level Skills Module, Paper F6 (RUS) Taxation (Russia) June 200 Answers and Marking Scheme Note: marks awarded for workings in notes have been shown within the computation, and below against the notes to show the breakdown of the marks. OOO Camarg Marks (a) Profits tax liability for the year 200 Domestic sales of goods (net of VAT) 27,58,573*00/8 23,374,25 Export sales 3,200,000 Prepayments from domestic customers (non-taxable item) 0 Total sales 26,574,25 Direct expenses: Cost of goods sold (Note ) (7,922,269) 3 Transportation costs (Note 2) (584,6) 2 Total direct expenses (8,506,385) Indirect expenses: Wages and salaries (3,406,407) Social insurance on wages and salaries 3,406,407*26% (885,666) Free meals (20,000) Social insurance on free meals 20,000*26% (3,200) Voluntary medical insurance to employees (Note 3) (2,584) Voluntary medical insurance to employees relatives non-deductible item 0 Property insurance for goods purchased (40,000) Immediate write off for the cars 73,600*00/8*40*30% (7,440,000) ( for net of VAT + for 30%) Indirect depreciation (Note 4) (7,604,048) 2 Immedidate write off for the capital improvements 804,760*00/8*30% (204,600) ( for 30%) Capital improvements to rented warehouse (Note 5) (63,653) Reimbursement on interest paid to employees (Note 6) (05,792) Rent expenses 64,60*00/8*2 (,674,000) ( for net of VAT) Total indirect expenses (2,886,950) Non-sale income: Forex gain on loan received (Note 7) 2,000,000 Non-sale expenses: Interest expense (Note 8) (535,932) Debt written off due to bankruptcy, including VAT (,500,000) Debt forgiven (non-deductible amount) 0 Total non-sale income less expenses 9,964,068 Total taxable base before loss offset 6,44,948 Tax losses from previous years within time limit, utilised on a FIFO basis: 2008 tax loss (700,000) 2009 tax loss (500,000) Tax base after loss utilisation 4,944,948 Tax at 20% 988,990 22 7

Marks Note Cost of merchandise goods sold: Watches of model 67*5,000 + 33*5,750 =,524,750 (FIFO method) Watches of model 2 45*8,000 + 45*8,900 + 8*9,845 =,89,260 (FIFO method) Rings of model 4*7,500 + 39*7,800 = 6,700 (FIFO method) Rings of model 2 34*5,000 + 43*5,53 = 407,059 (FIFO method) Earrings 85*7,000 + 385*9,086 *00/8 = 3,559,500 ( FIF0 method, for net of VAT) Total 7,922,269 3 Note 2 Total transport costs 50,000 + 657,260*00/8 = 707,000 ( for net of VAT) Total goods available for sale: 2,887,500 + 7,325,26 (4,088,700*8/8) = 9,588,926 ( for net of VAT for local goods) Transportation costs to be included into direct deductible expenses: (Cost of goods sold/total goods available)*total transportation costs 7,922,269/9,588,926*707,000 = 584,6 2 Note 3 Voluntary medical insurance for employees: maximum allowable amount 6% of labour costs plus free meals (3,406,407 + 20,000)*6% = 2,584 ( for 6%, for meals included) Note 4 Depreciation for the cars (purchased post 2009, therefore 0.5 coefficient should not be applied): Net book value at 3 December 200: 73,600*00/8*40*70%*( 5.6%/00)^0 = 9,755,952 2 ( for after 30% write-off, for correct formula, for no 0.5 coefficient, for correct number of months) Depreciation for the year 200: 73,600*00/8*40*70% 9,755,952 = 7,604,048 Note 5 Capital improvements not reimbursed by the landlord should be depreciated during the rent period only: 804,760*00/8*70%*8/60 = 63,653 ( for 70% application, for correct depreciation period, for correct months) Note 6 Mortgage interest reimbursed: maximum allowable amount 3% of labour costs plus free meals (3,406,407 + 20,000)*3% = 05,792 ( for 3%, for meals included) Note 7 Forex exchange gain,500,000*(35 27) = 2,000,000 ( for each correct exchange rate) Note 8 Interest expense Interest paid on 3 December 200 is within the maximum 5% for the currency loans,500,000*7%*(8 + 30 + 3)/365 = 9,849.32 SFR 9,849.32*27 = 535,932 ( for correct exchange rate, for correct days) 2 8

Marks (b) VAT for the year 200 Output VAT Sales of goods to domestic customers 27,58,573*8/8 4,207,359 Export sales exempt from VAT 0 VAT on 200 prepayments to domestic customers 5,26,963*8/8 782,079 VAT on debt waiver 2,000,000*8% 360,000 No additional VAT on debt written off of,500,000 0 Total output VAT 5,349,438 Input VAT VAT on prepayments for domesic customers 4,703,636*8/8 (77,504) Customs VAT on imported goods (2,598,750 + 637,676)*8% (582,557) VAT on local purchases of earrings 4,088,700*8/8 (623,700) VAT on transportation costs 657,260*8/8 (00,260) VAT on all kinds of insurance exempt from VAT 0 VAT on cars 73,600*40*8/8 (4,464,000) VAT on capital improvements 804,760*8/8 (22,760) VAT on rent 64,60*2*8/8 (30,320) VAT on free meals (as deductible costs) 20,000*8% (2,600) Total input VAT (6,933,70) Total VAT for recovery (,584,263) 8 Total 30 2 Irina and Alexei (a) (i) Personal income tax liability of Irina for the year 200 withheld at source by Lumiere Income taxed at 3% Gross salary accrued 200,000*2 2,400,000 No standard personal allowance (since her income exceeds the 40,000 threshold in January) N/A Children allowance (her income exceeds 280,000 threshold in February) for two children (,000*2) (2,000) ( per child) Medical voluntary insurance paid for her by Lumiere (non-taxable item) 0 Medical insurance for her daughters paid by Lumiere (non-taxable item) 0 Property allowance (Note ) (,05,288) 2 Bonus from employer accrued for the year 200 70,000 Total employment income,56,72 Tax withheld at rate 3% 97,73 Income taxed at 35% Imputed interest income on corporate loan for construction of the new house (Note 2) 0 8 Note Property allowance Since Irina and Alexei own their new house jointly, the maximum property allowance should be split between them: 2,000,000/2 =,000,000 The 40,000 spent for the development of the project documentation in respect of the new house does not increase the maximum threshold available for Irina. But the actual interest paid on her corporate loan should be added to the,000,000 Interest paid for the period 7 March to October (st day was not taken into account, but last payment date October is included): 3,000,000*3%*(24 + 30 + 3 + 30 + 3 + 3 + 30 + )/365 = 5,288 ( for correct days; for formula) Total housing allowance:,000,000 + 5,288 =,05,288 2 9

Marks Note 2 Although imputed interest income should have been calculated by her employer, Lumiere, initially at rate of 35%, since Irina managed to submit her entitlement for the property allowance as confirmed by the tax authorities before the year end the income should have been clawed-back and the tax withheld refunded. (ii) Final settlement of Irina s personal income tax liability for the year 200 Taxable base including benefits from employer (from (i)),56,72 Social deductions (Note 3) (02,000) 2 Educational deduction for her daughter (within 50,000 ) 2 (40,000) Taxable base,374,72 Tax due to the budget at 3% 78,73 Tax withheld by her employer (from (i)) (97,73) Tax for refund under personal tax return at 3% rate (8,460) 4 Note 3 Annual medical voluntary insurance for her mother 7,000 Pension contribution for non-state pension fund for herself 35,000 Pension contribution for her parents 50,000 Total social deductions (within maximum of 20,000 ) 02,000 2 (iii) Final settlement of Alexei s personal income tax liability for the year 2009 Income taxed at 3% Gross salary accrued (Note 4),934,975 2 ( per correct gross up) Standard personal allowance (since his gross income does not exceed the 40,000 threshold in January) (400) Children allowance (his income exceeds the 280,000 threshold in March) (4,000) ( per month) Voluntary medical insurance paid himself (within 20,000 limit) (0,000) Inherited plot of land (market value of,500,000 ) from a close relative non-taxable item 0 Educational deduction for his daughter (maximum 50,000 40,000) (0,000) Education deduction for his younger brother (maximum 50,000 ) (45,000) Taxable income:,865,575 Tax at 3% rate 242,525 Income taxed at 35% Imputed interest income on loan from the bank (Note 5) 38,780 4 Tax at 35% rate 3,573 Total tax due to the budget at different rates 256,098 Note 4 Gross salary accrued 0.87 X = 34,000 0.3*400 0.3*2,000 X = 33,688/0 87 = 38,722 January gross X2 0.3(X2 2,000) = 50,000 (February gross) X2 = (50,000 260)/0.87 = 72,5 38,722 + 72,5 + 0*50,000*00/87 =,934,975 2 ( for correct January income, for correct February income, for gross inocme for 0 months) 2 Note to markers: if students re-allocate the limit of 50,000 in another proportion (e.g. 30,000 to Irina and 20,000 to Alexei) full marks should be given to them. 20

Marks Note 5 Since Alexei has already utilised his property allowance, imputed interest income on the bank mortgage loan is relevant to him as follows: On October: period 5 July to October:,500,000*(2/3*20% 7%)*(26 + 3 + 30 + )/365 = 22,904 ( for 2/3, for correct CBR rate, for correct number of days) On November: period 2 October to November:,500,000*(2/3*20% 7%)*3/365 = 8,068 ( for 2/3, for new CBR rate, for correct number of days) On December: period 2 November to December:,500,000*(2/3*20% 7%)*30/365 = 7,808 ( for 2/3, for correct number of days) Total imputed interest income: 38,780 4 (b) If Orange reimburses Alexei the total amount of interest he paid for the year 200, his personal income tax for the year 200 would not change, as the reimbursement will be totally exempt from PIT provided the reimbursement expense is deductible for Orange for corporate profits tax purposes. 2 Total 25 3 (a) ZAO Avenuda and Regus (i) Quarter 200 Avenuda Regus Prepayment 4 February 200 200,600*8/8 30,600 0 Actual transaction 30 March 200 220,660*8/8 33,660 (33,660) Recovery of VAT from February repayment 30 March 200 200,600*8/8 (30,600) Total VAT for Quarter 33,660 (33,660) The deadline for Avenuda s Quarter VAT liability is 20 April 200 3 (ii) Revised Quarter 200 The general rules as to when VAT on a prepayment may be recovered are as follows: () the prepayment should be confirmed by supporting documents; (2) the agreements between the parties should contain the stipulated condition of prepayment; and (3) the customer should receive a special VAT invoice for the prepayment issued from the supplier in compliance with the tax legislation. Avenuda Regus Prepayment 4 February 200: as in (i) for both parties 30,600 0 Advance invoice 7 February 200 200,600*8/8 (30,600) Actual transaction 30 March 200 as in (i) for both parties 33,660 (33,660) Recovery of VAT 30 March 200 as in (i) for Avenuda (30,600) Re advance invoice for Regus 30,600 for correct amount) ( for correct date for claw-back, Total VAT for Quarter (as in (i)) 33,660 (33,660) 3 2

(iii) (iv) Marks Lease of office premises to Knives Plc VATable sales in total sales 495,600*00/8/(495,600*00/8 + 80,000) = 84% ( for net of vat sales, for correct formula) VAT on the costs of both activities is still recoverable if the percentage of costs related to the exempt activity in the total period costs is less than 5%. But 20% > 5%, hence in Quarter 2 of 200 the expenses related to the exempt activity are irrecoverable. Thus the 30 June input VAT stipulated on the face of the ordinary VAT invoice should be treated as follows: Offsetable part of input VAT for both vatable and exempt operations for purchased leased services: 200,600*8/8*84% = 25,704 ( for net of VAT, for correct % applied) The VAT to be included in the cost of the exempt sublease services rendered is thus: 200,600*8/8 25,704 = 4,896 4 If Regus subleases 00% of the office premises to Knives Plc, then 00% of the purchased lease services would be used in a VAT exempt operation from April 200. The impact on the input VAT in April and in June would be as follows: April: it would not be possible to recover the input VAT of 30,600 stipulated in the advance VAT invoice received from Avenuda on 7 April (Government resolution N 94). June: the total amount of the irrecoverable VAT of 30,600 from the VAT invoice received from Avenuda on 30 June would have to be included in the cost of subleased services. 2 (b) ZAO Miramar s VAT liability for the year 200 The cost of hotel construction using own workforce should include the following items: Wages and salaries 40,800,000 Social insurance contributions 40,800,000*26% 0,608,000 Materials and services 63,720,000*00/8 + 49,088,000*00/8 95,600,000 Total cost 47,008,000 Output VAT on own capital construction: 47,008,000*8% 26,46,440 Input VAT: VAT on materials and services 95,600,000*8% (7,208,000) VAT on own capital construction (26,46,440) The output VAT on own capital construction is available for recovery in the fourth quarter of 200, i.e. when the output VAT on the construction was charged. Total input VAT (43,669,440) VAT liability (7,208,000) 3 Total 5 22

Marks 4 (a) Final personal income tax liability of Igor Melnikov for the year 200 Gross salary for the year (Note ) 2,234,64 Personal allowance applicable only in January 200 (400) Children allowance for January and February (,000*2*2) ((30,450*00/87 + 200,000) < 280,000 ) (4,000) ( for correct number of children, for correct number of months) Property allowance (Note 2) (,85,890) Sale of car (Note 3) N/A Proceeds from sale of garage 300,000 Property deduction (250,000) Taxable income 464,35 Tax at 3% rate 60,366 Income at 35%: Imputed interest on bank loan for the plot of land purchased (Note 4) 0 8 Note 0.87 X = 30,450 0.3*2,000 0.3*400 X = 34,64 Gross salary = 200,000* + 34,64 = 2,234,64 ( for correct formula for January, for adding months income) Note 2 Maximum limit is 2,000,000 for the year 200 Igor invested 200,000 +,500,000, i.e.,700,000 should be included Interest paid for the year 200 (the first day is not taken into account):,500,000*2%*(2 + 3 + 30 + 3 + 30 + 3 + 3 + 30)/365 = 5,890 ( for the correct day) Total housing allowance, including interest is,85,890 Note 3 Since the vehicle was owned by Igor and registered in his name for more than three years before de-registration, the proceeds of 480,000 will be: exempt from personal income tax; and there is no need to declare a property deduction (new rules effective from January 200). Note 4 Imputed interest income on the land aquisition does not arise because Igor is entitled to the property allowance with respect to mortgage loan interest. (b) Effects of refinancing part of the loan (i) In order to maximise his claim for property allowance Igor should obtain confirmation from the tax authority regarding his entitlement to the property allowance, including the interest on the bank loan refinancing. If he does not do so Igor will not be able to include the interest on the 500,000 refinancing loan in his property allowance claim. 2 ( for the need for additional confirmation, for the effect) (ii) The maximum limit for the property allowance (as in (a)) is 2,000,000 for the year 200. Interest on the initial mortgage loan needs to be recalculated due to the partial redemption on July 200. The date of repayment is taken into account in the calculation.,500,000*2%*(2 + 3 + 30 + 3 + 30 + )/365 = 7,04,000,000*2%*(29 + 3 + 30)/365 = 29,589 Total allowable interest on the initial mortgage loan is 00,603 ( for the correct days in first period, for the correct days in the second period) 23

(iii) Marks Interest paid on the refinacing loan for the year 200 can also be added to the amount spent on the acquisition: 500,000*0% (2 + 3 + 3 + 30)/365 =2,877 ( for the correct number of days) Total 200 property allowance:,700,000 + 00,603 + 2,877 =,83,480 2 Provided Igor has received confirmation from the tax authorities of his entitlement to the property allowance including paid interest, the imputed interest income will still be exempt from personal income tax as the refinancing bank loan has been taken exclusively for the redemption of Igor s initial bank loan for the acquisition of the plot of land. ( for the correct treatment, for the reason) (c) As the Russian Tax Code does not contain a provision with respect to the exemption of imputed interest income on an employer s loan received for the refinancing of a bank loan for the purchase of a plot of land, in this case imputed interest income taxable at the 35% rate will arise. 2 ( for the correct treatment, for the reason) Total 5 5 (a) Marina (i) Taxable income for the year 200 Gross income (Note ) 880,088 No personal allowance (January income exceeds 40,000 ) 0 Professional deduction (30%) (264,026) Donations in cash (up to 25% of her gross income) (3,000) Donations in kind not allowed as a deduction 0 Taxable income 63,062 Tax withheld at 3% 79,698 4 (ii) Note X (X 0.3X)*3% = 800,000 X 0.3X + 0.039X = 800,000 0.909 X = 800,000 X = 880,088 Social insurance contributions Taxable base under copyright agreement: Gross income 880,088 Professional deduction (30%) (264,026) Taxable base 66,062 Exceeds 45,000, therefore social contributions are 23.%*45,000 95,865 24

(b) (c) Marks Anna s dividend income KML s profits before tax 34,000,000 Profits tax at 20% (6,800,000) Profits after tax 27,200,000 65% for distribution 7,680,000 Less interim dividend received (4,300,000) Taxable dividends 3,380,000 Anna s share is 700/7,000 = 0% Anna s taxable income is 3,380,000*0%,338,000 PIT to be withheld by KML at 9% 20,420 Net amount received is 7,680,000*0% 20,420 =,647,580 4 Pantera Ricon owns more than 20% of Pantera, therefore the first criterion for the application of the thin capitalisation rules is met. Net assets at 30 June 200: (65,400,000 53,000,000 + 3,000,000) = 5,400,000 ( for correct formula, for correct deduction of tax liabilities) Loan as at 30 June 200:,000,000 EUR*46.3 = 46,300,000 Interest to 30 June 200:,000,000*7%*(8 + 3 + 30)/365*46.3 = 70,477 ( for correct exchange rate, for correct days) Total controlled debt = 46,300,000 + 70,477 = 47,00,477 As 47,00,477 is greater than 3*5,400,000, the thin capitalisation rules should apply Thin capitalisation ratio: 47,00,477/(5,400,000*3*25%) = 4.069 ( for total controlled debt including interest accrued, for 3, for 25%) Maximum deductible interest on the loan from Ricon is 70,477/4.069 = 72,395 6 Total 5 25