Professional Level Options Module Advanced Taxation (Malta) Friday 5 December 2014 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 2013 (year of assessment 2014) are to be used in answering the questions. Individual income tax Resident individuals 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% Next 31,300 32% Next 40,500 32% Remainder 35% Remainder 35% Parent rates 0 9,300 0% Next 6,500 15% Next 5,400 25% Next 38,800 32% 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 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 Investment allowances Industrial buildings and structures 20% Plant and machinery 50% 2
Corporate income tax Standard rate 35% Value added tax (VAT) Standard rate 18% Reduced rate 5% Reduced rate accommodation 7% Car fringe benefit 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 2011 791 02 2012 810 16 2013 821 34 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 a medium sized enterprise An enterprise which is not a small enterprise and: Investment Aid Regulations has fewer than 250 employees; and has an annual turnover not exceeding 50 million and/or annual balance sheet total not exceeding 27 million; and is to be treated as being independent. Definition of a small enterprise An enterprise which: has fewer than 50 employees; and has an annual turnover and/or annual balance sheet total not exceeding 10 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 Annual market rent (tax accounting) The annual market rent of immovable property situated in Malta owned and used by a company for the purpose of its activities (excluding property which is rented by the said company to other parties) is calculated by multiplying the aggregate surface area in square metres of all floors of such premises so owned and used by 250 per annum. Tax refund calculation when a company benefits from a reduced rate in terms of a tax treaty Y = (R 5%)/R Where: Y represents the rate to be determined; and R represents the reduced rate. 5 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 Borg Co and Galea Co, two companies registered in Malta, are looking to combine forces. Borg Co, a company incorporated in Malta, was set up in 1999 with an issued share capital of 10,000 shares of 1 each (fully paid up). The shares have always been held as to 100% by Joe Borg, an individual resident and domiciled in Malta. Borg Co s profits before tax over the last five years were as follows: 2009 200,000 2010 150,000 2011 225,000 2012 170,000 2013 200,000 The financial statements of Borg Co as at 31 December 2013 show a net asset value of 1,000,000. Borg Co does not hold shares in any companies or own any immovable property. Its offices are rented from third parties. Galea Co, a company incorporated in Malta, was set up in 2004 with an issued share capital of 5,000 shares of 1 each, fully paid up. The shares in Galea Co have always been held as follows: 75% by Peter Galea, an individual resident and domiciled in Malta; 15% by Michael Galea, an individual resident in Dubai but domiciled in Malta; and 10% by Petra Galea, an individual resident and domiciled in Malta. Galea Co s profits before tax over the last five years were as follows: 2009 70,000 2010 100,000 2011 75,000 2012 65,000 2013 80,000 The financial statements of Galea Co as at 31 December 2013 show a net asset value of 250,000. Galea Co does not hold shares in any companies or own any immovable property. Its offices are rented from third parties. Any transaction for the combination of the two companies is to take place in 2014, and the shareholders are considering two options: Option A Exchange of shares followed by a merger Joe Borg will transfer his 10,000 shares in Borg Co to Galea Co, and in exchange Galea Co will increase its share capital by 10,000, divided into 10,000 shares of 1 each, fully paid up, and issue these new shares to Joe Borg (the consideration paid is therefore to be taken as 10,000). As a result of the share transfer, Galea Co will become the parent company of Borg Co. As a result of the exchange of shares, the shareholding of Galea Co will become as follows: Joe Borg: 66 7% Peter Galea: 25% Michael Galea: 5% Petra Galea: 3 3% The value of the new shares which will be issued to Joe Borg will be lower than the current market value of Borg Co, but the parties have agreed that there will be no cash compensation. 6
After the exchange of shares, Borg Co will merge into Galea Co. The merger will take place by the transfer of all of the assets and liabilities of Borg Co to Galea Co and the dissolution of Borg Co. Galea Co will then be renamed Borg Galea Co. Option B Transfer of assets Borg Co and Galea Co will set up a new company (Borg Galea Co) with an issued share capital of 2,000 shares of 1 each, fully paid up; the shareholding of the company will be as follows: Joe Borg: 66 7% (i.e. 1,334 shares) Peter Galea: 25% (i.e. 500 shares) Michael Galea: 5% (i.e. 100 shares) Petra Galea: 3 3% (i.e. 66 shares) Borg Co and Galea Co will transfer all of their assets and liabilities to Borg Galea Co, and Borg Galea Co will then increase its share capital by 15,000 and issue a further 15,000 new shares of 1 each, fully paid up, to its four shareholders in proportion to the shareholding indicated above. Borg Co and Galea Co will subsequently be liquidated. Draft a letter to Borg Co which: (a) Explains the income tax and duty on documents and transfers implications of both Option A and Option B. The letter should examine, in particular, the applicability or otherwise of the provisions of the Income Tax Act and the Duty on Documents and Transfers Act which grant relief on an exchange of shares which takes place on a reorganisation and the provisions of those laws which impose an income tax and duty charge when a change in the share capital of a company produces a shift in the values of the shareholdings. (25 marks) (b) Provides calculations of the income tax and duty on documents and transfers which would be payable to support your explanations in respect of Option A. Note: You are not required to provide calculations in respect of Option B. (6 marks) Note: You can assume that, in the case of all four shareholders, any taxable gain will be taxed at 35%. Professional marks will be awarded for the format and presentation of the letter and the effective communication of the information. (4 marks) (35 marks) 7 [P.T.O.
2 Foreign Hold Co Malta Hold Co Interest Co Property Co Foreign Fund EU Op Co Foreign Hold Co, a non-maltese company incorporated in a European Union (EU) Member State, is fully owned by individuals who are neither resident nor domiciled in Malta. Foreign Hold Co is the 100% parent company of Malta Hold Co, a company incorporated in Malta. Malta Hold Co has the following holdings: 100% of Interest Co, a company incorporated outside Malta with its management and control in Malta. Interest Co is the treasury company of the group and has 20 million in a bank account outside Malta from which it derives interest at 8%. The interest is not subject to any withholding tax. It is received in another bank account held by Interest Co, either in Malta or outside Malta, from which it will then be distributed by way of dividend to Malta Hold Co. 50% of Property Co, a company incorporated outside Malta, which derives all of its income by renting and selling immovable property situated outside Malta. Property Co distributes an annual net dividend of 450,000 to Malta Hold Co. This dividend is subject to a withholding tax of 10%. 15% of Foreign Fund, a collective investment scheme registered outside Malta which invests mainly in private equity ventures. Investors liability in the collective investment scheme is limited to the amount invested. Foreign Fund distributes an annual net dividend of 1,250,000 to Malta Hold Co. This dividend is not subject to any withholding tax. 5% of EU Op Co, a company incorporated outside Malta in an EU Member State. Malta Co has the right to appoint a director to the board of EU Op Co. EU Op Co distributes an annual net dividend of 1,000,000 to Malta Hold Co. This dividend is not subject to any withholding tax. Malta Hold Co has provided a loan of 3,000,000 to Property Co, from which it derives interest. The interest payments are subject to a withholding tax of 10% in the State of residence of Property Co. The amount of interest net of withholding tax is 150,000 per annum. It is Malta Hold Co s policy to distribute all its profits by way of dividend to Foreign Hold Co. 8
(a) Explain the Maltese income tax treatment of the income derived by Interest Co and Malta Hold Co, including in particular: the relevance of the country from where Interest Co receives its income; the taxation of dividends distributed by the four subsidiaries to Malta Hold Co; the allocation of the companies income to the tax accounts; the extent to which the imputation system, and the relative rights to tax refunds, can be applied to the profits derived by and distributed by Interest Co; and the types of relief from double taxation which are available to Malta Hold Co, the different results which they may produce and their interaction with the imputation system and the relative rights to tax refunds. (20 marks) (b) In relation to the dividends received by Foreign Hold Co from Malta Hold Co, explain: (i) (ii) The income tax treatment in Malta and in Foreign Hold Co s country of residence, in terms of both Maltese law and the EU Parent Subsidiary Directive, of the dividend and any related tax refunds which may be claimed under the imputation system. (3 marks) The procedures which must be followed under Maltese law for Foreign Hold Co to be able to claim refunds under the imputation system. (1 mark) (c) Explain the Maltese income tax treatment of any gains which may be derived by Malta Hold Co or by Foreign Hold Co should either of them dispose of their shareholdings. Note: You are not required to prepare calculations for this part. (1 mark) (25 marks) 9 [P.T.O.
Section B TWO questions ONLY to be attempted 3 (a) Mr Jones lives, with his family, in a rented apartment in Malta but he is domiciled in the United Kingdom. He is to be employed with a Maltese company under a contract whose terms will require him to carry out his employment activities in Libya. Mr Jones will work from Monday to Friday in Libya, where he will stay in a rented apartment, and return to Malta every weekend. His wife and two children will continue to reside in Malta, and his children will continue to receive their education in Maltese schools. All of Mr Jones salary will be paid into a Maltese bank account. For the purposes of Maltese domestic tax law, Mr Jones will be deemed to be a resident of Malta, however, he will also be deemed to be tax resident in Libya for Libyan domestic tax law purposes. Advise Mr Jones on how the provisions relating to the taxation of employment income and to relief from double taxation under the double taxation treaty between Libya and Malta will apply to his income. Your advice should include explanations of how the issue of his dual residence will be resolved in terms of the tax treaty and the manner in which his employment income will be taxed under Maltese law. Note: You should assume that the double tax treaty between Malta and Libya is similar in all relevant respects to the OECD Model Tax Convention. (10 marks) (b) Mr James is ordinarily resident but not domiciled in Malta. He is the 100% shareholder of International Property Co, a company incorporated in the British Virgin Islands which in turn is the 100% shareholder of Extreme Property Co, a company registered in Malta. Extreme Property Co has acquired a large office in Valletta which is to be rented out to a company registered under Article 10 of the Value Added Tax Act for a monthly rent of 3,000. The acquisition of the property was wholly funded by a loan from International Property Co which will bear interest at 8% per annum. All of the profits derived by Extreme Property Co will be distributed to International Property Co and, in turn, to Mr James. (i) (ii) Set out the value added tax (VAT) implications of the rental of the property by Extreme Property Co. (3 marks) Advise Mr James on the manner in which the rental income derived by Extreme Property Co will be computed, the Maltese income tax treatment of the interest paid by Extreme Property Co to International Property Co and the dividends distributed by International Property Co to Mr James. (7 marks) Note: You are not required to provide calculations. (20 marks) 10
4 Mr Grech, an individual resident and domiciled in Malta, and Mr May, an individual resident but not domiciled in Malta, are looking to invest in a Maltese collective investment scheme which is listed on the Malta Stock Exchange. Mr May will be investing in the scheme via his wholly owned non-resident company. The scheme will derive the following income: interest paid by a Maltese bank; interest derived from investment in Maltese government bonds; distributions from various prescribed funds; and dividend distributions from a minority shareholding in a non-resident company which owns immovable property situated outside Malta. (a) (b) Assuming the scheme qualifies as a PRESCRIBED FUND, advise Mr Grech and Mr May on the income tax treatment of the income derived by the prescribed fund, on the income tax implications of the distributions derived by Mr Grech and Mr May respectively from the prescribed fund, and on any income tax and duty on documents and transfers liability which would arise should they transfer their units in the prescribed fund. (12 marks) Assuming the scheme qualifies as a NON-PRESCRIBED FUND, advise Mr Grech and Mr May on the income tax treatment of the income derived by the non-prescribed fund, on the income tax implications of the distributions derived by Mr Grech and Mr May respectively from the non-prescribed fund, and on any income tax and duty on documents and transfers liability which would arise should they transfer their units in the non-prescribed fund (1) by way of a direct transfer or (2) in the event of a redemption of the units by the non-prescribed fund. (8 marks) (20 marks) 11 [P.T.O.
5 (a) Mr and Mrs Bugeja, both residents of Malta, are on a Mediterranean cruise holiday which will cruise around EU Member States. The cruise ship, after leaving its port of departure in Italy, picked Mr and Mrs Bugeja up from Valletta Harbour and continued its journey around the Mediterranean. While in Croatian territorial waters, Mrs Bugeja bought a number of souvenirs from the cruise ship s souvenir shop. While in Greek territorial waters, Mr and Mrs Bugeja acquired tickets for participation at the Gala dinner on board the cruise liner, on the last evening of the holiday. State, giving reasons, the place of supply for value added tax (VAT) purposes of the sale of the souvenirs and of the Gala dinner. (5 marks) (b) Oil Co, a company registered for value added tax (VAT) purposes in Malta under Article 10, is drilling for oil in Maltese territorial waters. During the third month of drilling, the machinery suffered serious mechanical faults and required expert assistance. Oil Co hired IT Engineers Co to supply engineers to fix the mechanical faults, and Helicopter IT Co to transport the engineers by helicopter from Sicily to the oil rig. Both IT Engineers Co and Helicopter IT Co are Italian companies, registered for VAT in Italy. Neither company is registered for VAT purposes in Malta nor do they have a place of establishment in Malta. Explain the value added tax (VAT) implications of the services carried out by IT Engineers Co and Helicopter IT Co for Oil Co, including the place of supply of the transaction, any liability to register for VAT in Malta and the entity liable to pay any VAT due. (8 marks) (c) Greek Ship Building Co, a Greek company registered for value added tax (VAT) in Greece, has entered into a contract with MT Ship Owner Co, a Maltese ship owning company registered for VAT in Malta in terms of Article 10, to construct a ship to be used for commercial purposes to transport cargo in international waters, navigating on the high seas. The cargo ship will be constructed in Greece and delivered in Greece. Greek Ship Building Co will purchase the mechanical parts of the cargo ship from MT Prop Co, a Maltese company registered for VAT in Malta. The parts will be transported to Greece from Malta. As soon as the ship is delivered to MT Ship Owner Co, it will hire the ship for five years to a related company, MT Op Co, a company registered for VAT in Malta under Article 10 which will operate the ship. The title of ownership over the ship will not be transferred to MT Op Co. Explain the value added tax (VAT) implications of each of the transactions described, including the place of supply of the transaction, any liability to register for VAT in Malta and the entity liable to pay any VAT due. (7 marks) (20 marks) End of Question Paper 12