Paper P6 (MYS) Advanced Taxation (Malaysia) Friday 7 June Professional Level Options Module. The Association of Chartered Certified Accountants

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1 Professional Level Options Module Advanced Taxation (Malaysia) Friday 7 June 2013 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 4 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 (MYS) The Association of Chartered Certified 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 should be made to the nearest RM. 3. All apportionments should be made to the nearest whole month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates, allowances and values are to be used in answering the questions. Income tax rates Resident individual Chargeable income Tax payable Band Cumulative Rate Cumulative RM RM % RM 2,500 2, ,500 5, ,000 20, ,000 35, ,525 15,000 50, ,325 20,000 70, ,125 30, , ,325 Excess 26 Non-resident individual All chargeable income 26% Resident company Paid up ordinary share capital RM2,500,000 More than or less RM2,500,000 On the first RM500,000 20% 25% On the remainder 25% 25% Non-resident company All chargeable income 25% Labuan entity income from a Labuan trading activity All chargeable profits 3% Trust body resident or non-resident All chargeable income 25% 2

3 Personal deductions RM Self 9,000 Self additional if disabled 6,000 Spouse 3,000 Spouse additional if disabled 3,500 Child basic rate each 1,000 Child higher rate each 4,000 Disabled child each 5,000 Disabled child additional each 4,000 Life insurance premiums, approved scheme contributions maximum 6,000 Deferred annuity premiums, private retirement scheme contributions maximum 3,000 Medical expenses for parents maximum 5,000 Medical expenses for serious disease of self, spouse or child, including up to RM500 for medical examination maximum 5,000 Basic supporting equipment for self, spouse, child or parent if disabled maximum 5,000 Educational and medical insurance for self, spouse or child maximum 3,000 Study course fees for skills or qualifications maximum 5,000 Broadband subscription maximum 500 Purchase of a personal computer maximum 3,000 Purchase of books, magazines etc for personal use maximum 1,000 Purchase of sports equipment maximum 300 Deposit for child into the National Education Savings Scheme maximum 3,000 Rebates Chargeable income not exceeding RM35,000 RM Individual basic rate 400 Individual entitled to a deduction for a spouse or a former wife 800 Capital allowances Initial Annual rate % rate % Industrial buildings 10 3 Plant and machinery general Motor vehicles and heavy machinery Office equipment, furniture and fittings Real property gains tax Disposal by all persons (except non-citizen individuals) Date of disposal Rate % Disposal within two years after the date of acquisition 30 Disposal in the third year after the date of acquisition 20 Disposal in the fourth year after the date of acquisition 15 Disposal in the fifth year after the date of acquisition or thereafter 5 Note: an exemption is granted which reduces the effective rate of tax as follows: where the disposal takes place within two years of acquisition 10 where the disposal takes place in the third, fourth or fifth year of acquisition 5 where the disposal takes place in the sixth year or thereafter 0 3 [P.T.O.

4 Sales and service tax Rate % Sales tax 10 Service tax 6 Rates of duty under the First Schedule Stamp duty Conveyance, assignment, transfer or absolute bill of sale Rate % For every RM100 or fractional part thereof: On the first RM100,000 1 On the next RM400,000 2 On the excess over RM500,

5 This is a blank page. Question 1 begins on page 6. 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 Medico Sdn Bhd (Medico), with a paid up capital of RM30 million, operates a hospital in Malaysia. It makes up its accounts annually to 30 June. In March 2013, the board of directors approved the following measures: incorporate a wholly-owned subsidiary, Klean Sdn Bhd (Klean), to take over the laundry and clinical waste disposal services currently provided by an unrelated service provider; and upgrade Medico s medical equipment. Other information: 1. Medico will take a bank loan of RM10 million, with an annual interest rate of 10%. The loan will be utilised as follows: RM million Invest in 100% ordinary shares in Klean 2 Lend money to Klean at an annual interest rate of 8% 5 (which is 4% below the prevailing market rate for a company with a similar profile) Pay for the latest medical equipment 3 Medico will repay the loan after five years, during which time the interest accrued will be paid each year. 2. Klean will take over the laundry and waste disposal services with effect from 1 July It will charge 20% less than the unrelated service provider because of the favourable rate of loan interest charged by Medico. Klean is expected to be immediately profitable. 3. The cost of the medical equipment, if purchased outright, is RM3 million. However, if Medico were to lease the medical equipment, the lease payments commencing 1 July 2013 would be as follows: Under an operating lease RM1 5 million for each 12-month period. The lessor will maintain and repair the equipment. At the end of the 48 months, the equipment reverts to the lessor. Under a finance lease arrangement RM1 3 million for each 12-month period for the first three years, (not a deemed sale) plus RM500,000 in the fourth year. During the lease period, Medico will maintain and repair the equipment. Of the total lease payments of RM4 4 million, the lease interest component is RM900,000 while RM3 5 million will be capitalised as fixed assets. Medico will also explore the possibility of acquiring the equipment under a separate arrangement at the end of the four-year lease period. If the equipment is leased, the RM3 million component of the loan will not be necessary. Medico now seeks tax advice from Goode Tax Services. 6

7 Required: Prepare a letter from Goode Tax Services to Medico Sdn Bhd s finance director, which explains the following: (a) (b) The income tax deductibility of the interest incurred on the RM10 million bank loan by Medico Sdn Bhd. (7 marks) The transfer pricing issues, their implications, and any advice with regard to the loan made to Klean Sdn Bhd and the charge for the services Klean Sdn Bhd will provide to Medico Sdn Bhd. (8 marks) (c) The income tax treatment and relative merits of obtaining the use of the latest medical equipment by means of each of the following methods and a recommendation as to the most advantageous method to adopt: outright purchase; operating lease; or finance lease (not a deemed sale). Support your explanations in part (c) with a tabulated comparative computation for each of the three methods for the years of assessment 2014, 2015, 2016 and 2017 of: the cash outflow for each of the four years and the total for the four years; the tax deductions and/or capital allowance (assuming an annual allowance rate of 14%) for each of the four years and the total for the four years; and the ownership status of the equipment at the end of the four years. (16 marks) Professional marks will be awarded in question 1 for the appropriateness of the format of the letter and appendix and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.

8 2 The Pelaburan group of companies comprises: Pelaburan Bhd (Pelaburan) and two wholly-owned subsidiaries, Subsidiary One and Subsidiary Two. Pelaburan has an issued share capital of RM12 million and each subsidiary has an issued capital of RM5 million. All three companies are incorporated in Malaysia and have been actively operating in Malaysia for the past five years; they each close their accounts annually to 31 August. None of the three companies have enjoyed any form of tax incentives so far. Each of the three companies makes an annual donation of RM50,000 to its chosen charity, which is an approved organisation. By 31 August 2013, Subsidiary One will complete the automation of its manufacturing assembly line at a cost of RM10 million. For the year of assessment 2013, Subsidiary One expects to incur an adjusted loss of RM1 8 million. However, it expects to register a statutory income of RM7 million in the year of assessment Subsidiary Two expects to register a statutory income of RM1 2 million from its only source of income, a trading business, in the year of assessment Pelaburan s aggregate income for the year of assessment 2013 is expected to be RM500,000, made up of a share of partnership profit and rental income. Required: (a) (b) (c) In respect of Subsidiary One: (ii) Explain how it satisfies the requisite conditions to qualify for the reinvestment allowance in the year of assessment 2013; and (5 marks) Compute the company s total income for each of the years of assessment 2013 and 2014, indicating clearly the computation of the reinvestment allowance, the amount absorbed and the amount carried forward, if any. (9 marks) With reference to the adjusted loss expected to be incurred by Subsidiary One: (ii) Explain the requisite conditions for group relief, and identify the condition which the group fails to satisfy in the year of assessment 2013; and (5 marks) State what measure/action can be taken by Subsidiary One in order for the group to be eligible for group relief in the year of assessment (2 marks) Assuming that the Pelaburan group does qualify for group relief in the year of assessment 2013, compute: (ii) the amount of loss which may be surrendered by Subsidiary One, and the amount of loss which must be carried forward; and (2 marks) the amount of loss which may be claimed respectively by Pelaburan Bhd and Subsidiary Two. (2 marks) (25 marks) 8

9 Section B TWO questions ONLY to be attempted 3 NumberWan Sdn Bhd (NumberWan), a well-established restaurant chain, appointed a foreign expert, Miss Smart, to assess the work process efficiency and thereafter to advise and supervise the upgrading of its kitchen equipment, starting from 1 July For this exercise, Miss Smart will be in Malaysia, for the first time, for about 80 days in The fee payable to Miss Smart by NumberWan in 2013 is expected to be RM200,000. There is no double tax agreement between Malaysia and the country in which Miss Smart is resident. NumberWan closes its accounts annually to 30 June. Required: (a) (b) With regard to Miss Smart: Explain why the technical fee payable to her is derived from Malaysia, bearing in mind her residence status. (3 marks) (ii) Explain the mechanism of taxation applicable to her, and on how much she will be taxed. (3 marks) With regard to NumberWan: (ii) Present arguments on both the capital and revenue nature of the technical fee payment made to Miss Smart. (5 marks) With reference to the compliance requirement on paying technical fees to a foreign expert, explain the income tax consequences of: non-compliance; late compliance but before the due date for submission of the tax return; and late compliance after the due date for submission of the tax return. (9 marks) (20 marks) 9 [P.T.O.

10 4 (a) A group of potential foreign investors has sought information about the tax treatment of a Labuan company in Malaysia. Required: (ii) List the Labuan trading activities and Labuan non-trading activities and explain the imposition of tax on each of these categories of activity under the Labuan Business Activities Tax Act (6 marks) State the tax exemptions available from direct and indirect taxes: to a Labuan company; to the key management personnel of a Labuan company; and to other persons receiving income from a Labuan company. (5 marks) (iii) Explain the impact on a Labuan entity if it elects to be charged to tax under the Income Tax Act (2 marks) (b) Mr Dee has been employed with Big Company since 1 September If Mr Dee opts for voluntary separation under the scheme which will come into effect on 1 August 2013, he will be paid RM15,000 for every completed year of service with Big Company. However, Mr Dee will be due for retirement at the age of 55 years on 31 January If he continues his employment with Big Company until that date, Mr Dee will be paid a retirement gratuity of RM15,000 for every completed year of service with Big Company. Required: Explain the income tax treatment of the lump sum payments available to Mr Dee under the voluntary separation scheme and as a retirement gratuity, and recommend the preferred course of action for him. (7 marks) (20 marks) 10

11 5 Pokok Sdn Bhd (Pokok) signed a sale and purchase agreement on 2 November 2012 to acquire a property comprising a piece of land with two warehouses (Block A and Block B) from Batang Bhd (Batang) at a cost of RM15 million. The requisite approval for the sale from the State Government was granted on 1 May The consideration is made up of RM250,000 in cash and the remainder in shares to be issued by Pokok. Batang had acquired the said land and buildings on 1 September 2010 for RM12 million. Pokok will let out Block A to a bubble-tea manufacturer, which will set up its production lines in Block A and will not be provided any support services by Pokok. Block B will be converted into ten units of SOHO (small office home office) which will share common facilities to be provided by Pokok. These facilities include broadband, printing and photocopying, meeting rooms and video conferencing, a small kitchen, and security services. Required: (a) (b) State, with reasons, the date of acquisition of the property by Pokok Sdn Bhd for real property gains tax purposes. (3 marks) State, with reasons, for the purposes of real property gains tax, the amount which Pokok Sdn Bhd must retain from the purchase price, what it must do with the money thus retained and the relevant due date. (4 marks) (c) Compute the real property gains tax payable by Batang Bhd. (5 marks) (d) Explain the income tax treatment for Pokok Sdn Bhd in respect of the rental income derived from the letting of: Block A; and (ii) Block B. Note: The marks will be split equally between each part. (8 marks) (20 marks) End of Question Paper 11