Professional Level Options Module Advanced Taxation (Zimbabwe) Monday 7 June 2010 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 3 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
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 US$1, unless directed otherwise. 3. All apportionments should be made to the nearest month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions: Income Tax: Individuals Band Quantum % rate Band tax (US$) Cumulative tax (US$) 1 1 800 1 800 0 0 0 1 801 6 000 4 200 20 840 840 6 001 12 000 6 000 25 1 500 2 340 12 001 18 000 6 000 30 1 800 4 140 18 001 36 000 18 000 35 6 300 10 440 36 000 + 37 5 Note: the AIDS levy of 3% of income tax payable, less credits remains. Pension Contributions Maximum permissible deduction US$ In relation to employers: Contribution to employer s pension fund per employee 3 600 In relation to employee Contribution to employer s pension fund 3 600 Retirement annuity fund/self employed pension fund 3 600 National Social Security: 4% of gross salary Aggregate maximum contributions to all above per employee per year: 3 600 Deemed motoring benefits: Year ended 31 December 2009 Engine capacity Annual benefit (US$) Up to 1500cc 600 1501 2000cc 720 2001 3000cc 960 3001 and above 1 200 Credits US$ Elderly person (55 years and over) 900 Physically disabled person 900 Blind person 900 Medical aid and expenses 50% of amount paid in each year Capital Allowances 2009 2010 Special initial allowance 50% 50% Accelerated wear and tear 25% 25% Industrial building 5% 5% Commercial building 2 5% 2 5% Motor vehicles 20% 20% Movable assets in general 10% 10% 2
Corporation Tax 2009 2010 Basic tax rate 30% 30% Aids Levy 3% 3% Value Added Tax (VAT) Standard rate 15% Individuals Income Tax Income from trade or investment 30% AIDS levy 3% Capital Gains Tax Disposal of listed marketable securities acquired after 1 February 2009 1% of gross proceeds Disposal of specified assets acquired prior to 1 February 2009 sold prior to 1 February 2009 20% of gain sold after 1 February 2009 5% of gross proceeds Disposal of specified assets acquired on or after 1 February 2009 (excluding listed securities) 20% of gain Gains on disposal of Principal Private Residence by persons of 55 years or over: Nil Inflation adjustment rate per year 2 5% Capital gains withholding tax on sale proceeds Immovable property 15% Unlisted securities 10% Listed securities (prior to 1 February 2009) 5% Note: the withholding tax is not a final tax. Actual liability is determined on assessment and the withholding tax is set off against the liability ascertained. Withholding taxes On dividends distributed by a Zimbabwean resident company to resident shareholders other than companies and to non-resident shareholders: By a company listed on the Zimbabwe Stock Exchange 15% By any other company 20% Non-residents tax On interest nil On certain fees and remittances 20% On royalties 20% Residents tax on interest From building societies 20% From other financial institutions (including discounted securities) 20% Elderly taxpayers (55 years and over) The exemptions from income tax are as follows: Year ended 31 December 2009 US$ Rental income 3 000 Interest on deposits with a financial institution 3 000 Interest on discounted instruments 3 000 Pension No limit Income from the sale or disposal of marketable securities or a principal private residence is also exempted. 3 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 Your manager has passed you a file which contains the following information about Butler Broadbend ( BB ). BB, the 60-year-old partner in a firm of chartered accountants, Broadbend and Co. retired from the partnership on 31 October 2009 after a period of 42 years of service to the firm. Broadbend and Co s financial year-end is 31 December each year. BB s accruals and deductions from the partnership in respect of the 2009 tax year are provided as follows: $ Gross salary remuneration for the period 1 January to 31 October 2009 80 000 Interest on capital 16 400 Aggregate contributions to approved pension fund (7 500) Employee s tax deducted (18 000) BB was also entitled to the following benefits: 1 Medical aid cover of $6 000 per year, fully paid by the partnership 2 Usage of a partnership expensed 3 000 cc Toyota Prado vehicle for both business and private purposes. 3 Membership of the Borrowdale Brooke Golf Club valued at $1 200 per year, fully paid by the partnership. The partnership agreed to the following in reaction to BB s retirement: 1 The partnership would continue to use the current partnership name of Broadbend and Co and for that it entered into a restraint of trade agreement with BB to the effect that he would not engage in any activity that could be construed to be in competition with the firm for a period of three years. BB accepted a payment of $90 000 for agreeing to the restraint. 2 BB was allowed to takeover ownership of the Toyota Prado he had been using in the partnership business. The vehicle was valued at $24 000 as at 31 October 2009. 3 BB s share of profit for the 2009 financial year was estimated as $120 000 by partnership consensus, based on a computation undertaken by the staff partner without preparing actual financial statements. 4 The Partnership Pension Fund rules provided an election to retiring persons an opportunity to commute the equivalent of 3/8 of the pension entitlement and receive a lumpsum up front, and a reduced monthly pension payable in arrears. BB made the election and received a lumpsum of $270 000 and was entitled to a reduced pension of $3 750 per month guaranteed for ten years with effect from 1 December 2009. BB utilised $100 000 from his retirement benefits by purchasing a holiday beach front property in Durban, South Africa, which he will let to tourists. He commenced to lease the property with effect from 1 November 2009. Rental income from the property in respect of the two months to 31 December amounted to $3 000. His South African Bank account was credited with a net amount of $2 600, after the deduction of a withholding tax of $600. During the 2009 tax year BB had also received gross investment income of $5 000 from an investment in Banker s Acceptances. BB had paid the following provisional tax instalments during the 2009 tax year: $5 000 on 25 March 2009, $10 000 on 25 June 2009; $12 000 on 25 September and $13 000 on 20 December 2009. 4
Required: Write a letter to Butler Broadbend (BB) setting out: (a) Your computation of BB s taxable income and tax liability : (i) From employment; (7 marks) (ii) From business and investment activities (5 marks) (b) Brief explanations of the tax status and reasons thereof, of the following accruals to BB: (i) Restraint of trade; (5 marks) (ii) Lumpsum commutation from the pension fund; (3 marks) (iii) Rental income from Durban property. (4 marks) (c) A brief commentary on BB s compliance status with regard to his provisional tax obligations, indicating any instances that could be open to potential statutory penalty or interest. Support your comments with appropriate workings. (5 marks) Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the letter and the effectiveness with which the information is communicated. (3 marks) (32 marks) 5 [P.T.O.
2 Zambia Metallurgical plc ( ZMplc ), a company listed on the Zambia Stock Exchange, entered into an agreement with a Zimbabwe steel producing company under which ZMplc purchased a large stockpile of contaminated metallurgical coke from the Zimbabwean company for purposes of converting it into coke suitable for industrial use. ZMplc will second a few technical experts from Zambia to Zimbabwe and will employ a largely Zimbabwean workforce. ZMplc will import its specialist operating equipment from Zambia into Zimbabwe but will repatriate the equipment to Zambia on completion of the project. Under the transaction, ZMplc will reclaim the contaminated metallurgical coke through a sorting, crushing and scalping and stockpiling process prior to selling it to industrial consumers in Zimbabwe, South Africa, Botswana and the Democratic Republic of Congo. The agreement states that initially ZMplc will process 30 000 tons of the metallurgical coke. This production is projected to take a minimum of two years commencing from 1 January 2010. The value of the contaminated metallurgical coke is virtually nil while the expected market value of the 30 000 tons of reprocessed coke is expected to be in excess of US$3 000 000. In order to finance the project, ZMplc has entered into a suitable offshore loan agreement with a Chinese Industrial Banking consortium, which will provide the requisite project finance. As ZMplc does not have any other operations in Zimbabwe, it wishes to seek clarification and confirmation that the sale proceeds from both Zimbabwean and non-zimbabwean industrial consumers of the processed metallurgical coke could be paid directly to its Zambian Bank Account. A top-level team of ZMplc company officials led by the Group Finance Director is due in Zimbabwe to seek clarification and put the final touches of the deal into place. They have asked for a meeting with you, in your capacity as a tax advisor. Prior to their visit, they require a report from you outlining the Zimbabwe tax status and potential statutory obligations that arise on the Zambian company as a result of entering into the agreement. Required: (a) Write a suitable memorandum to the Group Finance Director of Zambia Metallurgical plc (ZMplc), explaining: (i) (ii) whether or not ZMplc will be treated as having a permanent establishment in Zimbabwe and if so, the tax consequences; (6 marks) the nature and types of Zimbabwean tax registration requirements, tax returns and frequency of submission; Note: you are not required to explain the rules for payment of taxes in instalments during the year. (8 marks) (iii) customs duty relief on temporary importation of equipment. (iv) exchange control and banking of sale proceeds; (3 marks) (3 marks) (v) whether ZMplc is required to register a Zimbabwean company in order to trade locally. (2 marks) Professional marks will be awarded in part (a) for the appropriateness of the format and presentation of the memorandum and the effectiveness with which the information is communicated. (2 marks) (b) Briefly comment on the potential impact of the Zimbabwean thin capitalisation rules in relation to the Chinese Industrial Bank loan assuming that: (i) ZMplc does not register a Zimbabwean company to carry out the venture; (ii) ZMplc DOES register a Zimbabwean company to carry out the venture and the loan is made to this Zimbabwean company. (4 marks) (28 marks) 6
Section B TWO questions ONLY to be attempted 3 Dudzai Mbudzi, a partner in a local law firm, inherited a condominium block with six two-bedroomed residential units from the estate of a deceased relative in July 2009. The block, situated ten minutes from the Harare City Centre is in an area with properties, which are increasingly being converted into commercial offices. The estate valuation of the condominium was $850 000 although by the time of transfer to Dudzai the market value of the property had substantially risen to $1 000 000. He made the decision that as soon as the property was transferred into his name he would convert it to commercial use rather than continuing the current residential use. Dudzai incurred the following expenditures in upgrading the property to make it attractive for sale: $6 000 on uprooting and removal of an old tree whose roots were threatening the foundation of the condominium; $20 000 on paving the driveway; $8 000 replacing broken window panes; $10 000 on installation of a new security system around the premises; and $6 000 on painting the property. Thereafter he placed the property with a reputable estate agent to advertise for sale on his behalf. Dudzai Mbudzi s advertising and agent s fees amounted to $18 500. In November 2009 Dudzai Mbudzi accepted an offer of $1 800 000 from a consortium of medical doctors who wanted to use the property as a medical centre. The sale agreement was signed on 20 November 2009 with the following terms: $800 000 was payable within seven days of signing the agreement; $600 000 was payable after one year, specifically on or by 30 November 2010; $400 000 after a further year on 30 November 2011. In recognition of the credit terms, the agreement also provided for Dudzai Mbudzi to receive in lieu of interest, a 2% share of the gross revenues made by the doctors until the whole purchase price was paid. The fee receivable in lieu of interest in respect of the year ended 31 December 2009 amounted to $8 000, and an estimate of $40 000 was expected in respect of the 2010 tax year. Dudzai approaches you for advice on the tax implications of the transaction as well as any ideas on how he could minimise the tax liability, particularly since he is going to receive the proceeds in instalments. Required: (a) (b) (c) Calculate the amounts of the tax payments which should be made as a result of the sale, clearly stating when the payments will be due. (12 marks) Briefly explain the tax treatment of the expenditure incurred in uprooting and removing the old tree from the condominium. (2 marks) Briefly explain the tax implications of the transaction, including the tax procedures which must be followed before the building can be transferred to the buyers, and any opportunities to minimise the tax liability. (6 marks) (20 marks) 7 [P.T.O.
4 Dutch Boilermakers AG is a German multinational company, which specialises in the manufacture of industrial boilers. The company has been trading in Zimbabwe for the past ten years through its 100% owned subsidiary, Overmaars (Zimbabwe) (Private) Limited ( Overmaars Zimbabwe ), with operations being undertaken from industrial premises in the Workington industrial area of Harare. In 2008 Dutch Boilermakers AG subscribed for 60% of the issued shares in a recent entrant to the boilermaking industry in Zimbabwe, a Bulawayo company, Industrial Boilers (Private) Limited ( Industrial Boilers ). Although the first four to six years of Overmaars Zimbabwe s operations had been promising, the company has incurred operating losses in the past two years due to a host of factors including foreign exchange related problems, which had made imported supplies extremely expensive. The accumulated assessed loss as at 1 January 2010 was $1 480 000. Industrial Boilers (Private) Limited however, has managed to make profits and its projected trading result in respect of the tax year ending 31 December 2010, is for a profit of $4 000 000. A review of group operations in Zimbabwe carried out in February 2010 by Dutch Boilermakers AG representative posted from Germany showed that to enable Overmaars Zimbabwe to turn around its fortunes, it needed to import some new plant which would cost $2 000 000. Dutch Boilermakers AG is prepared to provide a loan repayable after 20 years. The other conditions of the loan would be that it would be subordinated to the Zimbabwean operations creditors and it would be a participating loan under which the parent company would be entitled to 1% of the gross income of the combined Zimbabwe operations. The new machinery is expected to be landed in Zimbabwe in October 2010 and would be commissioned for use with effect from 1 November 2010. The representative also queried the payment of tax by the subsidiary Industrial Boilers while Overmaars Zimbabwe was accumulating losses. In order to minimise the group company exposure to taxation in Zimbabwe, the representative engages you to review the group tax exposure and suggest ways of achieving the optimum tax structure. He makes available to you the following additional information: Estimated profits/(losses) of the two Zimbabwe operations of the group in respect of the 2010 financial year. Overmaars Zimbabwe ($1 200 000) Industrial Boilers $4 000 000 These figures are before providing for the following: Scrapping allowance of $300 000 in respect of an envisaged disposal of old plant which would be replaced by the new machinery to be financed by the parent company. $25 000 being the projected income due to Dutch Boilermakers AG from Overmaars Zimbabwe in 2010 in respect of the loan made to finance the new machinery acquisition. Required: (a) Briefly comment on the nature, deductibility and tax treatment of the $25 000 due to Dutch Boilermakers AG as a result of funding the new machinery required by Overmaars (Zimbabwe) (Private) Ltd. (3 marks) (b) (c) Outline how the operations can best be structured or organised in order to achieve group tax efficiency within Zimbabwe. (12 marks) Compute the combined taxable income or loss of the Zimbabwean operations for the 2010 tax year on the basis that the structure outlined in (b) above is followed. (5 marks) (20 marks) 8
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5 Ruramai Ngirozi is a qualified beauty therapist with some three years experience on international cruise ships. In view of the scarcity of well-established beauty salons in Zimbabwe, she decided to start her own business in the country with effect from January 2009. In November 2008 Ruramai Ngirozi had registered a company, Rujeko Beauty Parlour (Private) Limited ( Rujeko ), and she started operations on 1 January 2009 in rented premises in Mount Pleasant suburb, Harare. In respect of the year ended 31 December 2009 Rujeko s gross revenue amounted to $800 000 and the income statement reflected a net profit of $420 000 before taking into account the following: 1 Preliminary expenses Ruramai Ngirozi had incurred the following expenses within a period of six months prior to the commencement of business on 1 January 2009: $ Legal fees re registration of the company 6 000 Purchase of consumable materials for use in the business 32 000 Purchase of computer equipment and software 10 000 Purchase of furniture, fittings and beauty equipment 50 000 2 Registration of trademark In December 2008 Ruramai had registered a trademark with the name Chenai. The trademark was added to Rujeko s legal documents, such as invoices and receipts and was used in all company advertisements. The total cost of the trademark was $8 000. 3 Rental payments Rujeko paid an amount of $20 000 on 2 January 2009, being a refundable rental deposit of $5 000 and 15 months rent in advance based on the lease agreement where rental was agreed at $1 000 per month. 4 Lease expenses Rujeko also paid lease expenses of $4 000 in relation to the drawing up of the lease agreement. 5 Purchase of beauty equipment In March 2009 Rujeko purchased a sauna infrastructure at a cost of US$ 30 000. 6 Manicure and pedicure on relatives During the year, Rujeko performed manicure and pedicure services on Ruramai s sister s wedding grooms and bridegrooms for free as a gift. The services would normally have been charged at $3 000 for labour and $4 000 was the cost of materials used. 7 Insurance claim During the year an electrical fault in the business premises resulted in the permanent damage to some computer equipment which had cost $5 000 and which had been bought prior to the commencement of the business. As the business assets were insured, Rujeko was able to make a claim to its insurers who then paid $5 000 as compensation. The amount was used as a deposit in the acquisition of new replacement computer equipment costing $8 000. 8 Replacement of equipment In October 2009, Rujeko sold a faulty component of the sauna equipment for $5 000. This part had cost $4 000. The replacement component cost was $10 000. 9 Donations In December 2009, Rujeko donated to a charitable organisation The Home by undertaking beautification procedures on resident participants in the home, taking part in an internal beauty contest mounted by the home to raise funds for Christmas for the homeless children. The cost of the treatment amounted to $12 000. 10
10 Research costs In October 2009, Rujeko contributed $6 000 to a research fund which was conducting a research into the effects of beauty cosmetics on different types of skins. The results of the research, expected in 2010, would help the company in its beauty treatments. 11 Rujeko was not registered for value added tax purposes. 12 Loans Rujeko s books reflected a loan of $80 000 owed to Ruramai Ngirozi, the shareholder. The loan was subject to interest at 10% per annum. The indebtness arose from the market value of a Mercedes Benz vehicle Ruramai Ngirozi had introduced into the business. The vehicle was reissued to her as the managing director for use for both business and private purposes. Required: (a) Explain, with reasons, whether or not the company should be registered for value added tax purposes. Your answer should include an outline of any potential remedies that the Zimbabwe Revenue Authority could invoke against the company and should set out the effect on the recovery of input tax caused by the failure to register. (8 marks) (b) Explain the tax treatment of the manicure and pedicure treatment provided to relatives; and the insurance claim, the donations and the research costs. (6 marks) (c) Compute the minimum taxable income/(loss) of Rujeko Beauty Parlour (Private) Limited in respect of the year ended 31 December 2009, clearly identifying those items which are not deductible for income tax purposes. (6 marks) (20 marks) End of Question Paper 11