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.
ALL RIGHTS RESERVED : NO PART OF THIS PUBLICATION MAY BE TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL PHOTOCOPYING, RECORDING OR OTHERWISE, WITHOUT THE PRIOR PERMISSION OF THE MACPA STUDENTS SOCIETY.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:
NoteRM’000RM’000
Sales 33,000
Less: Cost of sales
Opening stock4,275
Cost of goods manufactured123,350
------
27,625
Closing stock25,035
------22,590
------
Gross profit10,410
Less:Selling and distribution expenses
Remuneration 34,280
Travelling expenses4510
Advertising and entertainment5830
------
5,620
------
Administration expenses
Depreciation220
Salaries and allowances61,100
Legal and professional fees7300
Miscellaneous8 200
------
1,820
------
Financial expenses
Interest expense9800
------8,240
------
2,170
Add:Other income
Loss on disposal of fixed assets(50)
Gain on foreign exchange10480
Profit on disposal of quoted shares300
Dividend income11400
Rental income12200
------1,330
------
Profit before taxation3,500
=====
Notes
1.Cost of goods manufactured includes:
RM’000
(i)Depreciation on factory building, plant and machinery420
(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 goods10
-import of raw materials20
-fire policy on factory and plant80
(v)Technical service fees paid to a German resident company for installation of plant and machinery 50
(vi)Research and development expenses
Market research expenses30
Quality control testing65
Payment for use of services of an approved research institute125
Raw materials used for approved research and development project40
- 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.
- Remuneration includes the following which were paid to the company’s general manager:
RM’000
Salary240
Bonus60
EPF66
Leave passage
- one trip to Thailand3
- 5 local trips costing RM1,000 each5
------
374
------
4.Travelling expenses include lease rental payments for the company’s motor vehicles:
Cost of vehicleCommencementMonthly lease
Type of vehiclewhen newof leaseTerm of leaserental
RM’000YearsRM’000
BMW 525 i350Nov 1, 200139
Honda CRV140Nov 1, 2001110
Van 130Nov 1, 199924
5.Advertising and entertainment include:
RM’000
Promotional samples of the company’s products23
Staff annual dinner100
Hampers for supplier’s annual dinner50
Donation of a van to an approved institution80
Cost of maintenance of overseas sales offices200
Cash donation to State Government for Merdeka Day celebration30
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 gratuity170
Salary of a blind telephone operator 12
7.Legal and professional fees comprise:
RM’000
Audit and tax filing fees25
Legal fees incurred for preparing a settlement agreement with a trade debtor 40
Legal fees incurred for refinancing of a loan facility60
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 employees20
Quit rent and assessment for the company’s 3 units of shophouses18
Cost of computer software5
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 subsidiary100
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, 200250
------
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, 2002October 31, 2001
RM’000RM’000
Closing balance200110
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 BhdTasik Metal (KL) Sdn BhdTasik Restaurants Sdn Bhd
(TT)(TMKL)(TR)
100%100%
Tasik Pipes Sdn BhdTasik 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:
2000RM / 2001
RM / 2002
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:
2000RM / 2001
RM / 2002
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:
2000RM / 2001
RM / 2002
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, 20023,000
(ii)March 15, 20021,000
(iii)March 20 20025,000
(iv)April 7, 20024,000
(v)April 18, 20026,000
(vi)April 30, 20022,000
(vii)May 2, 20022,000
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:
Year endingDecember 31 / Land
RM’000 / Factory
RM’000 / Plant &
Machinery
RM’000 / Office
Equipment
RM’000 / Computers
RM’000 / Adjusted
Income
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.