Paper P6 (MLA) Advanced Taxation (Malta) Friday 6 June Professional Level Options Module. Time allowed

Transcription

1 Professional Level Options Module Advanced Taxation (Malta) Friday 6 June 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

2 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 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 % 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

3 Corporate income tax Standard rate 35% Value added tax (VAT) Standard rate 18% Reduced rate 5% Reduced rate accommodation 7% 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.

4 Capital gains Index of inflation 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

5 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: Business Promotion Act Incentives has fewer than 250 employees; and has an annual turnover not exceeding 40 million or total assets 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 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 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 Y represents the rate to be determined; and R represents the reduced rate. 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 You should assume that today s date is 20 September 2013 X Ltd, a company incorporated in Malta, was set up in 2002 with an issued share capital of 1,200,000 shares of 1 each. All the shares have equal voting and profit participation rights. Upon incorporation, the shareholders of X Ltd were Mr X, an individual resident and domiciled in Malta, who held 120,000 shares, and AB Ltd, a company incorporated in Malta, which held 1,080,000 shares. AB Ltd had been set up as a joint investment by two siblings who are prominent property developers, Mr A and Mrs B, each of whom holds 50% of the shares of AB Ltd. All shares have equal voting and profit participation rights. Mr A and Mrs B are both resident and domiciled in Malta. Over the years, X Ltd has built and sold a number of apartment blocks and it currently owns three apartment blocks, which were acquired in shell form in 2009 for 500,000, 650,000 and 550,000 respectively. Building work on all three blocks was completed in The acquisition of the apartment blocks was financed as to 50% by bank loans and 50% by shareholders loans which were not registered in the public registry. X Ltd has no other non-current assets. The total book value and market value, as determined by an architect, of the three apartment blocks were determined in 2011 and 2013 as follows: Book value 2,650,000 2,650,000 Market value 4,200,000 4,200,000 X Ltd s profits before tax for the last seven years have been as follows: 2006: 150, : 250, : 400, : 250, : 500, : 450, : 600,000 In 2011, Mr X wanted to exit the business. According to the 2010 financial statements, the net asset value of X Ltd was 1,500,000. Having found another investor, Mr X and AB Ltd decided to transfer all of their shares in X Ltd to Y Ltd, a newly set up company owned as to 85% by AB Ltd and 15% by Mr Y, an individual resident and domiciled in Malta. Y Ltd was incorporated in Malta in September 2011 (with a December year end) by AB Ltd and Mr Y with an issued share capital of 1,500,000 shares of 1 each. All the shares have equal voting and profit participation rights. Mr X transferred his shares in X Ltd for 150,000, and AB Ltd transferred its shares in X Ltd for 1,350,000. Y Ltd s sole investment is in X Ltd. It has no other assets. In 2013, Mr A was introduced to Mrs Z, an individual resident but not domiciled in Malta, who had approached Mr Y expressing interest in acquiring his 15% shareholding in Y Ltd. Mrs Z has also expressed an interest in acquiring a further 15% shareholding in Y Ltd from AB Ltd. She is willing to pay 300,000 for each of the 15% holdings (i.e. 600,000 in total for two 15% holdings) and would like to complete the purchase no later than the end of November As at 31 December 2012, the financial statements of X Ltd show a net asset value of 1,800,000. X Ltd has not transferred or acquired any immovable property or rights over any immovable property since 1 January As at 31 December 2012, the financial statements of Y Ltd show a net asset value of 1,500,000. 6

7 (a) (b) Draft a letter to AB Ltd which: (i) (ii) Explains the income tax implications of the sale of its interest in Y Ltd to Mrs Z, including the effect, if any, the sale may have on the tax treatment of the previous transfer of shares in X Ltd by AB Ltd to Y Ltd. (20 marks) Provides supporting calculations of any income tax payable. Note: For the purpose of your calculations, ignore inflation on improvements. (7 marks) Professional marks will be awarded in part (a) of this question for the format and presentation of the letter and the effective communication of the information. (4 marks) Explain how the stamp duty payable by Mrs Z on the purchase of the shares in Y Ltd from AB Ltd will be calculated. Note: You are not required to calculate the duty. (4 marks) (35 marks) 7 [P.T.O.

8 2 Deluxe For Ltd Deluxe MT Ltd Luxe MT Ltd South East Dreams MT Ltd Stone MT Ltd SED Cam Ltd SED Vie Ltd SED Thai Ltd Dubai Rev For Ltd Deluxe For Ltd, a company incorporated outside Malta, is wholly owned by Mr Jones, an individual resident and domiciled outside Malta. Deluxe For Ltd wholly owns Deluxe MT Ltd, a company incorporated in Malta which wholly owns three other companies incorporated in Malta: Luxe MT Ltd: sells luxury goods in South East Asia through luxury stores in five star hotels, as well as across Europe. In 2013, Luxe MT had a taxable profit of 350,000. South East Dreams MT Ltd: wholly owns three companies each of which owns and operates a single hotel: SED Cam Ltd: owns and operates a four star hotel in Cambodia. In 2013, SED Cam Ltd distributed dividends of 100,000 to South East Dreams MT Ltd. SED Vie Ltd: owns and operates a luxury five star hotel in Vietnam. In 2013, SED Vie Ltd distributed dividends of 500,000 to South East Dreams MT Ltd. SED Thai Ltd: owns a five star hotel in Thailand. In 2013, SED Thai Ltd distributed dividends of 600,000 to South East Dreams MT Ltd. In 2013, South East Dreams MT Ltd also received consultancy fees totalling 180,000 from its subsidiaries. South East Dreams MT Ltd owns office space of 400 square metres in Malta. It rents 150 square metres of this space to Luxe MT Ltd on an annual basis at the beneficial rate of 175 per square metre, and uses the remaining 250 square metres of space for its own operations. Stone MT Ltd: sells precious stones in the Middle East through its permanent establishment (PE) in Dubai. In 2013, the Dubai PE derived a profit of 275,000 on which it paid no tax in Dubai. Stone MT Ltd also wholly owns Rev For Ltd, a company incorporated outside Malta which owns a large office block in Malta from which it derives rental income. In 2013, Rev For Ltd distributed a dividend of 325,000 to Stone MT Ltd. (a) (b) Advise Deluxe MT Ltd on the Maltese income tax treatment of the income of Luxe MT Ltd, South East Dreams MT Ltd and Stone MT Ltd, indicating the manner in which the allocation to the tax accounts should be made and the implications of these allocations for any refunds which may be available if the income is distributed as dividends. (17 marks) Assuming that each of its subsidiaries distributes all of their after tax profits to Deluxe MT Ltd, prepare the tax computations of Luxe MT Ltd, South East Dreams MT Ltd, Stone MT Ltd and Deluxe MT Ltd, showing the allocation of profits to the respective tax accounts. (8 marks) (25 marks) 8

9 Section B TWO questions ONLY to be attempted 3 (a) Ms Egli, a national of Switzerland, has visited Malta on holiday on a yearly basis since She and her partner have decided they will retire in Gozo. In order to prepare for their retirement, Ms Egli acquired a farmhouse and surrounding land there in July 2010 for 150,000. When purchased, the farmhouse was in an extremely dilapidated state. However, after obtaining the necessary permits, Ms Egli has converted the farmhouse and surrounding land into a house with a large swimming pool. Ms Egli has two (now adult) children from her marriage to her previous partner. Both her children work in Switzerland and will not be joining her in Malta, other than for holidays. In view of the thresholds for qualifying property, Ms Egli has never considered applying for the benefits under the High Net Worth Individuals EU/EEA/Swiss Nationals Rules. Ms Egli plans to retire and move to Malta in July 2014 but does not intend to remain in Malta for more than ten years. Upon retirement, she will become the beneficiary of an occupational retirement scheme set up in Switzerland by her employers when she took up employment with them 25 years ago. Sometime in September 2014 she will receive a capital sum of 750,000 by way of a 25% commutation of her pension, and thereafter she will receive a monthly pension of approximately 9,000. Other than her pension, Ms Egli will receive interest income from her bank account in Switzerland, which she will transfer to her bank account in Malta. She will have no other income. Ms Egli s partner does not have any pension or other income. (i) (ii) Advise Ms Egli whether she may benefit from the application of the Malta Retirement Programme Rules and what action(s) she will need to take in order to do so. (9 marks) Assuming Ms Egli can benefit from the application of the Malta Retirement Programme Rules, advise her on the tax treatment of her pension and interest income once she takes up residence in Malta. Notes: 1. You should assume that Malta and Switzerland have signed a double tax treaty which is similar in all relevant respects to the OECD Model Tax Convention. 2. When answering this part you should ignore the additional information given at (b) below. (7 marks) (b) After taking up residence in Malta, Ms Egli is considering not retiring completely, and is looking to act as a non-executive director of companies resident in Malta. She intends charging 4,000 per annum per directorship and does not plan to take up more than ten such positions. Her partner is looking to open and operate a small café in his own name. Advise Ms Egli and her partner on whether it is possible in terms of the Malta Retirement Programme Rules to carry out the activities proposed, and the tax implications of doing so. (4 marks) (20 marks) 9 [P.T.O.

10 4 (a) Fringe Ltd is a newly incorporated company planning to commence operations in Malta. Fringe Ltd is wholly owned by Dutch Ltd, a company incorporated in the Netherlands, which in turn is owned by persons who are not resident and not domiciled in Malta. Fringe Ltd is not licensed by the Malta Financial Services Authority or the Lottery and Gaming Authority and is not in the aviation industry. In order to ensure continuity with its operations outside Malta, Fringe Ltd is planning to relocate Mr Smith, who currently manages its Scottish operations, as chief executive officer (CEO) of Fringe Ltd on a full time contract. It also plans to employ a further five Maltese individuals, including a financial controller, also on full-time contracts. Fringe Ltd has asked your advice on the tax implications of the standard contract it intends offering to its employees. You are informed that, although salaries will be negotiated on an individual basis, all employees will be offered the same contract containing the following benefits provided by Fringe Ltd: All employees to be covered by insurance against expenses for medical treatment paid for by Fringe Ltd the policy is still to be determined. All employees will be given an allowance for the use of their own cars the allowance has been set at 3,000 per year. All employees will be given a weekly lunch allowance of 25. Given the nature of the employees work will require them to be available at all times and to make work related calls outside normal working hours, Fringe Limited will cover the costs of their mobile telephony services. All employees will be part of Fringe Ltd s share option scheme, under which options granted may be exercised any time after the employees have been employed by the company for eight years. All employees will attend business training in Switzerland for one week each year, with all expenses flights, accommodation and meals being covered by Fringe Ltd. In addition to the conditions which apply to the rest of the employees, as CEO, Mr Smith will be entitled to an allowance equivalent to the rent paid for the apartment in Malta which he rents from a private landlord who has no connection with Fringe Ltd for 1,500 per month. Advise Fringe Ltd on the tax considerations relevant to the fringe benefits provided for in the standard contract and the further accommodation benefit the company is planning to provide to Mr Smith. (13 marks) (b) Mr van Dijk, the chief operations officer of Dutch Ltd, is to be seconded to Fringe Ltd from 1 February to 1 August 2015, a total period of 181 days. The secondment agreement will provide that, for the said six-month period, Mr van Dijk is to be considered an employee of Fringe Ltd and his base salary is to be paid by Fringe Ltd. However, Dutch Ltd will continue contributing to Mr van Dijk s pension scheme in the Netherlands, and will also pay for the rental of Mr van Dijk s accommodation in Malta. Mr van Dijk s family are to remain in the Netherlands although they may visit him in Malta from time to time. Mr van Dijk is planning to return to the Netherlands once every three weeks. For the purposes of Maltese domestic law, Mr van Dijk will be treated as resident in Malta for the duration of his secondment to Fringe Ltd but for the purposes of Dutch domestic law, he will continue to be treated as resident in the Netherlands throughout the period of the secondment. Advise Mr van Dijk on the tax implications of the secondment for his base salary and fringe benefits, taking into account the effects of the double tax treaty between Malta and the Netherlands. Note: You should assume that the double tax treaty signed by Malta and the Netherlands is similar in all relevant respects to the OECD Model Tax Convention. (7 marks) (20 marks) 10

11 5 (a) Mr S, the heir to the estate of a wealthy family, has recently inherited some property in Malta, comprising houses and a large tract of land. Mr S will own all the property in his own name and, in order to ensure himself a good level of income, has decided to let the property out to third parties. Once he has obtained all necessary permits he intends: to convert five houses in Valletta into offices for letting to commercial businesses; to renovate a number of apartments in Msida and let them to individuals on contracts for a minimum of 12 months; and to convert a large tract of land in Floriana into a car park. The lease agreements for the apartments will not need to be licensed by virtue of the Malta Travel and Tourism Services Act. Advise Mr S on any value added tax (VAT) implications of his proposals, including any registration obligations. (13 marks) (b) Family Office Ltd, a company recently incorporated in Malta, is owned by individuals resident in Switzerland. Family Office Ltd only operates in Malta providing consultancy services to high net worth individuals. It is registered under Article 10 of the VAT Act. Swiss Design Co, a company incorporated in Switzerland and not registered for VAT purposes in Malta, has supplied Family Office Ltd with all the furniture for its offices in Malta. All the furniture was assembled in Malta for Family Office Ltd by contractors acting on behalf of Swiss Design Co. Swiss Design Co has also received a request from Mr Schultz, an employee of Family Office Ltd living in Malta, to supply and assemble furniture for his private residence. Mr Schulz is not a taxable person for VAT purposes. Advise Swiss Design Co on the value added tax (VAT) implications, including any obligations it may have to register for VAT in Malta, of: (1) the sale and assembly of the furniture supplied to Family Office Ltd, (2) the proposed supply and assembly of the furniture for Mr Schultz. (7 marks) (20 marks) End of Question Paper 11