Professional Level Options Module Advanced Taxation (Malta) Friday 9 December 2011 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 2 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 (MLA) The Association of Chartered Certified Accountants The Malta Institute of Accountants
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 Euro 3. All apportionments should be made to the nearest month unless stated otherwise 4. All workings should be shown TAX RATES AND ALLOWANCES The following tax rates and allowances for the year of assessment 2011 are to be used in answering the questions. Individual income tax rates Resident individual tax rates Married couples joint computation: Other individuals: 0 11,900 0% 0 8,500 0% Next 9,300 15% Next 6,000 15% Next 7,500 25% Next 5,000 25% Remainder 35% Remainder 35% Non-resident individuals 0 700 0% Next 2,400 20% Next 4,700 30% Remainder 35% Returned migrants Married couples Others 0 5,900 0% 0 4,200 0% Remainder 15% Remainder 15% Capital allowances Income Tax Act rates Industrial buildings and structures Initial allowance 10% Wear and tear allowance 2% Plant and machinery Wear and tear allowance as indicated in the question where applicable Capital allowances Business Promotion Act rates Investment allowances Industrial buildings and structures 20% Plant and machinery 50% Corporate income tax Standard rate 35% Value added tax (VAT) Standard rate 18% Reduced rate 5% 2
Car fringe benefit calculation and rates Annual value of benefit = (vehicle use + fuel value + maintenance value) x private use percentage Vehicle use % of vehicle value Vehicle not more than six years old 17% Vehicle more than six years old 10% Fuel value % of vehicle value Vehicle value not exceeding 28,000 3% Vehicle value exceeding 28,000 5% Maintenance value % of vehicle value Vehicle value not exceeding 28,000 3% Vehicle value exceeding 28,000 5% Car value Private use percentage Not exceeding 16,310 30% Exceeding 16,310 but not 21,000 40% Exceeding 21,000 but not 32,620 50% Exceeding 32,620 but not 46,600 55% Exceeding 46,600 60% 3 [P.T.O.
Capital gains Index of inflation 1988 439 62 1989 443 39 1990 456 61 1991 468 21 1992 475 89 1993 495 60 1994 516 06 1995 536 61 1996 549 95 1997 567 95 1998 580 61 1999 593 00 2000 607 07 2001 624 85 2002 638 54 2003 646 84 2004 664 88 2005 684 88 2006 703 88 2007 712 68 2008 743 05 2009 758 58 2010 770 07 Applicability of increase for inflation Cost of acquisition/improvements x index(yd) index(ya) 1 index(ya) Where: index(yd) is the index for the year immediately preceding that in which the transfer is made; index(ya) is the index for the year immediately preceding that in which the property in question had been acquired or completed, whichever is the later, or, when it relates to improvements, for the year immediately preceding that in which the cost of carrying out the improvements was incurred. Y = (A B) + C D Transfer of value Where: Y represents the value transferred or acquired by a person A is the market value of the shares held in the company immediately before the change B is the market value of the shares held in the company immediately after the change C is the consideration paid by the person for the acquisition of shares or additional shares issued by the company, where the change consists of an issue of share capital for consideration D is the amount paid by the company in respect of a cancellation of shares held by the person, where the change consists of a reduction of share capital 4
Cost of acquisition of shares in the transfer of value Z = ((A B)/A) x E Where: Z represents the amount to be determined A is the market value of the shares held by the transferor immediately before the change B is the market value of the shares held by the transferor immediately after the change E is the cost of acquisition of the shares held by the transferor immediately before the change Definition of medium sized enterprise An enterprise which is not a small enterprise and: Business Promotion Act Incentives has fewer than 250 employees; and has annual turnover not exceeding 40 million or total assets not exceeding 27 million; and is to be treated as being independent. Definition of small enterprise An enterprise which: has fewer than 50 employees; and has annual turnover not exceeding 7 million or total assets not exceeding 5 million; and is to be treated as being independent. Stamp Duty Standard rate Property companies (as defined) 2 for every 100 in value or part thereof 5 for every 100 in value or part thereof 5 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 John Paul 50% 50% 50% 50% A Ltd B Ltd 100% C Ltd A Ltd, B Ltd and C Ltd are limited liability companies incorporated and managed and controlled in Malta. They all adopt the calendar year as their financial year. John and Paul each own 50% of the share capital of A Ltd and B Ltd, while A Ltd owns 100% of the share capital of C Ltd. John and Paul are individuals who are ordinarily resident and domiciled in Malta. The share capital of A Ltd and B Ltd is wholly made up of ordinary shares of equal nominal value and carrying equal voting rights, and has not been changed since the incorporation of the companies. The share capital of C Ltd originally consisted of 25,000 ordinary shares of 1 each which carry equal voting rights and which were issued to A Ltd when C Ltd was incorporated in 2007. The share capital of C Ltd was changed in 2011 by the issue of redeemable preference shares by way of a capitalisation, described below. On 15 June 2010 B Ltd transferred an office building situated in Malta to C Ltd for a consideration of 100,000. The property had been acquired by B Ltd during 2002 for 30,000. The acquisition of the office building by C Ltd was financed by an unsecured shareholder s loan of 100,000, none of which has been repaid to date. In December of 2010, C Ltd carried out a revaluation of the office building and this is now shown in its books at its present market value of 150,000. On 15 February 2011, C Ltd issued 50,000 4% preference shares of 1 each to A Ltd by way of a capitalisation of the revaluation reserve of 50,000 that was created on the revaluation of the office building. The following financial information relates to C Ltd: 31 December 31 December 31 December 31 December 15 December 2007 2008 2009 2010 2011 Profit/(loss) before tax (15,000) (10,000) 50,000 70,000 120,000 Chargeable income 0 0 20,000 60,000 100,000 Income tax 0 0 7,000 21,000 35,000 Balance sheet (extract) 31 December 15 December 2010 2011 Property 150,000 150,000 Plant and equipment 110,000 150,000 Current assets 65,000 70,000 Current liabilities 83,000 63,000 Long-term borrowings 100,000 100,000 Share capital 25,000 75,000 Distributable reserves 67,000 132,000 Revaluation reserve 50,000 0 6
The directors of C Ltd have decided to expand the business and Alex, who is ordinarily resident and domiciled in Malta, is interested in acquiring 50% of the ordinary share capital of the company. C Ltd is not expected to pay out any dividends for the next three years. Two options are being considered. Option 1: Option 2: A Ltd will transfer 12,500 ordinary shares in C Ltd to Alex for a consideration of 6 per share. C Ltd will issue 25,000 ordinary shares of 1 each to Alex at a premium of 5 per share, to be paid for in cash. Whichever option is decided on, it will take place on 15 December 2011. John, Paul and Alex wish to establish the tax and duty implications of each of the two options before taking any decision. They are also concerned about any adverse tax consequences that may arise as a result of the change in the shareholders of C Ltd because of the intra-group transfer that took place in 2010. Required: Prepare a report for John, Paul and Alex advising them on the income tax and duty implications of each of the two options. The report should include: (i) (ii) An explanation of any adverse tax consequences that may arise as a result of the change in the shareholders of C Ltd because of the intra-group transfer that took place during 2010. (6 marks) An explanation of the income tax and stamp duty implications arising under each of the two options being considered. (19 marks) (iii) Calculations of income tax and stamp duty liabilities identified as payable, to support the information given in the report. (9 marks) Professional marks will be awarded in Question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which the advice is communicated. (2 marks) Note: you are advised first to prepare the calculations required under (iii) and then to proceed with the drawing up of the report. (36 marks) 7 [P.T.O.
2 Mr Hunt MALTA FORCO Ltd HOLDCO Ltd BLACK Ltd YELLOW Ltd GREEN Ltd Holdco Ltd, Black Ltd, Yellow Ltd and Green Ltd are all companies incorporated and managed and controlled in Malta. Holdco Ltd owns all of the ordinary share capital of the other three Maltese companies. Holdco Ltd is fully owned by Forco Ltd, a company which is incorporated and managed and controlled outside Malta. Forco Ltd is fully owned by Mr John Hunt who is neither ordinarily resident nor domiciled in Malta. All five companies have a 31 December year end. Holdco Ltd is registered with the Commissioner of Inland Revenue to be eligible for refunds of tax on dividend distributions. Yellow Ltd holds 10% of the share capital of Redco, a limited partnership which is similar in nature to a partnership en commandite the capital of which is divided into shares. Redco is incorporated and managed and controlled in Country D, a territory forming part of the European Union, and is recognised as a company for the purposes of the EU Parent/Subsidiary Directive. The investment in Redco, which was acquired during 2008, consists of shares which provide limited rights to its shareholders. Yellow Ltd is entitled to 10% of the profits available for distribution and to 10% of the assets available for distribution on a winding up, but is not entitled to vote. Under the domestic law of Country D, limited partnerships that are managed and controlled in that country are taxable at the rate of 20% on all their income and the distribution of dividends attracts a withholding tax of 15%. A double taxation agreement is in force between Malta and Country D based on the OECD Model Convention. Redco does not own directly or indirectly any immovable property situated in Malta. Yellow Ltd also carries on business through a branch situated in Country E. A double taxation agreement is in force between Malta and Country E based on the OECD Model Convention. During 2011 Yellow Ltd derived the following income: Business profits derived from its branch in Country E 500,000 Dividends received from Redco 300,000 The income from the branch in Country E is shown gross of 20% foreign tax. The dividend received from Redco is shown gross of all Country D taxes. Black Ltd, which has been owned by Holdco Ltd since its incorporation in 2005, carries on manufacturing activities in Malta. For the year ended 2011 Black Ltd incurred an accounting loss of 200,000 (after deducting 20,000 depreciation) from these activities. It derived no other income during the year 2011. Green Ltd operates a hotel in Malta and its business consists of the provision of accommodation as defined in the Value Added Tax Act. The value of its sales is wholly subject to value added tax (VAT) at the rate of 7% in terms of item 1 of the Eighth Schedule of the Value Added Tax Act. The hotel which Green Ltd operates is rented from an unrelated person. Green Ltd was acquired by Holdco Ltd on 20 February 2011. The acquisition of its entire share capital was financed by way of a bank loan on which interest amounting to 160,000 was incurred by Holdco Ltd up to 31 December 2011. The chargeable income of Green Ltd computed in accordance with the Income Tax Act for basis year 2011 amounts to 500,000. Yellow Ltd and Green Ltd will distribute all of their profits for 2011 by the end of 2011. 8
Required: (a) (b) Draft a letter to Mr John Hunt advising him on: (i) (ii) The Maltese income tax treatment of each of Yellow Ltd s and Green Ltd s items of income, taking into account any group loss relief that may be available and indicating any options available in the computation of their chargeable income to the extent that they can affect the calculation of the tax refunds that may be claimed by Holdco Ltd; (13 marks) The tax implications for Holdco Ltd arising from the distribution of profits by both Yellow Ltd and Green Ltd taking into account any group loss relief that may be available. (6 marks) Professional marks will be awarded in part (a) for the appropriateness of the format and presentation of the letter and the effective communication of the information. (2 marks) Prepare tax computations for Holdco Ltd, Yellow Ltd and Green Ltd showing their taxable income and tax liability for the year of assessment 2012, allocate the distributable profits to the respective tax accounts and determine the tax refunds available to Holdco Ltd on the distribution of those profits. Note: The basis upon which you are to determine the taxable income should take into account the fact that the two companies have as their main objective the maximisation of the return to the company s shareholder (including the right to benefit from any tax refunds) upon the distribution of dividends. (7 marks) (28 marks) 9 [P.T.O.
Section B TWO questions ONLY to be attempted 3 Albert, who is ordinarily resident and domiciled in Malta, is in the retail business, selling souvenirs. He is registered under article 10 of the Value Added Tax Act (VATA) and has a three-month tax period for value added tax (VAT) with the first tax period commencing on 1 January of each year. His business assets as at 1 December 2011 consisted of the following: (1) Shop purchased in 2004 for 100,000. (2) Store A purchased in 2004 for 25,000. (3) Store B, which was built on land that Albert had purchased in 2008 for 18,000. The development costs amounted to 15,000 (net of VAT) and were reported for VAT purposes in the tax return for the first tax period of 2009. The construction of the store was completed on 10 January 2009 and used immediately by Albert in his business. (4) Furniture and fixtures costing 12,000 (net of VAT) purchased during 2008. (5) Stock of goods for resale costing 15,000 (net of VAT). Albert has decided to incorporate his business into a limited liability company. For this purpose he will form a new company with his son Paul. Albert will own 75% of the company and the consideration for his shares will be paid by means of the transfer to the company of the business, together with all the business assets except for Store B, in exchange for new fully paid-up shares. The company will be formed on 1 January 2012 and the transfer will be made on that date. The company will be registered under article 10 of the VATA. Albert will sell Store B to a third party on 25 December 2011 for 60,000. Required: (a) (b) Explain the tax implications (other than value added tax) of the transfer of the assets on the incorporation of Albert s business into a limited liability company, and of the sale of Store B, calculating the amount of tax, if any, payable by Albert. Notes: 1. You are only required to explain the relevant provisions relating to capital gains (article 5) and property transfers (article 5A). 2. You are to assume that any chargeable capital gains will be taxed at the marginal rate of 35%. (8 marks) Explain the value added tax implications of the transfer of the assets on the incorporation of Albert s business into a limited liability company, and of the sale of Store B, calculating the amount of VAT, if any, payable by Albert. (10 marks) (18 marks) 10
4 (a) Tony and his sister Carmen, who are both ordinarily resident and domiciled in Malta, each acquired 10,000 1 ordinary shares in TP Holdings Limited for 1 each upon the incorporation of the company in 1985. Tony and Carmen, the directors of the company, decided during 2010 to expand their business both locally and overseas. In order to raise new finance, TP Holdings Limited carried out an initial public offering (IPO) of shares on 30 September 2010 and issued one million 1 ordinary shares at a premium of 4 to the public. All of the issued share capital of TP Holdings Limited, now TP Holdings plc, including the shares held by Tony and Carmen, were listed on the Malta Stock Exchange. On 30 March 2011 Tony purchased a further 20,000 TP Holdings plc shares on the market for 5 10 each, while Carmen retained her original holding of 10,000 shares. Both Tony and Carmen have now decided to dispose of their entire investment in TP Holdings plc and will sell all of their shares for 5 15 each, being the current quoted price on the Malta Stock Exchange. The market value of TP Holdings plc, as calculated in accordance with the Capital Gains Rules, is 6,120,000. The company does not own any immovable property. Required: (i) (ii) Discuss the extent to which Tony and Carmen will be subject to Malta income tax on any capital gains derived from the transfer of their shares in TP Holdings plc; (8 marks) Using the values given calculate the potential Malta income tax payable, if any, on the transfer of their shares in TP Holdings plc by Tony and Carmen. (2 marks) (b) Aldo, who is ordinarily resident and domiciled in Malta, has been appointed HR manager with HT Limited, a company incorporated and managed and controlled in Country G. On 1 January 2012, Aldo will leave Malta to start work in Country G for a period of two years. During the period of his posting in Country G, Aldo will visit his wife and children in Malta for four days in every month and he will return to Malta on the expiry of his contract. The terms of his contract of employment state that Aldo is to receive employment income of 150,000 per annum to be paid by HT Limited. HT Limited has also agreed to pay 3,000 per month for Aldo s accommodation in Country G. Aldo does not have any other sources of income. A double taxation agreement is in place between Malta and Country G based on the OECD Model Convention. Country G charges tax on emolument income at a flat rate of 10%. Required: Explain the extent to which Aldo will be subject to income tax in Malta and in Country G during 2012 and 2013 and the availability of any potentially relevant option(s), calculating his taxable income and tax liability for the said years. (8 marks) (18 marks) 11 [P.T.O.
5 GRN Limited (GRN), a company incorporated and managed and controlled in Country H, carries out research and development and owns the technical know-how and patent arising from its activity. TGS Limited (TGS) is a manufacturing company incorporated and managed and controlled in Malta. Alan, who is ordinarily resident and domiciled in Malta, owns 60% of the share capital and voting rights of GRN and 100% of the share capital of TGS. GRN received the following income from TGS during the financial year ending 31 December 2011: 1. 150,000, being royalties derived from patents in respect of an invention. The invention is licensed for use in Malta by TGS, as the Maltese manufacturer. 2. 100,000, being interest derived from a loan advanced to TGS to finance its business operations in Malta. Malta has a treaty with Country H for the elimination of double taxation based on the OECD Model Convention. The treaty entitles the country of source to withhold tax on the payment of interest at a rate not exceeding 10% and provides for a 0% withholding tax on royalties. GRN is not engaged in any trade or business in Malta through a permanent establishment. The transactions between GRN and TGS are entered into on arm s length terms. Under the domestic law of Country H tax is charged at the rate of 10% on all income, whether of domestic or foreign source, derived by a company incorporated in Country H. Required: (a) (b) Discuss the Maltese income tax implications for both GRN Limited and TGS Limited in respect of the royalty and interest receipt/payment. (14 marks) State the Maltese income tax implications for both GRN Limited and TGS Limited in respect of the royalty and interest receipt/payment had GRN Limited been incorporated and managed and controlled in Malta, and calculate the total tax that would have been payable by GRN Limited in Malta on its income in this case. Note: You are to assume that GRN Limited does not claim any deductions against the royalty and interest income. (4 marks) (18 marks) End of Question Paper 12