Advanced Taxation
(Malta)
Friday 15 June 2012
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.
The Association of Chartered Certified Accountants
The Malta Institute of Accountants
Paper P6 (MLA)
Professional Level – Options Module
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 2012 are to be used in answering the questions.
Individual income tax rates
Resident individual tax rates
Married couples – joint computation:
€
0 – 11,900
Next 9,300
Next 7,500
Remainder
0%
15%
25%
35%
Non-resident individuals
€
0 – 700
Next 2,400
Next 4,700
Remainder
0%
20%
30%
35%
Returned migrants
Married couples
€
0 – 5,900
Remainder
0%
15%
Other individuals:
€
0 – 8,500
Next 6,000
Next 5,000
Remainder
0%
15%
25%
35%
Others
€
0 – 4,200
Remainder
0%
15%
Capital allowances – Income Tax Act rates
Industrial buildings and structures
Initial allowance
Wear and tear allowance
10%
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
Plant and machinery
20%
50%
Corporate income tax
Standard rate
35%
Value added tax (VAT)
Standard rate
Reduced rate
Reduced rate – accommodation
18%
5%
7%
2
Car fringe benefit calculation and rates
Annual value of benefit = (vehicle use + fuel value + maintenance value) x private use percentage
Vehicle use
Vehicle not more than six years old
Vehicle more than six years old
% of vehicle value
17%
10%
Fuel value
Vehicle value not exceeding €28,000
Vehicle value exceeding €28,000
% of vehicle value
3%
5%
Maintenance value
Vehicle value not exceeding €28,000
Vehicle value exceeding €28,000
% of vehicle value
3%
5%
Car value
Private use
percentage
30%
40%
50%
55%
60%
Not exceeding €16,310
Exceeding €16,310 but not €21,000
Exceeding €21,000 but not €32,620
Exceeding €32,620 but not €46,600
Exceeding €46,600
3
[P.T.O.
Capital gains
Index of inflation
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
439·62
443·39
456·61
468·21
475·89
495·60
516·06
536·61
549·95
567·95
580·61
593·00
607·07
624·85
638·54
646·84
664·88
684·88
703·88
712·68
743·05
758·58
770·07
780·00 (est)
Applicability of increase for inflation
Cost of acquisition/improvements
index(yd) – index(ya)
–––––––––––––––––––––––––––– x ––––––––––––––––––
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.
Transfer of value
Y = (A – B) + C – D
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
Business Promotion Act Incentives
Definition of medium sized enterprise
An enterprise which is not a small enterprise and:
–
–
–
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
€2 for every €100 in value or part thereof
€5 for every €100 in value or part thereof
Standard rate
Property companies (as defined)
5
[P.T.O.
Section A – BOTH questions are compulsory and MUST be attempted
1
Albert, an individual, is ordinarily resident and domiciled in Malta. A Ltd is a limited liability company incorporated
and managed and controlled in Malta, which adopts the calendar year as its financial year.
A Ltd was incorporated during 2000 with a share capital of 200,000 fully paid-up ordinary shares of €1 each. On
incorporation, the shares in A Ltd were owned equally by Albert and John, but on 15 December 2009, John
transferred his 100,000 shares to Albert for a consideration of €200,000 and the company is today 100% owned
by Albert. All A Ltd’s shares in issue are of the same class.
A Ltd has always carried on a business consisting of the importation and distribution of food products. During 2002
Albert and John decided to start an additional business consisting of the acquisition of land for development and
resale. A Ltd acquired a plot of land during 2002 for a total cost (including duty and other legal fees) of €530,000,
with the intention of constructing thereon a residential complex consisting of 50 units to be sold on the market. The
present market value of the land, which remains undeveloped to date, is €750,000. A Ltd financed the acquisition
of the land by means of a bank loan which was fully repaid by the end of 2009. The land is not situated in a special
designated area as defined in the Immovable Property (Acquisition by Non-Residents) Act. The necessary permits for
the development of the land into a residential complex were issued on 15 May 2012. A Ltd expects to start the
development in September 2012, and to have the first units available for sale towards the end of that year.
The following financial information relates to A Ltd:
Balance sheet as at 31 December 2011
€
520,000
530,000
200,000
––––––––––
1,250,000
(250,000)
(500,000)
––––––––––
500,000
––––––––––
Fixed assets – Plant and equipment
Current asset – Land held for development
Other current assets
Current liabilities
Long-term borrowings
Net assets
Share capital
Distributable reserves
200,000
300,000
––––––––––
500,000
––––––––––
Equity and reserves
All of A Ltd’s assets and liabilities, other than the land held for development, relate to the food importation and
distribution business. The aggregate profits before tax of A Ltd for the five financial years immediately preceding 2012
amount to €285,000.
David, an individual who is ordinarily resident and domiciled in Malta, is interested in acquiring a share in the
business carried on by A Ltd and he has discussed two possible scenarios with Albert.
First scenario
Under the first scenario, David will acquire an interest only in the land development project. The steps involved under
this scenario are the following:
Step 1: Albert forms a new company, C Ltd, in June 2012 with a share capital of €10,000 divided into 10,000
shares of €1 each.
Step 2: Immediately following C Ltd’s incorporation, A Ltd sells the land to C Ltd for €750,000. C Ltd finances the
acquisition fully by means of a bank loan.
Step 3: After the formation of C Ltd and the transfer of the land, David acquires 50% of C Ltd.
Two options are being considered for the acquisition of David’s shareholding in C Ltd under this first scenario:
Option 1:
Option 2:
Albert sells 5,000 shares in C Ltd to David in July 2012 for a price of €5,000.
C Ltd increases its share capital and issues to David 10,000 new ordinary shares of the same class as
those already in issue for a consideration of €1 per share.
6
Second scenario
Albert will sell 100,000 shares in A Ltd to David in June 2012 for the price of €400,000. The second scenario does
not involve the formation of a new company and David’s participation would not be limited to the property project.
Albert and David wish to establish the income tax and stamp duty implications of each of the courses of action that
they are considering before taking any decision.
Albert’s marginal income tax rate is 35%.
Required:
(a) Draft a letter to Albert with regard to the FIRST SCENARIO only, in which you explain:
(i)
the income tax and stamp duty implications arising from:
(1) the transfer of the land from A Ltd to C Ltd, including the applicability or otherwise of any relevant
exemption or reliefs;
(7 marks)
(2) the subsequent sale by Albert of 5,000 shares in C Ltd to David proposed under option 1, including
the extent to which the transfer may adversely affect the tax treatment of the earlier transfer of the
land discussed in (1) above. Provide details of any income tax and stamp duty payable as a
consequence of this sale;
(10 marks)
(3) the acquisition by David of his 50% interest in C Ltd by way of an issue of 10,000 new shares
proposed under option 2, highlighting the manner in which the income tax and stamp duty
implications differ from those arising from the acquisition of shares under option 1.
(4 marks)
(ii) The income tax considerations relevant to the transfer of the first residential unit, and any such
subsequent transfers, by C Ltd once the development project is completed.
(6 marks)
Professional marks will be awarded in part (a) for the format and presentation of the letter and the effective
communication of the information.
(2 marks)
(b) Calculate the income tax and stamp duty payable on the transfer of shares to David in A Ltd proposed under
the SECOND SCENARIO, giving any explanations that you consider appropriate by way of notes. (7 marks)
(36 marks)
7
[P.T.O.
2
FORCO Ltd
COUNTRY X
MALTA
HOLDCO Ltd
SUBCO A Ltd
The Forco Group consists of Forco Ltd, Holdco Ltd and Subco A Ltd. Holdco Ltd and Subco A Ltd are limited liability
companies incorporated and managed and controlled in Malta. Holdco Ltd owns all of the ordinary share capital of
Subco A Ltd.
Holdco Ltd is fully owned by Forco Ltd, a limited liability company incorporated and managed and controlled in
Country X. Forco Ltd is fully owned by individuals who are neither resident nor domiciled in Malta. A double taxation
agreement is in force between Malta and Country X, based on the OECD Model Convention. In terms of this double
taxation agreement, the maximum rate of tax applicable on dividends paid to Country X residents out of profits that
have qualified for tax incentives in Malta is 15%.
Both Holdco Ltd and Subco A Ltd were incorporated on 1 January 2011 and 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.
Subco A Ltd carries on a business consisting of the manufacture and distribution of catering equipment. It carries on
this business both in Malta and through a branch situated in Country Z. Subco A Ltd does not sell by retail. A double
taxation agreement is in force between Malta and Country Z, based on the OECD Model Convention. Country Z applies
a corporate tax rate of 15%.
Subco A Ltd owns immovable property situated in Malta consisting of a factory used solely for the purpose of its
Maltese manufacturing and distribution business. The area of the factory is 500 square metres. Subco A Ltd is eligible
for investment tax credits under the provisions of the Investment Aid Regulations.
The following information relates to Subco A Ltd for the financial year ended 31 December 2011:
Accounting profit before tax
Accounting depreciation (note)
Capital allowances as per Income Tax Act
Investment tax credits
Country Z tax on profit
Branch in Country Z
€
800,000
200,000
180,000
Malta business
€
100,000
150,000
100,000
100,000
120,000
Note: accounting depreciation is already taken into account in the figures for accounting profit before tax.
Subco A Ltd distributed all of its profits available for distribution for 2011 by the end of 2011.
8
Required:
(a) Draft a memorandum for the managing director of the Forco Group, advising him of:
(i)
The Maltese income tax treatment of each of Subco A Ltd’s items of income, indicating the manner in
which the allocation to the tax accounts is to be made, and the options available in the computation of
its chargeable income to the extent that they can affect the calculation of the tax refunds that may be
claimed by Holdco Ltd;
(14 marks)
(ii) The tax implications for Holdco Ltd arising from the distribution of profits by Subco A Ltd.
(4 marks)
Professional marks will be awarded in part (a) for the appropriateness of the format and presentation of the
memorandum and the effective communication of the information.
(2 marks)
(b) Prepare tax computations for Holdco Ltd and Subco A Ltd showing their taxable income and tax liability for
the year of assessment 2012, applying all available credits. Allocate the distributable profits to the respective
tax accounts and determine the tax refunds available to Holdco Ltd on the distribution of those profits.
(8 marks)
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 Holdco Ltd, including the right to benefit
from any tax refunds upon the distribution of dividends.
(28 marks)
9
[P.T.O.
Section B – TWO questions ONLY to be attempted
3
(a) Explain the meaning of the term ‘Property Company’ as defined in article 2 of the Income Tax Act.
(6 marks)
(b) DEF Ltd, a limited liability company incorporated and managed in Country R, is fully owned by Catherine, an
individual who is neither ordinarily resident nor domiciled in Malta. A double taxation agreement is in force
between Malta and Country R, based on the OECD Model Convention. In accordance with Country R’s tax laws,
capital gains derived from the transfer of shares are chargeable to tax at the rate of 10%.
DEF Ltd fully owns the issued share capital of ABC Ltd, a limited liability company incorporated and managed
and controlled in Malta which does not own any immovable property situated in Malta. ABC Ltd fully owns the
issued share capital of XYZ Ltd, a limited liability company which is also incorporated and managed and
controlled in Malta and which carries on a trading activity in Malta.
XYZ Ltd owns an office in Malta used solely for the purpose of carrying on its trading operations in Malta. The
office was purchased for €220,000 and is shown in the company’s latest balance sheet at its current market
value of €250,000. The total asset value of XYZ Ltd amounts to €400,000. XYZ Ltd does not own any
immovable property in Malta other than the office, and does not carry on any activity the income from which is
derived, directly or indirectly, from immovable property situated in Malta. The shares held by DEF Ltd in ABC Ltd
derive more than 50% of their value indirectly from the value of the office owned by XYZ Ltd.
Required:
Discuss the availability or otherwise of an income tax exemption on any gains derived from each of the
following share transfers in terms of both the provisions relating to the participation exemption under the
Income Tax Act and the applicable double taxation agreement.
(i)
ABC Ltd transfers all of its shares in XYZ Ltd to Marco, an individual who is ordinarily resident and
domiciled in Malta;
(4 marks)
(ii) DEF Ltd transfers all of its shares in ABC Ltd to Marco, an individual who is ordinarily resident and
domiciled in Malta.
(4 marks)
(c) The Income Tax Act requires every company paying a dividend to furnish the shareholder with a dividend
certificate. State briefly the information that is required to be shown on a dividend certificate.
(4 marks)
(18 marks)
10
This is a blank page.
Question 4 begins on page 12.
11
[P.T.O.
4
Anthony and Kevin, who are both qualified electronic technicians, have decided jointly to set up a new business
consisting of the provision of electronic equipment repair services. This new business is referred to hereafter as ‘AK’
or ‘the AK business’. Anthony and Kevin will both be actively involved in the management of AK and will each invest
€20,000, representing the initial capital. The initial capital will be used primarily to finance the acquisition of new
equipment, electronic components, a motor vehicle and a computer, which will all be purchased during August 2012.
Anthony and Kevin have not yet decided whether to run AK via a partnership en nom collectif or via a limited liability
company. Whichever option is taken up, the company or the partnership will be registered with the Registry of
Companies on 31 July 2012 and the economic activity will be registered with the Commissioner of Value Added Tax
under article 10 of the VAT Act (VATA) on 1 August 2012.
The following information has been obtained from a meeting with Anthony and Kevin.
(i)
A business plan has been drawn up for AK by a consultancy firm, which includes the following financial
projections for the years 2012 and 2013. All figures are stated net of value added tax (VAT) except for the fuel
expense which is stated gross of VAT.
Period ending 31 December
Services rendered
Expenses:
Material
Advertising
Consultancy fees
Repairs and maintenance
Stationery
Fuel
Rent
Note
1
2
3
4
5
6
Profit
Capital expenditure:
Electronic equipment
Motor vehicle
Computer
2012
€
25,000
2013
€
65,000
1,200
1,000
1,500
300
200
890
2,500
–––––––
7,590
–––––––
17,410
–––––––
5,500
300
750
450
3,400
6,000
–––––––
16,400
–––––––
48,600
–––––––
10,000
20,000
900
–––––––
30,900
–––––––
7
Notes:
1. These amounts are made up of tax invoices to be issued during the period. The consideration displayed on
the invoices to be issued to customers will distinguish between the consideration for the parts/components
used and the consideration for repair services. AK’s policy is to issue all tax invoices within a maximum of
seven days from the date the services are performed.
2. All taxable supplies made to AK will be made by persons registered under article 10 of the VATA.
3. No stock of electronic components is to be maintained. Components will be purchased specifically for each
job.
4. The invoice for the consultancy fees of €1,500 is dated 25 May 2012 and was issued to Anthony and Kevin
personally, but is to be paid out of AK’s business bank account.
5. The repairs and maintenance expense relates to the electronic equipment which is shown as a fixed asset
on the balance sheet .
6. AK will rent a workshop from RS Ltd, a limited liability company, from 1 August 2012.
7. The motor vehicle is a saloon car to be used by Anthony and Kevin solely for the purpose of visiting AK’s
clients.
(ii) Anthony, who is single, resigned from his job with Blue Ltd with effect from 1 June 2012. Blue Ltd had employed
him on an annual salary of €30,000 since January 2007. Anthony took out a bank loan of €15,000 on
1 August 2012 at an annual interest rate of 7% to finance his investment in the AK business. The terms of the
loan state that only the interest element is to be paid in the first three years.
12
(iii) Kevin, who is married, has been in full-time employment with Yellow Ltd for over two years, earning a salary of
€2,000 per month. He will retain this full-time employment up to 31 December 2012, after which he will
continue to be employed with Yellow Ltd on a part-time basis, earning a salary of €800 per month. During 2013
Kevin expects to receive a net dividend of €2,000 from Pink Ltd, a Maltese resident company. This dividend will
be distributed from the company’s final tax account (FTA).
(iv) Anthony and Kevin intend to start the AK business on 1 August 2012 and have agreed to share in the profits
and losses equally.
(v) Anthony and Kevin do not intend to withdraw any profits from AK before 1 January 2014.
Required:
(a) Based on the projections and information given above, calculate the chargeable income and tax liability of
Anthony and Kevin’s business, AK, for each of the two years 2012 and 2013 if:
(i)
the business is carried on through a partnership en nom collectif;
(ii) the business is carried on through a limited liability company.
(6 marks)
(4 marks)
In each case provide a brief explanation of how the business will be taxed, together with any other matters
you consider appropriate to support your calculations.
Note: the applicable rates of annual wear and tear allowances are:
(1) motor vehicles 20%
(2) computers and electronic equipment 25%.
(b) (i)
State, giving reasons, the extent to which (if at all) the supplies to be made by the AK business during
2012 and 2013 are to be treated as a supply of goods or a supply of services for the purpose of value
added tax (VAT), and state the date when VAT on those supplies becomes chargeable;
(2 marks)
(ii) Assuming that the Commissioner of VAT determines AK’s first tax period to cover 1 August 2012 to
31 December 2012, calculate the input and output tax and the VAT payable/refundable for the first tax
period. Provide relevant explanations to support your calculations.
(6 marks)
(18 marks)
13
[P.T.O.
5
TRM Ltd and GHL Ltd are limited liability companies incorporated and managed and controlled in Malta. Mark and
Elisa each hold 50% of the ordinary share capital of TRM Ltd and GHL Ltd. Both companies adopt a 31 December
year end.
GHL Ltd carries on a business in Malta consisting of the importation and distribution of food products. Due to
increased competition, GHL Ltd has not been in a position to raise its prices in the last two years and its market share
has dropped drastically. As a result, GHL Ltd reported a loss before accounting depreciation of €100,000 for the year
ended 31 December 2011, and is expected to incur losses before accounting depreciation of €150,000 and
€70,000 for the years 2012 and 2013 respectively. However, the company will make an investment during 2013,
following which GHL Ltd is expected to become profitable after 2014. As a result of this investment, GHL Ltd will
have substantial capital allowances carried forward to 2014 and subsequent years.
GHL Ltd owns 100% of the share capital of FTR Ltd, a limited liability company incorporated and managed in
Country F, which is a member of the European Union. FTR Ltd will distribute a cash dividend amounting to €300,000
(net of corporate tax) to GHL Ltd in December 2012. The dividend will be paid out of profits taxed in Country F at
the rate of 35%.
TRM Ltd’s annual sources of income consist of rents amounting to €40,000 in respect of an office building situated
in Malta that it rents out to an unrelated company, MNM Ltd; interest amounting to €10,000 received from GHL Ltd
on loans to that company; and bank interest received from a Maltese bank amounting to €3,570, net of 15%
withholding tax. TRM Ltd does not incur any expenses that are deductible against these sources of income.
Required:
(a) Examine the tax implications of the current holding structure of the three companies GHL Ltd, TRM Ltd and
FTR Ltd, for the ability to set off the losses incurred and expected to be incurred by GHL Ltd in the years
2011, 2012 and 2013. Provide relevant computations to support your comments.
(7 marks)
(b) Advise how the relief for GHL Ltd’s losses can be maximised and the overall tax burden of the three
companies GHL Ltd, TRM Ltd and FTR Ltd minimised in the years 2011, 2012, 2013 and subsequent
years, through the restructuring of the shareholdings and/or other measures. Provide relevant computations
to support your comments.
Note: you should assume that restructuring and any other measures that you will propose will take place
during October 2012.
(11 marks)
(18 marks)
End of Question Paper
14