ADVANCED TAXATION - MICPA
MICPA EXAMINATION
MAY 2003
Questions,
Unofficial Suggested
Answers and
Examiners’ Reports
ADVANCED STAGE
EXAMINATION
Module C
Advanced Taxation
Published by MACPA STUDENTS SOCIETY
This booklet contains the questions, unofficial suggested answers and examiners’ reports for MODULE C of ADVANCED STAGE EXAMINATION for the May 2003 examination session.
The unofficial suggested answers were prepared by the MACPA Students Society and are not purported to be the official positions of The Malaysian Institute of Certified Public Accountants (MICPA).
While every care has been taken to anticipate and satisfy the examiners’ requirements in the preparation of the suggested answers, these should not be regarded as the only solutions.
Some of the answers set out are considerably more substantial than even the best candidate could achieve in the time available in and examination. It is felt, however, that longer, more detailed answers can be great help for study purposes and that shorter answers would not always be as helpful.
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THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
(INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA)
MAY 2003
Advanced Stage Examination - Module C
ADVANCED TAXATION
1. Time allowed: 3 hours
2. This paper is set in both the English Language and Bahasa Malaysia. You may answer this paper either in the English Language OR in Bahasa Malaysia. Only ONE language may be used.
3. This paper consists of SIX questions totalling 100 marks.
4. Answer ALL questions.
5. Any reference to "the Act" means the Income Tax Act, 1967 (as amended).
6. Workings are to be submitted.
ADVANCED TAXATION
(Answer ALL questions)
Question 1
The principal activities of Rawang Industrial Rubber and Plastic Sdn Bhd (RIRP) are the manufacturing of rubber and plastic products as well as investment holding. It is wholly-owned by Malaysians.
RIRP’s profit and loss account for the year ended October 31, 2002 is as follows:
Note RM’000 RM’000
Sales 33,000
Less: Cost of sales
Opening stock 4,275
Cost of goods manufactured 1 23,350
---------
27,625
Closing stock 2 5,035
--------- 22,590
----------
Gross profit 10,410
Less: Selling and distribution expenses
Remuneration 3 4,280
Travelling expenses 4 510
Advertising and entertainment 5 830
---------
5,620
---------
Administration expenses
Depreciation 220
Salaries and allowances 6 1,100
Legal and professional fees 7 300
Miscellaneous 8 200
---------
1,820
---------
Financial expenses
Interest expense 9 800
-------- 8,240
---------
2,170
Add: Other income
Loss on disposal of fixed assets (50)
Gain on foreign exchange 10 480
Profit on disposal of quoted shares 300
Dividend income 11 400
Rental income 12 200
-------- 1,330
--------
Profit before taxation 3,500
=====
Notes
1. Cost of goods manufactured includes:
RM’000
(i) Depreciation on factory building, plant and machinery 420
ii) Amortisation of cost (at 10%) incurred during the year in acquiring patent rights used for the manufacture of a rubber product 100
iii) Legal fees and stamp duty incurred in acquiring the above patent rights 200
iv) Insurance premiums paid to Alliance Insurance Bhd in respect of :
- export of goods 10
- import of raw materials 20
- fire policy on factory and plant 80
(v) Technical service fees paid to a German resident company for installation of plant and machinery 50
(vi) Research and development expenses
Market research expenses 30
Quality control testing 65
Payment for use of services of an approved research institute 125
Raw materials used for approved research and development project 40
2. It is the company’s policy to provide for stock obsolescence equivalent to 5% of its year-end stock. Closing stock is, therefore, arrived at after deduction of provision for stock obsolescence.
3. Remuneration includes the following which were paid to the company’s general manager:
RM’000
Salary 240
Bonus 60
EPF 66
Leave passage
- one trip to Thailand 3
- 5 local trips costing RM1,000 each 5
-------
374
-------
4. Travelling expenses include lease rental payments for the company’s motor vehicles:
Cost of vehicle Commencement Monthly lease
Type of vehicle when new of lease Term of lease rental
RM’000 Years RM’000
BMW 525 i 350 Nov 1, 2001 3 9
Honda CRV 140 Nov 1, 2001 1 10
Van 130 Nov 1, 1999 2 4
5. Advertising and entertainment include:
RM’000
Promotional samples of the company’s products 23
Staff annual dinner 100
Hampers for supplier’s annual dinner 50
Donation of a van to an approved institution 80
Cost of maintenance of overseas sales offices 200
Cash donation to State Government for Merdeka Day celebration 30
Condolences and congratulatory advertisements in newspapers for business associates 45
6. Salaries and allowances include:
RM’000
Staff entertainment allowances (wholly expended on clients) 80
Retirement gratuity 170
Salary of a blind telephone operator 12
7. Legal and professional fees comprise:
RM’000
Audit and tax filing fees 25
Legal fees incurred for preparing a settlement agreement with a trade debtor 40
Legal fees incurred for refinancing of a loan facility 60
Legal fees incurred in connection with the dismissal of an employee of the company 10
Professional fees incurred in connection with the company’s tax investigation matters 165
-------
300
-------
8. Included in miscellaneous expenses are:
RM’000
Cost of computers given to the company’s new employees 20
Quit rent and assessment for the company’s 3 units of shophouses 18
Cost of computer software 5
9. Interest expense includes an amount of RM250,000 incurred on the company’s 3 units of shophouses.
10. Gain on foreign exchange comprises:
RM’000
Foreign exchange gain arising from translation of trade debts at year end 50
Foreign exchange loss on trade debts collected (30)
Foreign exchange gain arising from settlement of a debt owing to a supplier of the company’s factory equipment 460
--------
480
--------
11. Dividend income comprises:
RM’000
Net dividend received from a Singapore subsidiary 100
Interim dividend from Elite Sdn Bhd on February 1, 2002 (gross) 250
Final dividend declared by Elite Sdn Bhd which was paid on
November 15, 2002 50
-------
400
--------
12. Rental income comprises rental derived from the company’s 3 units of shophouses. The Inland Revenue Board had in the past agreed to treat the rental income as business income.
13. Other information
(i) Balances of the provision for retirement gratuity are:
October 31, 2002 October 31, 2001
RM’000 RM’000
Closing balance 200 110
Retirement gratuity was paid to the company’s retired employees during the year.
(ii) The company’s capital allowance claim in respect of its manufacturing business for the year assessment 2002 is RM1,143,000.
Required:
Compute the income tax payable by RIRP for the year of assessment 2002, showing all relevant tax adjustments.
(20 marks)
Question 2
The existing group structure of the TH Group of Companies comprising Tasik Holdings Sdn Bhd (TH) and its wholly-owned subsidiaries is as follows.
Tasik Holdings Sdn Bhd
(TH)
100% 100% 100%
Tasik Trading Sdn Bhd Tasik Metal (KL) Sdn Bhd Tasik Restaurants Sdn Bhd
(TT) (TMKL) (TR)
100% 100%
Tasik Pipes Sdn Bhd Tasik Metal (Terengganu) Sdn Bhd
(TP) (TMT)
100%
Tasik China Pte Ltd
(TC)
TH is an investment holding company wholly owned by the Yoong family. TH has substantial bank borrowings to finance the investments and operations of its subsidiaries.
TT is the marketing arm of TP, which manufactures water pipes. TT’s business has been highly profitable due to the pricing strategy adopted by TT and TP. TP has substantial amounts of unabsorbed capital allowances and reinvestment allowance.
TP has established TC, a wholly-owned subsidiary in China, to undertake the business of manufacturing water pipes in China. TC has been highly profitable.
TMKL is principally engaged in the business of manufacturing steel pipes in its factory located in Kuala Lumpur.
TMT was established two years ago to undertake steel pipes manufacturing in Terengganu due to the cheap and abundant supply of labour there. Both TMKL’s and TMT’s operations have been profitable. TMT plans to embark on an expansion programme, which would double its production capacity. TH provides an interest-free loan to TMT.
TR was established recently to operate a chain of restaurants. TR began to make substantial profits within one year after commencement of business. Encouraged by the initial success of its business, TR plans to expand its restaurant business and intends to finance the expansion through borrowings from TH. It is now in the final stage of negotiations to acquire a chain of restaurants owned by Best Aroma Sdn Bhd (BA). TH has the option of acquiring either the restaurant business of BA or the shares in BA. Other than the restaurant business, BA does not carry out any other business. BA has substantial unabsorbed capital allowances and tax losses from its restaurant business. It also has a substantial amount of credit in its Section 108 account.
Required:
Advise how the operations and structure of the TH Group of Companies can be reorganised more efficiently for tax purposes (including the proposed acquisition of the business of BA or the shares in BA), giving reasons to support your recommendations.
(15 marks)
Question 3
(a) (i) State what you understand by the terms ‘tax avoidance’ and ‘tax evasion’.
(2 marks)
(ii) State the powers of the Director General of Inland Revenue under the Income Tax Act which can be used in conducting a tax investigation.
(2 marks)
(iii) State the period for which a taxpayer is required to maintain his records for tax purposes.
(1 mark)
(b) Mr Flash Shee owns a second hand car sales shop, Best Deal Sdn Bhd (BDSB). Following information provided by a disgruntled employee of BDSB, the Inland Revenue Board (IRB) has decided to investigate Mr Flash Shee. He has been requested to prepare his capital statement as at December 31, 2000, 2001 and 2002.
Mr Shee has appointed you to prepare his capital statements based on the following information:
(1) BDSB has reported the following employment income in Mr Shee’s Form EA:
| |2000 |2001 |2002 |
| |RM |RM |RM |
|Cash remuneration |120,000 |120,000 |120,000 |
|Bonus |30,000 |30,000 |30,000 |
|Car benefit |1,800 |1,800 |1,800 |
Mr Shee paid the following income tax in the respective years:
| |2000 |2001 |2002 |
| |RM |RM |RM |
|Income tax |30,000 |30,000 |28,000 |
2) Mr Shee provided the following information in relation to the year end balances of his bank accounts:
| |2000 |2001 |2002 |
| |RM |RM |RM |
|Bank balances |100,000 |200,000 |250,000 |
(3) List of Mr Shee’s assets and liabilities
• 90 percent shareholding in BDSB, which has a paid-up capital of RM1 million.
• A bungalow purchased in 1990 for RM1,200,000 was sold on January 1, 2001 for a gain of RM300,000. He had an outstanding loan of RM900,000 as at December 31, 2000, which was fully settled upon the sale of the bungalow.
• He used the proceeds from the above bungalow sale to acquire 2 shoplots for RM1,600,000 on January 2, 2001. He obtained a loan of RM800,000 on the same day for the acquisition and was able to reduce the loan by RM100,000 every year.
• He and his wife own Rolex watches worth RM50,000 since 1999. He bought a diamond ring costing RM30,000 in 2002 for his wife.
• He owns a Mercedes Benz, which was bought for RM280,000 in 1999.
(4) Mr Shee estimated his household expenses to be approximately RM100,000 each year. This excluded his annual holiday trip, which he estimated to cost RM20,000.
Required:
Compute the omitted income (if any) of Mr Flash Shee for the years of assessment 2001 and 2002.
(10 marks)
(Total: 15 marks)
Question 4
a) Xebase Sdn Bhd (XSB), a company engaged in the manufacturing of high precision tools, entered into a technical services agreement with US Corporation Ltd (USCL), a company resident in the United States, on October 1, 2001. Under the terms of the technical services agreement, XSB shall pay USCL technical fees based on 2% of net sales of XSB. It was further provided in the agreement that the technical fees be paid net of withholding tax, if any.
For the year ended September 30, 2002, XSB paid technical fees of RM90,000 to USCL. XSB grossed up the technical fees and paid RM10,000 as withholding tax to the Inland Revenue Board. XSB charged RM100,000 as an expense in the profit and loss account and claimed this amount as a deduction in the tax computations for the year of assessment 2002.
Required:
State your arguments for AND against the deductibility of the amount of RM10,000, being the withholding tax paid to the Inland Revenue Board.
(5 marks)
(b) F Housing Sdn Bhd (FHSB), a property developer, acquired 1,000 acres of oil palm plantation land in Shah Alam for a mixed housing development project. The land is to be developed in phases over 10 years. During the course of the development, FHSB intends to engage a contractor to harvest the oil palm fruits for sale to third parties before the land is cleared for development. The proceeds from the sale of the oil palm fruits will be set off against the cost of development of the housing project in FHSB’s accounts.
Required:
State your arguments for AND against the treatment of the income from the sale of oil palm fruits as a source of income separate from the housing project.
(5 marks)
(c) On July 1, 1998, Hitech Projects Sdn Bhd (HPSB) entered into an agreement to acquire the entire 1 million ordinary shares of RM1.00 each in IT Tech Sdn Bhd (ITTSB) for a purchase consideration of RM5 million. ITTSB is engaged in the software development business for 5 years and has a profitable track record since it commenced operations. The vendors of ITTSB were confident that it would be able to maintain its track record for the next 3 years due to projects already secured. The purchase consideration of RM5 million was based on the expected future earnings of ITTSB. As part of the acquisition, the vendors of ITTSB provided a profit guarantee (net profits after tax) of at least RM1 million a year for 3 years commencing from January 1, 1999.
However, for the three-year period, ITTSB achieved total net profits after tax of only RM1 million. In 2002, HPSB exercised the profit guarantee and received RM2 million from the vendors of ITTSB. The sum was reflected as income in the profit and loss account of HPSB for the year ended December 31, 2002.
Required:
State your arguments for AND against the taxability of the amount of RM2 million received by HPSB for the year ended December 31, 2002.
(5 marks)
(Total: 15 marks)
Question 5
(a) Supreme Inc is tax resident in the United States. It enters into contracts with its customers in Malaysia for the sale of pharmaceutical products manufactured in the United States.
All sales contracts between Supreme Inc and its Malaysian customers are concluded outside Malaysia. Acceptance of purchase orders and issuance of invoices are done by Supreme Inc but transmitted via a Malaysian agent, which has no authority to conclude contracts on its behalf. To ensure prompt delivery of its orders, Supreme Inc leased a warehouse in Singapore for storage and delivery of its goods directly to its customers in Malaysia at which time title to the goods passes.
Required:
i) Advise Supreme Inc whether its income derived from the sale of the pharmaceutical products to its customers in Malaysia would be subject to Malaysian income tax.
(5 marks)
(ii) Advise whether Supreme Inc would be deemed to have a permanent establishment (PE) in Malaysia if it were a tax resident in the United Kingdom. Give reasons to support your argument.
(3 marks)
(b) The Malaysian Government awarded contracts to Masaki Ltd (Masaki), a company resident in Japan, for the supply of the plant and machinery and the construction of its waste disposal plant in Selangor. The contracts are split into offshore and onshore portions as follows:
Offshore portion
- Provision of offshore design services (RM8 million)
- Supply of plant and machinery (RM92 million)
Onshore portion
- Supervision of the installation and commissioning of plant and machinery (RM20 million).
(It is anticipated that Masaki’s personnel would be present in Malaysia for a period of 8 months).
The Government also awarded a consultancy contract to Superflex Pty Ltd, a company resident in Australia, which involves onshore work by its employees for a two-month period in Malaysia (assume that Superflex Pty Ltd has no PE in Malaysia).
Required:
i) Advise Masaki on the withholding tax rates relating to payments for the onshore and offshore portions of the contract, stating the sections of the Income Tax Act requiring deduction of withholding tax.
(5 marks)
ii) State, with reasons, whether the payments to Superflex Pty Ltd would attract withholding tax and the withholding tax rate, if applicable.
(2 marks)
(Total: 15 marks)
Question 6
(a) Syarikat Furniture Manufacture Sdn Bhd, which holds a sales tax licence, has the following local sales:
RM
i) March 4, 2002 3,000
ii) March 15, 2002 1,000
iii) March 20 2002 5,000
iv) April 7, 2002 4,000
v) April 18, 2002 6,000
vi) April 30, 2002 2,000
vii) May 2, 2002 2,000
The rate of sales tax is 10% of sales value. As of May 15, 2002, Syarikat Furniture Manufacture Sdn Bhd has received payments for invoices (i), (ii) and (v). The company paid the sales tax for the period March to April 2002 on July 7, 2002.
Required:
i) Compute the sales tax payable for the period March to April 2002 and state the date by which the sales tax is payable.
(2 marks)
ii) State the rate of penalty that would apply to the late payment of sales tax on July 7, 2002.
(1 mark)
(b) ABC Co, a management company with an annual turnover of RM400,000 is licensed under the Service Tax Act, 1975. ABC Co decides to charge its customers a parking fee for the use of its parking lots. It is estimated that the annual income from the parking lots is RM90,000.
ABC Co has rendered management services to John. In providing such services, ABC Co has sought legal advice from LLB & Co. for which it was invoiced RM2,100 (including service tax of RM100). This amount is recoverable from John together with an amount of RM30 being facsimile and telephone charges. ABC Co’s professional fees for its services to John is RM2,500.
Required:
(i) State, with reasons, whether ABC Co is required to charge service tax on the parking fees.
Assume that ABC Co decides to rent the entire parking space to Syarikat Fastpark, a car park operator. State, with reasons, whether ABC Co is required to charge service tax on the rental.
(3 marks)
(ii) State how the invoice from ABC Co to John should be itemised for service tax efficiency and compute the service tax payable.
(2 marks)
(c) Swiss Co, a company resident in Switzerland, is involved in the manufacture of porcelain and bone china figurines and is keen to expand its operations to Malaysia. Following several meetings with their tax consultants and the Malaysian Industrial Development Authority (MIDA), it has been confirmed that the project qualifies for pioneer status. The following projections of capital expenditure and adjusted income were given in evaluating the project:
| | | |Plant & |Office | |Adjusted |
|Year ending |Land |Factory |Machinery |Equipment |Computers |Income |
|December 31 |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |
|2003 |4,000 |2,500 |4,000 |200 |400 |1,200 |
|2004 |- |- |- |- |- |2,200 |
|2005 |- |- |- |- |- |3,000 |
|2006 |- |- |- |- |- |3,400 |
|2007 |- |- |- |- |- |4,800 |
|2008 |- |- |- |- |- |7,200 |
|2009 |- |- |- |- |- |8,000 |
Installation of plant and machinery is scheduled for February 2003 and manufacturing is expected to commence in June 2003. However, production day is expected to commence on January 1, 2004.
Based on past projects, Swiss Co expects to incur additional capital expenditure of RM6 million on plant and machinery for purpose of expanding and modernising its existing business either in 2008 or 2009.
The annual capital allowance rates are as follows :
%
Factory 3
Plant & machinery 14
Office equipment 10
Computers 40
Required:
i) Compute the chargeable income and tax exempt income for the years of assessment 2003 to 2008 in respect of the project, ignoring the issue of expansion.
(7 marks)
ii) Advise Swiss Co when it would be most tax efficient to incur capital expenditure for expansion and modernisation. Support your advice with computations of chargeable income and tax exempt income for the years of assessment 2008 and 2009.
(5 marks)
(Total: 20 marks)
MAY 2003 EXAMINATION
SUGGESTED ANSWERS
ADVANCED TAXATION
Question 1
Rawang Industrial Rubber and Plastic Sdn Bhd
Year of Assessment 2002
I. Manufacturing Business
RM’000 RM’000
Profit before taxation 3,500
Add/(Less)
Depreciation (420 + 220) 640
Cost incurred in acquiring patent rights
(20% x 100/0.1 – 100) (100)
Legal fees and stamp duty in acquisition of patent rights (200 – 20% x 200) 160
Double deduction of insurance premiums (10 + 20) (30)
Technical service fees 50
R & D expenses (125 + 40) (165)
Closing balance for provision of stock obsolescence
(5,035 x 5/95) 265
Opening balance for provision of stock obsolescence
(4,275 x 5/95) (225)
EPF restriction (66 – 300 x 19%) 9
Leave passage (3 + 5) 8
Traveling – lease rental (58 + 20) 78
Hampers for suppliers’ annual dinner 50
Donation of van 80
Cost of maintenance of overseas sales offices (200)
Cash donation to State Government 30
Condolences and congratulatory advertisements 45
Entertainment allowances 80
Provision for retirement gratuity
[170 – (110 + 170 -200)] 90
Double deduction – salary of disabled employee (12)
Legal and professional fee (60 + 165) 225
Quit rent and assessment of rental property 18
Computer software 5
Interest expenses on rental properties 250
Loss on disposal of fixed assets 50
Exchange gains (50 + 460) (510)
Profit on disposal of quoted shares (300)
Dividends (400)
Rental income (200) (9)
--------- ----------
3,491
Less: Capital allowances (1,143)
----------
2,348
II. Rental business
RM’000 RM’000 RM’000
Rental income (gross) 200
Less: Quit rent and assessment 18
Interest expense 250 (268) Nil
------ -------
Adjusted loss (68)
====
III. Dividend income (T/C RM70,000)
Dividend income – Malaysian (gross) 250
----------
Aggregate income 2,598
Less: Current year loss (Rental business) (68)
Approved donation (30)
----------
Chargeable income 2,500
======
Tax @ 28% on RM2,500,000 700
Less: Section 110 relief (70)
---------
Tax payable 630
=====
Question 2
• TP could decide to sell its products directly (as part of a rationalisation exercise) rather than through TT. The “trading profits” which are currently made by TT would then be earned by TP. TP’s substantial unabsorbed capital allowances and reinvestment allowances could be used to off-set against these “trading profits”.
• As TP is enjoying reinvestment allowance, the payment of tax-exempt dividends by TP will create a dividend trap in TH due to the “two tier” exemption restriction. After the transfers of TT’s operations to TP, TT should be liquidated so that TP would be held directly by TH thereby removing the dividend trap at TH’s level.
• Dividends received by TP from TC would be regarded as off-shore income which is tax-exempt. TP could, in turn, pay tax-exempt dividends to TT. Such payment, however, would also create a dividend trap in TH due to the “two tier” exemption restriction. With the liquidation of TT (as mentioned above), the dividend trap for payment of tax-exempt dividend would be removed.
Alternatively, the shares in TC could be held directly by TH instead of TP and this will also remove the dividend trap.
• TMT’s operations and assets should be transferred to TMKL. TMKL would then be eligible for reinvestment allowances (RA) on grounds of expansion of production capacity.
The RA would be granted at the rate of 60% of qualifying capital expenditure incurred without any restriction on utilisation against statutory income since the project is located in Terengganu, which is an Eastern Corridor State.
However, the qualifying capital expenditure would be subject to the controlled transfer provision where RA would be given based on the tax written value of the assets transferred.
• The planned expansion programme in Terengganu should then be undertaken by TMKL where RA of 60% of qualifying capital expenditure incurred would be applicable.
• TH should charge interest to TMT (or TMKL after the transfer as stated above) to defray its own interest cost since the interest cost would be deductible at TMT’s or TMKL’s (after the transfer) level.
• TR or TH should acquire all the shareholding in BA instead of the restaurant operations of BA. This is because of the substantial unabsorbed tax losses and capital allowances in BA which could be used to shelter future profits from the restaurant business. If TR acquires only the restaurant operations, the tax losses and unabsorbed capital allowances would remain in BA, which continue to be owned by the existing shareholders of BA and not TR.
• After acquiring BA, as part of a business rationalisation exercise, the existing restaurant chain owned by TR could be transferred to BA such that the profits generated from these restaurants could be sheltered by the tax losses and unabsorbed capital allowances of BA.
• In addition, BA could then pay dividends to TR or TH due to the substantial amount of credit in its Section 108 account. TR or TH could then use the dividends to pay for its substantial borrowing costs.
Question 3
(a)(i) The difference between tax avoidance and tax evasion:
|Tax Evasion |Tax Avoidance |
|Tax evasion occurs where the taxpayer “alters the |Tax avoidance would refer to legitimate steps taken by a taxpayer |
|incidence of tax as a result of “artificial and/or |who seeks to arrange his affairs in a legal way to reduce the |
|fictitious” transactions i.e. transactions that have no |incidence of tax without any violation of tax legislation and |
|commercial substance. Evasion would involve either |transactions are bona fide. |
|under-declaring (or not reporting) income or | |
|over-claiming expenses by creating fictitious expenses. | |
(ii) The powers granted under the Income Tax Act 1967 which the Director General can call upon in conducting a tax investigation are:
• Power to call for specific returns and production of books (section 78)
• Power to call for statement of bank accounts (section 79)
• Power of access to buildings and documents etc (section 80)
• Power to call for information (section 81)
(iii) Section 82(1)(a) of the Income Tax Act requires that every person carrying on a business shall keep and retain sufficient records for a period of seven years. Section 82A(1) extends this obligation (from year of assessment 2003) to every person (i.e. this would include employees, etc).
(b)
Year ended 31 December 2000 2001 2002
RM’000 RM’000 RM’000
Assets
Bank balances 100 200 250
Investment in BDSB 900 900 900
Bungalow 1,200 - -
2 Shoplots - 1,600 1,600
Jewellery/watches 50 50 80
Mercedes Benz 280 280 280
--------- --------- --------
2,530 2,750 2,830
Less: Liabilities
Loan – bungalow (900) - -
Loan – shoplots - (700) (600)
--------- --------- ---------
1,630 2,050 2,230
Capital at 1 January (1,630) (2,050)
--------- ---------
Capital increase during year 420 180
Add: Cash outflows
Household expenses 1
Holiday expenses
Income tax
Less: Gain on sale of bungalow 300 -
Less: Income declared 150 150
------- ------
Omitted income 120 178
==== ====
Question 4
(a) Arguments for deductibility
• The grossing-up is to ensure the USCL receive the contractual sum as agreed between the two parties.
• The total amount of RM100,000 represents the actual costs to XSB for the services rendered.
Arguments against deductibility
• Withholding tax is a tax to be borne by the non-resident person and not a tax of the payer.
• Withholding tax is not a cost of production and therefore does not qualify for a deduction. The regrossed amount is a tax rather than a fee, and thus not wholly and exclusively incurred in the production of gross income.
• Withholding tax does not represent any services rendered by USCL.
• The law does not provide for the grossing-up method.
(Note: The EPM case would be a useful guide)
(b) Arguments for separate source of business income
• Due to the duration of development of the land over 10 years, the harvesting of oil palm fruits was carried out on a frequent and regular basis and is therefore an activity in the ordinary course of business.
• Profit seeking motive would be an indication of a trade or business source.
Arguments against separate source of business income
• Proceeds from the sale of oil palm fruits were set off against the development cost of the houses. This indicates that it represents a reduction of the cost of construction of the houses.
• FHSB is principally a property developer, and the harvesting of oil palm fruits is incidental to this principal activity. The oil palm fruit trees need to be felled in order that the land may be cleared and developed.
• FHSB engaged a contractor to harvest the fruits and sold it outright to a third party. It did not carry out any systematic activity to harvest the fruits as would be the case of an oil palm plantation company.
(c) Arguments for taxability
• The amount represents the profits that would have been made by ITTSB had it been able to meet its expectations, and would have been available for distribution as dividends to HPSB.
• The receipt is reflected as income in the Profit & Loss account of HPSB.
Arguments against taxability
• The amount arose from a takeover arrangement and hence is capital in nature
• The amount did not arise in the ordinary course of business of HPSB
• The receipt represents a reduction in the cost of investment of HPSB in ITTSB
Question 5
(a)(i) The income should be subject to Malaysian income tax on the basis that it is deemed to be carrying on business in Malaysia due to goods being delivered directly to the clients in Malaysia and title passing in Malaysia.
Arguments on why the sale of pharmaceutical products to its Malaysian customers should not be subject to Malaysian income tax would include the following:
- All sales contracts are concluded outside Malaysia.
- Acceptance of purchase orders and issuance of invoices are carried out in the US.
Overall, due to the absence of a double tax agreement between Malaysia and the US, it would appear that there is a source of income derived from Malaysia.
(ii) There would not be a PE in Malaysia under the Malaysia/United Kingdom double tax agreement due to the following:
- No maintenance of stocks in Malaysia for purpose of fulfilling orders.
- No agents in Malaysia with authority to enter into contracts on behalf of Supreme Inc.
- No branch, office or other fixed place of business in Malaysia.
(b)(i) Withholding tax requirements of Masaki.
Offshore Portion
- 10% withholding tax (Sections 4A and 109B) for offshore design services.
(Note: Based on the 2003 Budget, the services are totally performed offshore, no withholding tax is applicable).
- No withholding tax on the supply of the plant and machinery.
Onshore Portion
Section 107A - 15% of the Malaysian Service Portion of the contract payment on account of the non-resident contractor’s tax liability.
- 5% of the Malaysian Service Portion of the contract payment on account of the tax liability of the employees of the non-resident contractor.
(Note: The withholding tax rate per the 2003 Budget was lowered to 10% + 3%)
(ii) Withholding tax requirements of Superflex Pty Ltd
No withholding tax is applicable due to DTA protection (under the business article) on the basis that Superflex Pty Ltd has no PE in Malaysia, i.e. the employees were in Malaysia for less than 90 days.
Question 6
a) The sales tax payable for the taxable period March/April 2002 is RM2,100. The tax shall be paid before the 28th May 2002. The late penalty amount is RM252 (10% + 2%)(2,100 X 12% = 252).
b) (i) ABC Co. is a taxable person under Group G of the second schedule of the Service Tax Regulations for provision of management services. As the provision of parking space for motor vehicles where charges are imposed is also a taxable service under Group G of the schedule, ABC Co. will be required to charge service tax.
ABC Co. will not be required to charge service tax on the rental of the space to Syarikat Fastpark as the provision of parking space is carried out by another company. Syarikat Fastpark need not be licensed since the income will be below the RM150,000 threshold.
(ii) Invoice issued by ABC Co. would include the following:
RM
Professional fee 2,500
Service tax 5% 125
Disbursements:
Fax and Telephone charges 30
Invoice from LLB & Co. 2,100
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4,755
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(c) (i) Pioneer Status Incentive
(Pioneer Status tax exemption of 70% for 5 years.)
| |2003 |2004 |2005 |2006 |2007 |2008 |Total |
| |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |
|Adjusted |1,200 |2,200 |3,000 |3,400 |4,800 |7,200 | |
|Income | | | | | | | |
|Less: |1,200 |1,600 |655 |655 |655 |495 | |
|Capital Allowances (CA) | | | | | | | |
|Statutory Income (SI) | | | | | | | |
|Less: 70% SI |- |600 |2,345 |2,745 |4,145 |6,705 |16,540 |
|- exempted | |420 |1,642 |1,922 |2,902 |4,694 |11,580 |
|Chargeable | |180 |703 |823 |1,243 |2,011 |4,960 |
|Income | | | | | | | |
|CA b/forward | |785 | | | | | |
|CA |1,985 |815 |655 |655 |655 |495 | |
|Total |1,985 |1,600 |655 |655 |655 |495 | |
|Utilised |1,200 |1,600 |655 |655 |655 |495 | |
|C/forward |785 | | | | | | |
Schedule 3 Capital Allowance Computation
| |Factory |Plant & |Office | | |
| |Building |Machinery |Equipment |Computers |Total |
| |RM’000 |RM’000 |RM’000 |RM’000 |RM’000 |
|YA 2003 | |
| | |
|Part (c) : |Most candidates missed the point that reinvestment allowance could only be claimed after the end of the pioneer |
| |status period. |
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100 100
20 20
30 28
150 148
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