Programme BA (Hons) Business Administration Banking & Financial Services (Top Up) BSc (Hons) Banking and International Finance Cohort BBABF/12/FT (Jan 12) Top Up BBIF/08/PT Examinations for 2012 2013 Semester I/ 2012 Semester II MODULE: BUSINESS AND INTERNATIONAL TAXATION MODULE CODE: ACCF3108 Duration: 2 Hours Reading Time: 15 Minutes Instructions to Candidates: 1. This question paper consists of Section A and Section B 2. Section A is Compulsory. 3. Answer any TWO questions from Section B. 4. Always start a new question on a fresh page. 5. Total Marks: 100. This question paper contains 5 questions and 11 pages (including supplementary information on Income Exemption Threshold, Car Benefit and Capital Allowances.) Page 1 of 11
SECTION A: COMPULSORY QUESTION 1: (40 MARKS) Edward deals in computer equipment, accessories and software. He began trade on 1 January 2011 and the profit and loss account for his first year of trade is set out below: Sales [Note (i)] 8,729,100 Purchases 4,393,700 Less: Closing stock [Note (ii)] 1,473,400 2,920,300 Gross Profit 5,808,800 Less: Wages & Salaries [Note (iii)] 2,612,900 Rent & rates 63,600 Electricity, water & telephone bills 94,340 Depreciation of equipment & furniture 29,150 Depreciation of vehicles 212,000 Taxation (Edward's income tax-note (iv)] 47,700 Insurance 57,240 Van expenses 63,600 Travelling and entertaining [Note (v)] 246,450 Bad debts [Note (vi)} 405,450 Legal and professional fees [Note (vii)] 50,350 Motor car expenses [Note (viii)] 165,360 Miscellaneous expenses[note (ix)] 13,780 4,061,920 Profit before interest 1,746,880 Less: Bank overdraft interest 71,550 Profit after interest 1,675,330 Page 2 of 11
Notes: (i) Sales include 10,500 reimbursed by Edward's relatives for computer accessories taken from stock. This reimbursement represented cost price. The normal gross profit margin on these accessories(i.e gross profit on sales) is 60%. (ii) Closing stock: The basis of closing stock valuation was the lower of cost and net realisable value,. less a contingency reserve of 20% in view of recession. (iii) Wages & Salaries. Included in wages and salaries are Edward's drawings of 2,000 per week and salaries of his wife (see Note (xi) below). (iv) Taxation Edward submitted quarterly CPS statements to the MRA during 2011 together with payments totalling 47,700. (v) Travelling and entertaining expenses Business Travel Edward 171,190 Entertaining UK suppliers 12,720 Entertaining Mauritian customers 51,410 End of year party and Christmas gifts for staff 11,130 246,450 (vi) Bad debt expense Provision against specific debtors 206,700 Trade debts written 110,240 General provision (4% of year end debtors) 88,510 405,450 Page 3 of 11
(vii) Legal and professional fees Accountancy fees 14,575 Collection of trade debts 10,60010 Obtaining 25-year lease of distribution depot 25,175 50,350 (viii) Motor car expenses Edward's car expenses: - on business (75%) 124,020 - private mileage (25%) 41,340 165,360 (ix) Miscellaneous expenses Theft of money by employee 03,180 Donation to a political party 02,100 Gifts 8,500 13,780 (x) Edward had lived in Moka in a Flat for several years until 1 March 2011 when he married his personal assistant, Mary who continued to work for him after their marriage. On 26 February 2011 Edward borrowed 1.5m from the MCB Ltd which he used immediately to part-finance the purchase of a house in the village of St Pierre. He, Mary and Mary s two children (aged 10 and 12) all occupied the house from 2 March 2011, although Edward did not manage to sell his flat until 31 December 2011. In 2011, Edward paid interest of 156,000 on the housing loan and received rent amounting to 35,000 from his flat. Page 4 of 11
(xi) Mary was a widow, whose first husband had died on 12 April 2006. Up to 28 February 2011 she received a widow's pension of 15,900 per month, and apart from that pension she had no other income besides that earned from Edward's business which in 2011 amounted to 80,000 before her marriage and 438,500 in remainder of the year. (xii) Edward is entitled to capital allowances amounting to a total of 240,000 for the income year 2011. Required: (a) to compute Edward's trade profit adjusted for income tax purposes in respect of the income year 2011. (26 marks) (b) to calculate the income tax liability of both Edward and Mary for the income year 2011 ( i.e. year of assessment 2012). (14 marks) Page 5 of 11
SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2 :(30 MARKS) (a)the non-current assets of XYZ Co Ltd comprise of the following: Cost Base Value At 1 st January 2011 Industrial Premises 6,000,000 2,700,000 Motor Vehicles 5,000,000 2,109,375 Computer Equipment 1,100,000 275,000 Furniture and Fittings 1,300,000 532,480 During 2011 Motor vehicle, costing 900,000 and depreciated by 480,000 was sold for 500,000. The base value of the vehicle at the date of disposal was 520,000. There were no additions during 2011. Required: Calculate the capital allowances including any balancing adjustment for the year ended 31 December 2011 and show the base value or tax written down value carried forward at 31 December 2011 in respect of each non-current asset. (14 marks) Page 6 of 11
(b) When a trader sells a capital or non-current asset at a price which is different from the base value or tax written down value of that capital asset then there will be a balancing adjustment referred to in practice as a balancing allowance or a balancing charge. Required: (i) By means of suitable numerical examples, illustrate both situations i.e.one where a balancing charge will arise and the other one giving rise to a balancing allowance. (ii) Explain clearly how you would treat a balancing charge in the trader s income tax computation. (2 marks) (c) Philippe started trading on 1 January 2011 and during that year he incurred the following capital expenditure: 3 Jan 2011 Philippe's car 0 498,200 9 Jan 2011 Office furniture & fittings 0249,100 10 Feb 2011 Delivery van 0 360,400 15 May 2011 Equipment 20,000 20 Nov 2011 Office furniture & fittings 42,400 1,170,100 Required: Prepare Philippe s annual allowances computation for the income year 2011 given that the car was used 60% for business use. (10 marks) Page 7 of 11
QUESTION 3 :( 30 MARKS) (a) What category of taxpayers would be required to comply with the Current Payment System (CPS)? (2 marks) (b) For each CPS quarter, state the due date for submission of the CPS statement of income. (6 marks) (c) Explain how a company with an accounting year ending 30 June would settle its tax liability in respect of its accounting year ended 30 June 2012 (i.e. year of assessment 2012) given that the company is, for that year, required to file under the Advanced Payment System (APS). (10 marks) (d) Benoit is married with two dependent children and his wife is not working and does not have any income. He is employed as a marketing manager of a big firm since many years. Currently he earns a monthly salary of 90,000 and has the benefit of a company car (cylinder capacity above 2000 c.c). During the month of September 2012 he was paid an allowance of 32,000 for some overtime work performed by him. On the basis of the information provided, you are required to compute: (i) the total tax withheld from Benoit's emoluments for the months of January to August 2012. (3 marks) (ii) the tax withheld from his emoluments for the month of September 2012. (iii) the tax to be withheld from his emoluments for the month of December 2012 assuming the prescribed end of year bonus will be paid in that month. (5 marks) Page 8 of 11
QUESTION 4: (30 MARKS) (a) What are the main reasons which may encourage a country to enter into bilateral tax treaties? (8 marks) (b) In respect of an income year, when is an individual treated as a resident of Mauritius for income tax purposes? (3 marks) (c) Explain the importance of the term resident for the application of a tax treaty. (5 marks) (d) April Ltd is incorporated in Australia where the members of its board of management meet and live. April Ltd earns income from business operations in Mauritius, where it manufactures and sells cardboard boxes. State, giving reasons for your answer, whether the Mauritius Revenue Authority (MRA) would regard April Ltd as a resident? Would it make any difference for income tax purposes whether the MRA regarded April Ltd as resident or non-resident? (5 marks) (e) Explain carefully how cases of dual residence for both individuals and companies would be resolved by the application of the relevant provisions of a tax treaty based on the OECD model. (9 marks) Page 9 of 11
QUESTION 5: (30 MARKS) (a) The term business is defined in both the Income Tax Act and the VAT Act. Compare these two definitions highlighting the similarities and differences. (6 marks) (b) Distinguish between exemption and zero-rating for VAT purposes. (c) Give four examples of supplies which are: (i) Zero-rated (ii) Exempt from VAT (8 marks) (d) When is a person compulsorily required to register for VAT? (e) Explain why it may be to a person s advantage to register voluntarily as a taxable person for VAT when there is no legal requirement for him to do so. (f) What are the conditions a person must satisfy if he wishes to apply for voluntary registration? ***END OF QUESTION PAPER*** Page 10 of 11
SUPPLEMENTARY INFORMATION INCOME EXEMPTION THRESHOLD ( IET ) 2011 2012 Category A (employee with no dependent) 255,000 270,000 Category B (employee with 1 dependent) 365,000 380,000 Category C (employee with 2 dependents) 425,000 440,000 Category D (employee with 3 dependents) 465,000 480,000 CAR BENEFIT CYLINDER CAPACITY MONTHLY TAXABLE VALUE Up to 1600 cc 6,000 1601 cc to 2000 cc 6,750 Above 2000 cc 7,500 CAPITAL ALLOWANCES Capital Expenditure incurred on: Rate of annual allowance Percentage of Base value Cost 1. Industrial premises excluding hotels - 5 2. Commercial premises - 5 3. Hotels 30-4. Plant or Machinery: (a) Costing or having a base value of 30,000 or less 100 100 (b) Costing more than 30,000: (i) Motor vehicles 25 (ii) Electronic and high precision machinery or equipment, computer hardware and software 50 (iii)furniture & fittings 20 (iv) Other 35 Page 11 of 11