SUNWAY UNIVERSITY BUSINESS SCHOOL SAMPLE FINAL EXAMINATION FOR ACC3024 ADVANCED TAXATION Please note that the syllabus and the structure of all the assessment components, including the final examination paper of this module have been progressively changed and improved. Therefore, the past examination questions in this sample paper are provided for reference only. This sample paper is NOT intended to give any indication of the key examinable topics or areas for the coming final examination.
Section A Compulsory Questions Answer ALL questions. Section A (Compulsory) Question 1 (Total 30 marks) Founders (holding equal beneficial interest) 100% shareholding Soon Heng Sdn Bhd 20% owned 100% wholly owned 80% owned Camgro Food Manufacturing Sdn Bhd Quick-Del Distributions Sdn Bhd Soon Heng Sdn Bhd, a holding company (with RM80 million paid-up capital in 2010) of two subsidiaries (Camgro Food Manufacturing Sdn Bhd and Quick-Del Distributions Sdn Bhd) which are involved in food manufacturing and distribution businesses. All these three companies are tax resident in Malaysia. Soon Heng Sdn Bhd was first incorporated as a small plantation company managing 300 acres of oil palm estates in a rural area located at east coast of Malaysia. Over the past three decades, Soon Heng Sdn Bhd has gradually shifted its business focus from plantation to food manufacturing due to the intense competition from the oil palm planters in Indonesia. Camgro Food Manufacturing Sdn Bhd is a canned food manufacturer with a paid-up capital of RM50 million, wholly owned by Soon Heng Sdn Bhd. This subsidiary is well-established and highly profitable, and thus contributes substantially to the group s overall profitability. In contrast, Quick-Del Distributions Sdn Bhd is a relatively new business unit with a paid-up capital of RM20 million. Soon Heng Sdn Bhd owned 80% shareholding of this subsidiary, and the balance of 20% shareholding is equally held by the founders of this group. Quick-Del Distributions Sdn Bhd supplies a broad range of canned food to end consumers via a direct selling network and online shopping portal. It is currently a loss incurring subsidiary but the founders are optimistic about the future prospects of this business unit. 2
In order to eliminate management bureaucracies and inefficiencies within the group, the founders have decided to permanently withdraw from the oil palm plantation business which has accumulated unabsorbed business losses of RM8 million and unutilised capital allowances of RM2 million. Under this restructuring plan, the equity shares of both Camgro Food Manufacturing Sdn Bhd and Quick-Del Distributions Sdn Bhd held by Soon Heng Sdn Bhd will be distributed to the founders equally. Besides, the following assets of Soon Heng Sdn Bhd will also be transferred to its two subsidiaries: transfer plants and machineries worth RM5 million to Camgro Food Manufacturing Sdn Bhd; transfer office building worth RM10 million to Quick-Del Distributions Sdn Bhd. The values of these assets are established according to the arm s length market value and the two transferee companies will acquire these assets by paying cash instalments to Soon Heng Sdn Bhd. The transfer of the equity shares and the ownership of the fixed assets will be done through the execution of a deed of conveyance and assignment. Soon Heng Sdn Bhd has fully utilised its S.108 franking credit balance. Two years after this restructuring exercise, Soon Heng Sdn Bhd will apply for voluntary winding-up and will then be dissolved permanently. Critically evaluate the income tax (i.e. distribution of equity shares, group relief, controlled transfer and etc.), Real Property Gains Tax and Stamp Duty implications of this proposed restructuring plan and the potential reliefs available to all parties involved. Apply the relevant statutes and case principles (if any) in your evaluation. (30 marks) Section A (Compulsory) Question 2 (Total 20 marks) Malaysia s dividend system has gone for a complete overhaul in 2008, with the objective to provide companies, shareholders and the government a simple, transparent, efficient and equitable system. With effect from YA 2008, a single tier dividend system will replace the tax imputation system on dividend payments to shareholders. (Choong Kwai Fatt, 2008) Source: extracted from Choong Kwai Fatt (2008), The Moving from Dividend Imputation System to Single Tier Dividend System. 3
(a) Dividend imputation system is a tax convention in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders (by way of dividend tax credits) to relief the economic double taxation. Under the imputation system, income tax paid by a company is considered as paid on behalf of its shareholders. However, the incidence of economic double taxation is not completely eliminated in this tax convention (i.e. dividends paid to nonresident shareholders). The elimination of economic double taxation in an international tax context might be achieved through the single tier dividend system. Discuss from conceptual perspectives, why the incidence of economic double taxation persisted in the dividend imputation system and how single tier dividend system could overcome this problem. Apply appropriate illustration(s) to support your explanation. (b) Effective from year of assessment 2008, Malaysia has introduced the single tier dividend system after the reading of Budget 2008 to replace the existing dividend imputation tax system. Critically evaluate how the single tier dividend system would practically benefit our government s revenue collection system and the country s taxation structure. Section A (Compulsory) Question 3 (Total 10 marks) Ministers faced the prospect today of a second wave of companies decamping to Switzerland after the building supplies group Wolseley said uncertainty around the tax regime in the UK had forced it to move offshore. Shareholders in Wolseley, which sells plumbing and building materials to the public through its Builder Centre chain, will vote next month on plans to register the business in Jersey while adopting Switzerland as its home for tax purposes. Source: Inman, P. (2010), Wolseley's move to Swiss tax haven raises fears of second UK exodus, guardian.uk.com, 27 Sept. http://www.guardian.co.uk/business/2010/sep/27/wolseley-taxhavens-swirtzerland 4
The use of tax havens for tax planning purposes is legitimate provided that all arrangements are operated on a commercial basis and not a sham created with the sole intention to evade tax. Discuss critically the criteria a business entity should take into consideration for selecting a tax haven to achieve international tax efficiency. CONTINUED NEXT PAGE 5
Section B Elective Questions Answer TWO (2) out of THREE (3) questions. Section B (Elective) Question 4 (Total 20 marks) Arix Insurance Bhd is a Malaysian resident licensed insurance company with many branches in East and West Malaysia. Arix Insurance provides a wide range of insurance products including life, medical and vehicle insurance. The management of Arix Insurance is planning to fully computerise its front office operation fully looking at the substantial volume of transactions. Arix Insurance received a quotation from an US-based IT company, Oracle Ltd (non-resident) with the following details: 1) The total cost of the system is RM24 million payable to MCSB Bhd, the supplier of the hardware and software. This cost consists of RM19 million for the hardware required for the computerised system and RM5 million for the operating platform (software). MCSB Bhd is an associate of Oracle Ltd and a tax resident in Malaysia. 2) A payment to Oracle of RM5.4 million (net of withholding tax) for the use of Oracle s know-how in developing the application software. 3) A payment to Oracle of RM4.5 million (net of withholding tax) for Oracle s technical assistance on customising and commissioning the software. Furthermore, Arix Insurance is required to establish an IT Department to assist in the system development and takeover the entire project from Oracle upon completion. The monthly overhead expenditure to maintain this department is estimated at RM500,000 per month (excluding depreciation). For the first 10 months of its operation, this department will be working on: Phase 1 (1 st to 6 th month): developing, testing and commissioning the application software. Phase 2 (7 th month): Phase 3 (8 th to 10 th month): loading of data files (transfer existing files into the new system). parallel test running alongside with the existing system. (a) Identify the expenditure which will be treated as machinery and plant for capital allowances purposes. Justify your decision with relevant statutes and case law. 6
(b) Instead of setting up an new IT Department, Arix Insurance is considering outsourcing the above mentioned IT function to one of it subsidiaries, Arix.Com. This arrangement will require Arix Insurance to purchase the hardware and software from MCSB Bhd and subsequently transfer these assets to Arix.Com at cost through a hire purchase arrangement. Arix.Com is then required to pay a fixed instalment of RM600,000 per month to Arix Insurance for 4 years. In addition, Arix.Com will pay all other initial expenditure to Oracle Ltd, and the monthly overheads incurred from the first month. Beginning from the 7 th month, Arix.Com will charge a monthly service fee of RM1 million to Arix Insurance. Currently, Arix.Com does not have any unabsorbed capital allowances and business losses from previous years. Taking into account the deductible expenses and utilisation of capital allowances against Arix.Com s forecasted adjusted income, advise Arix Insurance on the viability of this outsourcing plan from a taxation perspective as compared to setting up an in house IT Department. Assume that Arix Insurance and Arix.Com will have sufficient current year adjusted income to absorb the capital allowances from the IT equipment, and the corporate tax rate for the next two years is 25%. Section B (Elective) Question 5 (Total 20 marks) (a) On 16/7/1990, the Inland Revenue Board of Malaysia (IRBM) has issued guidelines on the application of s.33(2) of the Income Tax Act 1967 in respect of interest expenses attributable to various investment income covering dividend from quoted and unquoted shares, rental from properties and interest income from extension of loans. These guidelines primarily deal with the circumstances in applying S. 33(2), i.e., the application of restricted interest to investment income. Critically discuss how a company taxpayer could minimise the impact of this interest restriction proviso (e.g. to maximise interest deductibility against investment income) on: 7
i) loans/ advances given to related business entities; ii) iii) investment in subsidiaries/ associated companies; and investment in portfolio shares. Your discussion should include both the financial and tax planning perspectives. (10 arks) (b) Art-Mind Bhd has incurred RM232,200 interests on a term loan repayable in five years. The loan was used to finance Art-Mind Bhd s investments and other non-trade activities such as extending short term advances to related companies. On the closing day of Art-Mind Bhd s tax account in YA2006, the details of the investment activities and advances are as follows: Temporary advances to subsidiaries Advances Interest received Advances to Art-Mind Manufacturing Sdn Bhd RM250,000 RM20,000 Advances to Art-Mind Distribution Sdn Bhd RM380,000 Nil Art-Mind Manufacturing Sdn Bhd and Art-Mind Distribution Sdn Bhd are both deriving business income. The advances extended to Art-Mind Distribution Sdn Bhd were interest-free. Investment in portfolio share counters Investment Dividend (net) Tradewind Bhd RM320,000 RM7,200 Hexagon Holdings Bhd RM160,000 RM2,880 CG Asia Bhd RM190,000 Nil Redtone Bhd RM310,000 RM10,800 Shareholding in Tradewind Bhd was paid for by a separate loan taken from CIMB Bank. Interest paid for this separate loan is RM17,600. Associated companies Investment Dividend (net) AM Trading Sdn Bhd RM1,250,000 Nil AM (Melaka) Sdn Bhd RM500,000 RM36,000 AM Trading Sdn Bhd has not paid a dividend to Art-Mind Bhd since its business inception in order to retain more funds for future expansion. 8
Properties Investment Rental received Warehouse 2 Nil RM24,000 Shop lot RM500,000 RM36,000 Condominium RM330,000 RM24,000 Apartment RM120,000 RM8,400 Warehouse 2 is part of the factory owned by Art-Mind Bhd. The apartment was acquired by a separate loan taken from Hong Leong Bank. Interest claimed on this separate loan is RM6,500. Art-Mind Bhd does not provide any management service to the tenants occupying its investment properties. Prepare a computation for the interest applicable to each of the sources and adjusted income based on: i) the Inland Revenue Board s guideline; and (7 marks) ii) the court judgment from P Securities V KPHDN (3 marks) Section B (Elective) Question 6 (Total 20 marks) (a) Michael, a practicing accountant, borrowed RM500,000 loan from Maybank at an interest of 8.5% per annum. The loan was guaranteed by a company owned by Michael s father-in-law. Michael subsequently lent the monies he borrowed to a company, Merlin Trading Sdn Bhd, wholly owned and controlled by him and his wife, charging an interest rate of 1.5% per annum. The borrowed fund was ultimately used by Merlin Trading to discharge a mortgage over a residential property owned by Merlin Trading and the balance of the fund was used to purchase another a new home for Michael and his wife. The company who guaranteed Michael s loan was paid an annual guarantee fee of 2% (by Michael) of the amount of the loan. In his tax return for the income year ended 31 December 2008, Michael included the 1.5% interest received by him from on-lending the borrowed fund as assessable income and claimed deductions for the interest he paid to 9
Maybank on the borrowed sum and guarantee fees paid by him in the income year, together with an appropriate proportion of valuation fees and legal costs paid in respect of the loan as wholly and exclusively expenses incurred incidental to his interest income. Critically discuss the purpose of this complicated arrangement made by Michael by evaluating his motives and the possible tax advantages he was trying to achieve thereof for the year ended 31 December 2008. Apply relevant statute(s) in your discussion and case law to strengthen your argument. (b) KVC Industries Sdn Bhd was incorporated in March 2004 with RM20 million paid-up capital. A factory was then setup by KVC to produce industrial chemicals, of which these products qualified as promoted products under the Promotion of Investments Act 1986. KVC was considering applying for either the pioneer status or investment tax allowances and thus drafted the following projection, assuming that its application will be approved by the relevant authority and the production shall commence on 1 Jan 2005. KVC closes its accounts every 31 December. Estimated expenditure: 2005 2006 2007 2008 2009 RM 000 RM 000 RM 000 RM 000 RM 000 Land 1,300 Factory building 2,600 Plant & machinery 1,900 1,000 700 Projected adjusted Income/ (loss) (550) (380) 2,800 3,100 3,300 Assuming that KVC could qualify for either pioneer status with 70% statutory income exemption or 60% investment tax allowances, evaluate whether KVC should apply for the pioneer status or the investment tax incentives. Support your evaluation with relevant tax computation and show your workings clearly. END OF PAPER 10