Professional Level Options Module Advanced Taxation (Zimbabwe) Monday 2 June 2008 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 3 5 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (ZWE) The Association of Chartered Certified Accountants
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SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future. 2. Calculations and workings need only be made to the nearest $. 3. All apportionments should be made to the nearest month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Rates of tax: Individuals Employment income Taxable income from employment Rate bands from 1 January 2007 to 30 June 2007 Basic income tax payable $ $ $ % $ 0 600 000 0% 600 001 1 200 000 25% of excess over 600 000 1 200 001 1 800 000 150 000 + 30% of excess over 1 200 000 1 800 001 6 000 000 330 000 + 35% of excess over 1 800 000 6 000 001 18 000 000 1 800 000 + 40% of excess over 6 000 000 18 000 001 30 000 000 6 600 000 + 45% of excess over 18 000 000 30 000 001 and over 12 000 000 + 47 5% of excess over 30 000 000 There is a 3% AIDS levy on tax: effective top rate is 48 925%. Taxable income from employment Rate bands from 1 July 2007 to 31 August 2007 Basic income tax payable $ $ $ % $ 0 3 000 000 0% 3 000 001 6 000 000 25% of excess over 3 000 000 6 000 001 10 000 000 750 000 + 30% of excess over 6 000 000 10 000 001 22 000 000 1 950 000 + 35% of excess over 10 000 000 22 000 001 36 000 000 6 150 000 + 40% of excess over 22 000 000 36 000 001 50 000 000 11 750 000 + 45% of excess over 36 000 000 50 000 001 and over 18 050 000 + 47 5% of excess over 50 000 000 There is a 3% AIDS levy on tax: effective top rate is 48 925%. Taxable income from employment Rate bands from 1 September 2007 to 31 December 2007 Basic income tax payable $ $ $ % $ 0 16 000 000 0% 16 000 001 32 000 000 25% of excess over 16 000 000 32 000 001 48 000 000 4 000 000 + 30% of excess over 32 000 000 48 000 001 120 000 000 8 800 000 + 35% of excess over 48 000 000 120 000 001 200 000 000 34 000 000 + 40% of excess over 120 000 000 200 000 001 280 000 000 66 000 000 + 45% of excess over 200 000 000 280 000 001 and over 102 000 000 + 47 5% of excess over 280 000 000 There is a 3% AIDS levy on tax: effective top rate is 48 925%. The above tables apply to the tax payable by individuals, deceased or insolvent estates and the estates of individuals under a legal disability. 3 [P.T.O.
Pension contributions Maximums per year 2007 $ Employer s pension fund 900 000 National Social Security 720 000 Retirement annuity fund/self employed pension fund 900 000 Aggregate contributions to all of the above 900 000 Motoring benefits Engine capacity Deemed benefit for period 1 January to 1 September to 31 August 2007 31 December 2007 $ $ Up to 1500cc 100 000 2 400 000 1501 2000cc 160 000 4 000 000 2001 3000cc 200 000 5 000 000 3001 and above 260 000 6 700 000 Credits $ Elderly person 120 000 Physically disabled person 120 000 Blind person 120 000 Medical expenses/contributions 50% of amount paid Capital allowances 2007 Special initial allowance 50% Accelerated wear and tear 25% Wear and tear Industrial building Commercial building Motor vehicles Movable assets in general 5% on cost 2 5% on cost 20% on written down value 10% on written down value Rate Corporation tax 30% plus 3% AIDS Levy Value added tax Standard rate 15% 4
Capital gains tax Rates: Gains of up to $5 000 Nil Gains above $5 000 20% Inflation index: The All Items Consumer Price Index per the Central Statistical Office is as follows: Tax year Index 2001 100 0 2002 233 2 2003 1 084 5 2004 4 880 3 2005 16 486 4 2006 184 101 1 2007 January 968 338 9 February 1 334 521 7 March 2 008 932 1 April 4 032 633 7 May 6 265 734 3 June 11 666 826 7 July 15 358 172 2 2008 January 44 250 150 0 February 46 308 505 0 March 48 564 300 0 5 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 Recently, an Indigenisation and Empowerment Bill (IEB) has passed its third and final reading in Parliament and is awaiting the signature of the President for it to become law. The essence of the IEB is that the ownership structure of all businesses operating in the country, whether as corporates or otherwise, should reflect at least 51% ownership by persons of indigenous stock within a specified period, still to be determined by the Minister responsible. Businesses which fail to implement the IEB requirements within the timeframe to be notified would be directed to take on partners as dictated by the Minister. In response to the IEB dictates, the Consortia Holdings Limited group of companies (Consortia Holdings), which has a number of agricultural and commercial concerns spread throughout the SADCC region, decided to pre-empt the bill by merging with an indigenously owned group of companies. The indigenous group identified for this merger is Platinum Holdings Limited (Platinum Holdings). Consortia Holdings currently holds 35% of Platinum Holdings. This 35% holding is the largest single block of shares held by a single shareholder in Platinum Holdings. Consortia Holdings itself is currently controlled by four non-indigenous family company investment vehicles. The current structure of the two groups is as per the diagram below: Consortia Holdings Limited 35% 100% 80% 60% Consortia Flowers Rose Garden Manufacturing 40% 30% Coffee Plantations Platinum Holdings Limited 90% 75% Stability Bank Stability Building Society The proposed merger transaction is as follows: All the shareholders in the two groups, other than those in Consortia Holdings Limited, will swap their current shareholdings for new shares in Consortia Holdings. Consortia Holdings does have the capacity to issue new shares under the control of the directors. The effect of this transaction will be that all the companies currently under the control of Consortia Holdings and Platinum Holdings will become effectively held 100% by Consortia Holdings; and Consortia Holdings itself will have an expanded list of shareholders, both indigenous and non-indigenous, with the combined indigenous shareholding block becoming 55% of the issued share capital of the expanded Consortia Holdings. The lead financial adviser to the proposed transaction has approached you for advice on the tax implications of the proposed transaction. He considers that since the swap of shares will not result in any beneficial disposal of shares, it surely should be possible to effect the transaction without any tax implications whatsoever. 6
Required: Write a memorandum to the lead financial adviser in which you: (a) Analyse the proposed transaction and outline the tax implications of the proposed merger. (9 marks) (b) Identify any clearances that can be obtained from the Zimbabwe Revenue Authority (ZIMRA) to reduce the potential taxation impact identified in (a), and the circumstances in which the Commissioner General would grant such clearances. (9 marks) (c) (i) Suggest ways in which the overall taxation impact of the proposed transaction can be minimised. (6 marks) (ii) Identify any potential risks associated with your suggestions in (i), and comment on any ethical considerations that may need to be considered in order to maintain professional independence. (5 marks) Appropriateness of the format and presentation of the memorandum and the effectiveness with which the information is communicated. (2 marks) (31 marks) 7 [P.T.O.
2 Shaft Masters Limited (SML) is a South African company which specialises in the manufacture of explosives used in the sinking and extension of mine shafts. Its headquarters are in Pretoria South Africa. Over the years it has steadily expanded its involvement with mining operations throughout Southern Africa and on 1 July 2007 it signed a three-year supply and manufacturing service agreement with Strategic Minerals Zimbabwe (Private) Limited (Strategic Minerals). Under this agreement SML is to supply raw materials and manufacture mining explosives on site at the Strategic Minerals gold mine near the Zimbabwean central town of Kwekwe. In view of the challenges in sourcing foreign currency, Strategic Minerals has secured an exchange control dispensation from the Reserve Bank of Zimbabwe under which it can maintain its revenues from the disposal of minerals offshore to enable it to pay for supplies and equipment, as in most cases these will need to be imported into Zimbabwe. Accordingly SML raises invoices monthly based on the quantities of raw materials supplied and explosives manufactured and Strategic Minerals pays SML directly from its offshore bank facilities. In order to facilitate the manufacture of explosives at the Strategic Minerals Kwekwe mine, SML invested in a 60% equity holding in a Zimbabwean company, Mining Technologies Zimbabwe (Private) Limited (MTZ), which had been involved in the manufacture of explosives on a small scale but was about to fold due to its failure to secure the requisite raw materials. Besides this equity investment, which made MTZ a subsidiary of SML, SML also injected modern manufacturing machinery into MTZ through a loan, which is repayable in two years time. SML subcontracted MTZ to carry out the manufacturing of explosives for Strategic Minerals on its behalf. To assist with this SML has seconded two of its mining engineers to MTZ for two years, to supervise the Strategic Minerals contract and also to train local human resources to take over the manufacturing process in due course. Under this secondment agreement, the engineers will remain as employees of SML and their salaries will continue to be paid into their South African bank accounts, but MTZ will provide furnished residences to the engineers and will pay quarterly technical fees to SML for these seconded resources. MTZ invoices SML for toll fees each month, based on the quantities of explosives manufactured. Due to the foreign exchange challenges in the country, SML sets off the technical fees payable by MTZ against the toll fees and only pays a small net amount of the toll fees into Zimbabwe. SML is not registered with the Zimbabwe Revenue Authority (ZIMRA) for anything as it has relied on a clause in the three-year agreement with Strategic Minerals which states that Strategic Minerals is responsible for all local taxes and the invoices raised by SML will be paid without effecting any deductions. MTZ is registered with ZIMRA for value added tax (VAT) and income tax purposes. MTZ has duly accounted for employees tax on the housing benefits supplied to the two engineers but not for other taxes in relation to its arrangements with SML. Six months after the commencement of the SML/Strategic Minerals contract, the finance director of SML, through the managing director of the local subsidiary MTZ, provides you with copies of the SML/Strategic Minerals and SML/MTZ contracts with a request that you assess their tax implications in order that the respective parties can make appropriate provisions and arrangements. 8
Required: Write a report to the finance director of Shaft Masters Limited (SML) in which you address the following matters in relation to the two contracts: (a) Whether or not SML can be deemed to be operating in Zimbabwe under a permanent establishment (PE). (7 marks) (b) The tax implications of operating under a PE compared with operating without a PE. (6 marks) (c) (d) (e) The taxation position of the seconded engineers, together with any statutory responsibilities arising on SML. (4 marks) Whether or not Mining Technologies Zimbabwe (Private) Limited (MTZ) has any tax obligations (other than for employees tax) as a consequence of the secondment arrangement with SML. (2 marks) The effect of the clause under which SML has absolved itself from any local tax obligations and whether or not the clause is defensible from a Zimbabwean tax perspective. (4 marks) (f) The remedies available to ZIMRA in relation to any unpaid taxes identified. (4 marks) Appropriateness of the format and presentation of the report and the effectiveness with which the information is communicated. (2 marks) (29 marks) 9 [P.T.O.
Section B TWO questions ONLY to be attempted 3 (a) Ryan Kruger retirement plans Ryan Kruger, aged fifty-six years, is currently the Chief Executive Officer (CEO) of a large mining house operating in Zimbabwe. He has decided to take early retirement on the attainment of his fifty-seventh birthday at the end of December 2008. His retirement package has been provisionally crafted to include the following items: (1) Receipt of a lump sum commutation the equivalent of 3/8ths of his pension entitlement from his employer s pension fund. (2) A reduced pension guaranteed for fifteen years or the rest of his life based on the remaining 5/8ths of his pension entitlement. (3) Medical cover for five years after retirement. The medical cover would be available to Ryan Kruger either as a quarterly cash payment to him personally, or an equivalent amount paid directly to a medical aid society of his choice. (4) As he has served the mining house for more than twenty years, the mining house has provisionally decided that as a golden handshake he should keep the CEO s house situated in Chegutu which he currently occupies. The house is expected to have a value of thirty billion dollars in December 2008. As the house is situated in Chegutu and Ryan Kruger would prefer to live in Harare, following his retirement he would like to arrange to sell the house back to the mining house for its then cash value in March 2009. (5) The mining house will also allow Ryan Kruger to purchase a Toyota Prado, one of the two company motor vehicles currently allocated for his use, at 25% of its value. Required: Review the tax implications of each of the above components of Ryan Kruger s proposed retirement package, indicating any exemptions or reliefs available. (13 marks) (b) Senior executive s remuneration structuring A senior finance executive (SFE) of a regionally spread financial services conglomerate has been selected as one of the beneficiaries of a remuneration strategy to be implemented by the financial conglomerate. Under the strategy senior executives will be paid a portion of their remuneration offshore in foreign currency. Although the SFE occasionally goes to South Africa for board meetings, most of his time is spent in Zimbabwe rendering services to the Zimbabwean branch of the conglomerate. Another matter being contemplated is the provision of a company vehicle to be kept in Johannesburg for use by the SFE during his visits to Johannesburg. The SFE will continue to have a dedicated company motor vehicle available to him in Zimbabwe. Under the proposed remuneration strategy, the SFE will be responsible for his own taxes on the portion of the remuneration receivable offshore. As a strategy to minimise the tax outflow, the SFE has decided that the salary should be paid into the Johannesburg account of his family trust. He is convinced that this plan is robust as he is of the opinion that the component of his remuneration paid outside the country is not taxable in Zimbabwe as it is for the services he renders in South Africa from time to time. 10
Required: (i) (ii) Analyse the proposed remuneration strategy and comment on the correctness of the senior finance executive s (SFE) beliefs in relation to the taxability of the portion of the salary paid offshore. (3 marks) Assuming the portion of salary payable offshore is indeed banked in the SFE s family trust s account, comment on any other regulatory issues that he should consider. (2 marks) (iii) State the tax implications arising from the company vehicle proposed to be made available to the SFE in Johannesburg. (2 marks) (20 marks) 11 [P.T.O.
4 Jan Smit, who has been a resident of Zimbabwe throughout his life, died on 20 December 2007 at the age of forty-five years. He was survived by his wife Anna and two children, Frederick and Paula, who are both majors. At the time of his death Jan was employed by Wild Haven Safaris (Private) Limited (Safaris), which operates a safari business in Hwange. The following information is relevant to the tax period 1 October to 20 December 2007: Gross monthly salary $60 000 000 Pension contribution per month (5% of gross) $3 000 000 National Social Security Authority contribution per month $60 000 Jan was a member of a non-contributory medical fund to which Safaris contributed $2 000 000 per month, which covered him and his one dependant, his wife Anna. Net rental income received from letting a holiday houseboat at Kariba amounted to $248 000 000 for the period 1 January 2007 to the date of death. Jan Smit s assets at the time of his death were as follows: A 50% share in the principal private residence purchased in January 2000 for $100 000 000 from the proceeds of an old matrimonial home. The value of the house at the time of his death per valuation by the executor was $50 billion. A houseboat on Lake Kariba, currently valued at $500 000 000, which he had inherited ten years previously from the estate of his late uncle. Two vehicles, a Toyota Twin Cab with a book value of $10 billion and a Mercedes Benz 320 with a commercial value of $15 billion. A beachfront property in South Africa valued at $10 billion. Personal household effects $150 000 000 Bank deposit $400 000 000 Cash on hand $350 000 000 Jan Smit formed the Jan Smit Family Trust six years before his death and made an initial donation to it of Old Mutual shares then valued at $10 000 000. Two years before his death, Jan had made another donation to the Trust, a block of flats inherited from his uncle s estate. The estate valuation of the block of flats when Jan inherited it was $200 000 000 and the value of the block of flats at the time of his death was $50 billion. In August 2006, Jan had made a further cash injection into the Trust of $100 000 000. The Jan Smit Family Trust is a discretionary trust under which the trustee was required to make discretionary distributions to Jan s children every year without bankrupting the Trust. The executor of the late Jan Smit s estate received the following amounts between 1 January 2008 and 28 May 2008, the date the final liquidation and distribution account for the late Jan Smit was approved by the Master of the High Court. Note Net rentals from the houseboat $480 000 000 Cash in lieu of leave received from Safaris $80 000 000 Lump sum from Safaris pension fund 1 $800 000 000 Lump sum from a matured life policy 2 $500 000 000 Proceeds from the sale of the two vehicles $25 billion Notes: 1. The lump sum receipt from Safaris pension fund was a death benefit payable according to the pension rules. 2. The late Jan Smit had taken out the life policy six months before his death. According to Jan Smit s Last Will and Testament, his 50% share of the matrimonial house was to go to his wife, while each of his children were to get $200 000 000 each on his death. The houseboat was to be transferred to the Trust. During the 2007 tax year the Jan Smit Trust had a total net income of $4 billion of which $500 000 000 each was distributed to Jan s children. 12
Required: (a) Explain the tax implications of the disposal of specified assets which form part of a deceased s estate if they are sold: (i) by the executor as part of the liquidation for the purposes of distribution; (1 mark) (ii) by the heir to any particular specified asset soon after distribution. (1 mark) (b) Explain the estate duty treatment of non-zimbabwean property. (4 marks) (c) Compute the value of Jan Smit s dutiable estate. (6 marks) (d) (i) Calculate Jan Smit s taxable income for the year of his death. (3 marks) (ii) In relation to any other items of taxable income arising from the above scenario, identify the respective taxpayer(s) on whom the income is assessable, together with the assessment year/period and the assessable amount. (5 marks) (20 marks) 13 [P.T.O.
5 (a) Imperial Investments and Worldwide Capital Brokers Imperial Investments plc (Imperial) is an international investor with its head office in London. In view of recent pronouncements in Zimbabwe regarding investment, it has decided to disinvest in Zimbabwe and move to a neighbouring country deemed to have a more favourable investment climate. Imperial has identified Worldwide Capital Brokers plc (WCB), another offshore investor which currently has no investments in Africa, as willing to purchase and take over Imperial s stake in Zimbabwe. Representatives of the two parties met in London in January 2008 and agreed the terms of the purchase and sale arrangement. WCB paid the agreed purchase price to Imperial in London and in return received the appropriate share certificates from Imperial, as well as an affidavit confirming the transfer of shares. In March 2008 a WCB representative flew to Zimbabwe to tie up the investment and to supervise a due diligence exercise. The representative has handed over the acquired share certificates as well as the affidavit to your firm, which specialises in tax advice and has requested that you obtain new replacement share certificates on her behalf. The representative has also provided you with a copy of the purchase agreement which shows that the purchase price in British pounds was GBP1 250 000. Also in the purchase agreement, there is a statement to the effect that the amount paid by WCB had been discounted by GBP1 000, being the potential capital gains tax that might become payable in relation to the transaction. The selling costs incurred by Imperial amounted to GBP20 000. You ascertain that Imperial made its initial investment in Zimbabwe in January 2002 at a cost of GBP250. The rate of exchange between the Zimbabwe dollar and the British pound had consistently been Z$450:GBP1 throughout the seven year period to 1 October 2007, when the rate was changed to Z$60 000:GBP1. From the due diligence exercise, it has been established that the Imperial Zimbabwean subsidiary has an accumulated assessed loss of $180 billion, just over $100 billion of which is five years old. Required: (i) (ii) Explain the actions necessary to obtain the replacement share certificates, clearly identifying any constraints that might apply. (6 marks) Compute the capital gains tax payable as a result of the transaction between Imperial Investments plc and Worldwide Capital Brokers plc. (6 marks) (iii) Explain whether or not the new shareholders will be allowed to carry forward the loss and outline any legal constraints that may limit their ability to carry forward the loss. (3 marks) (b) Government directive on price reduction In view of the galloping increases in prices, which are causing serious difficulties for consumers, a senior government official in the Ministry responsible for Industry and Trade is contemplating implementing a drastic measure through the use of a statutory instrument (SI), compelling trade and industry to reduce prices by at least 50% with immediate effect. While the statutory instrument is being crafted, the official has informally asked you to comment on any tax implications that the order might have. Required: Comment on the potential impact of the proposed order from a tax perspective. (5 marks) (20 marks) End of Question Paper 14