Taxation
(Malta)
Thursday 8 December 2016
Time allowed: 3 hours 15 minutes
This question paper is divided into two sections:
Section A – ALL 15 questions are compulsory and MUST be attempted
Section B – ALL SIX questions are compulsory and MUST be attempted
Tax rates and allowances are printed on pages 2–4.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
Paper F6 (MLA)
Fundamentals Level – Skills Module
The Association of Chartered
Certified Accountants
The Malta Institute of
Accountants
SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest €
2. All apportionments should be made to the nearest month unless stated otherwise
3. All workings should be shown in Section B
TAX RATES AND ALLOWANCES
The following tax rates and allowances for 2015 (year of assessment 2016) are to be used in answering the questions.
Individual income tax
Resident individual tax rates
Married couples – joint computation
€
€
0
to 11,900
11,901
to 21,200
21,201
to 60,000
60,001 and over
Rate
0%
15%
25%
35%
Other individuals
€
€
0
to 8,500
8,501
to 14,500
14,501
to 60,000
60,001 and over
Rate
0%
15%
25%
35%
Parents maintaining a child/paying maintenance
€
€
Rate
0
to 9,800
0%
9,801
to 15,800
15%
15,801
to 60,000
25%
60,001 and over
35%
Non-resident individuals
€
€
0
to 700
701
to 3,100
3,101
to 7,800
7,801 and over
Rate
0%
20%
30%
35%
Note: In the case of non-resident EU/EEA individuals who do not derive at least 90% of their worldwide income from
Malta, the tax liability is capped as follows:
Malta chargeable income
–––––––––––––––––––––
Worldwide income
x
Tax charge if worldwide income is charged
at the applicable resident individual tax rates
Corporate income tax
Standard rate
35%
Value added tax (VAT)
Standard rate
Reduced rate – general
Reduced rate – accommodation in premises required to be licensed in virtue
of the Malta Travel and Tourism Services Act
2
18%
5%
7%
Capital allowances
Industrial buildings and structures
Initial allowance
Wear and tear allowance
10%
2%
Plant and machinery
Wear and tear allowance as indicated in the question where applicable
Minimum number of years over which items of plant and machinery are to be depreciated:
Computers and electronic equipment
Computer software
Motor vehicles
Furniture, fixtures, fittings and soft furnishings
Equipment used for the construction of buildings and excavation
Catering equipment
Aircraft airframe or engine
Aircraft engine or airframe overhaul
Aircraft interiors and other parts
Ships and vessels
Electrical and plumbing installations and sanitary fittings
Cable infrastructure
Pipeline infrastructure
Communication and broadcasting equipment
Medical equipment
Lifts and escalators
Air conditioners
Equipment mainly designed or used for the production of water or electricity
Other machinery
Other plant
4
4
5
10
6
6
6
6
4
10
15
20
20
6
6
10
6
6
5
10
Capital gains
Capital gains index of inflation
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
428·06
426·18
425·17
433·67
435·47
439·62
443·39
456·61
468·21
475·89
495·60
516·06
536·61
549·95
567·95
580·61
593·00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
607·07
624·85
638·54
646·84
664·88
684·88
703·88
712·68
743·05
758·58
770·07
791·02
810·16
821·34
823·89
832·95
3
[P.T.O.
Applicability of increase for inflation
Cost of acquisition/improvements
index(yd) – index(ya)
–––––––––––––––––––––––––––– x ––––––––––––––––––
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.
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.
Car fringe benefit rates
Vehicle use
Percentage of
vehicle value
17%
10%
Vehicle not more than six years old
Vehicle more than six years old
Fuel value
Vehicle value not exceeding €28,000
Vehicle value exceeding €28,000
3%
5%
Maintenance value
Vehicle value not exceeding €28,000
Vehicle value exceeding €28,000
3%
5%
Private use percentages
Car value
From
€
0
16,311
21,001
32,621
46,601 and
To
€
16,310
21,000
32,620
46,600
over
30%
40%
50%
55%
60%
4
Section B – ALL SIX questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
1
Circle Holding Limited (CHL) is a company registered in Malta. CHL is wholly owned by Anna Berg, an individual
who is neither ordinarily resident in Malta nor domiciled in Malta. CHL owns all of the share capital of Circle Trading
Limited (CTL), which is also a company registered in Malta.
During its first financial year ended 30 June 2015, CTL derived the following streams of income:
1.
Income from local retail operations within Malta and Gozo. The chargeable income from this source of income
was €75,000.
2.
Income from retail operations conducted outside the Maltese Islands, which is attributable to a foreign permanent
establishment. The chargeable income (gross of foreign tax) from this source was €112,000. This income
suffered foreign tax at the rate of 25%. Evidence of the foreign tax paid is available, and double taxation relief is
to be claimed in relation to this income.
3.
Income from retail operations conducted outside Malta which is not attributable to a permanent establishment
situated outside Malta. The chargeable income (gross of foreign tax) from this source was €62,000. This income
suffered foreign tax of €2,400, for which double taxation relief is available and is to be claimed.
4.
Foreign source passive interest income of €15,000, in relation to which no relief for double taxation is to be
claimed.
The distributable profits of CTL for the year ended 30 June 2015 were equal to its chargeable income after tax, and
CTL distributed all of its post-tax profits for that year by way of dividend to CHL.
CTL does not own any immovable property situated in Malta. It does not derive any income from immovable property
situated in Malta, whether directly or indirectly.
Required:
In respect of each of Circle Trading Limited’s streams of income (1) to (4):
–
–
–
state the tax account to which the chargeable income after tax will be allocated;
calculate the tax payable in Malta; and
calculate the income tax refund claimable by Circle Holdings Limited as a result of the dividend distribution.
Note: You should deal with each stream of income separately, and unless otherwise indicated, select the most
beneficial method of taxation, taking into account the combined position of the company and its shareholder.
(10 marks)
9
[P.T.O.
2
Esperti Limited (EL) is a company established in Malta which is engaged in the provision of professional marketing
services to clients based in Malta and overseas. EL is registered for value added tax (VAT) purposes under Article 10
of the Value Added Tax Act.
The following information relates to EL’s VAT period from 1 September to 30 November 2015. All amounts in this
question are stated exclusive of VAT.
Note
Turnover
– Marketing
– Marketing
– Marketing
– Marketing
– Marketing
– Marketing
services
services
services
services
services
services
to
to
to
to
to
to
local retail customers
local business customers
foreign EU retail customers
foreign EU business customers
non-EU retail customers
non-EU business customers
€
€
2,400
12,750
3,200
14,780
1,650
9,860
–––––––
Total turnover for the VAT period
44,640
–––––––
Purchases of computer equipment for business use (capital goods)
– Intra-EU acquisitions
– Imports
(1)
12,900
1,100
–––––––
14,000
Local overhead expenditure
– Goods at standard VAT rate
– Utilities (all supplied by the public authority)
Water
Electricity
– Premises insurance premium charges
(2)
1,120
230
665
120
–––––––
2,135
Outsourced marketing services
– Received from foreign firms established in the EU
– Received from foreign firms established outside the EU
(3)
1,550
1,210
–––––––
2,760
–––––––
18,895
–––––––
Total expenditure for the VAT period
Notes:
(1) VAT at the standard rate was paid to Malta Customs on the imported computer equipment before the goods were
released into free circulation. EL was issued with a document of importation evidencing the importation VAT paid.
(2) Local overhead expenditure on goods includes an amount of €650 (exclusive of VAT) spent on an antique item
bought at auction to decorate the company’s office premises.
(3) The outsourced marketing service providers are registered for VAT or equivalent tax in their respective countries
of establishment, but are neither established nor registered for VAT in Malta.
Required:
Calculate Esperti Limited’s total output tax and total input tax for the value added tax (VAT) return period ended
30 November 2015.
Clearly identify any components of turnover which are not subject to Maltese VAT, and any items of expenditure
to which input tax does not apply or otherwise is not deductible.
(10 marks)
10
3
Silvia is an unmarried individual who was born in Malta and who formerly resided in Malta. Since 2005, Silvia has
been working and residing overseas and envisages that she will continue to do so for the foreseeable future, albeit
she expects to return to Malta in the distant future.
The following information relates to Silvia’s income and capital transactions in respect of the year ended 31 December
2015:
1.
Salary of €75,500 derived from her overseas employment, which was received into her personal bank account
in her country of residence. No part of this income was remitted to Malta.
2.
Interest received on her bank account balances, as follows:
Interest on bank accounts in her country of residence – not remitted to Malta
Interest on bank accounts in Malta
€
950
125
––––––
1,075
––––––
3.
Rental income totalling €12,000 received from the long-term letting of her former residence in Malta, which she
still owns. She incurs annual interest of €7,500 on the outstanding balance of a bank loan she took out in Malta,
in order to finance the purchase of this property. In 2015, she also incurred ground rent amounting to €250 and
maintenance expenses of €975 in relation to this property. The income was received directly into, and the
expenses were paid from, her personal bank account outside Malta and no part of the income was remitted to
Malta.
4.
Capital gains from the sale of marketable securities, as follows:
(i)
A surplus of €2,500 from the sale of ordinary shares in a non-listed foreign company, which was remitted
to her bank account in Malta; and
(ii) A surplus of €1,450 from the sale of ordinary shares listed on the Malta Stock Exchange, which was
received directly into her bank account in Malta.
Required:
(a) State the basis on which Silvia will be chargeable to tax in Malta for the year of assessment 2016.
(2 marks)
(b) Assuming that Silvia selects the most beneficial method of taxation, calculate her income chargeable to tax
and tax payable in Malta in respect of the year of assessment 2016.
Clearly identify and give reasons why any items of income or gains referred to in the question are not subject
to tax in Malta.
(8 marks)
(10 marks)
11
[P.T.O.
4
Charles, an unmarried individual who is ordinarily resident and domiciled in Malta, used to own 50% of the shares
in Irons Limited (IL), a private company registered in Malta. The other 50% of the shares in IL were, and still are,
owned by David. Both Charles and David had subscribed for their shares in IL at par, when IL was incorporated on
15 August 2001.
As Charles wished to retire, he agreed to sell all of his shares in IL to David, for a consideration of €176,500. Charles
and David had been business partners for many years, but are otherwise unrelated. The date of the share transfer
was 15 October 2015.
Each of the shares in IL has an equal €1 nominal value and confers equivalent percentage rights in the profits
available for distribution to the ordinary shareholders. However, each share originally subscribed for by Charles confers
three times the voting rights of each share subscribed for by David. Prior to 15 October 2015, there had been no
changes in the shareholding of IL.
IL’s audited financial statements as at 31 December 2014 show the following balance sheet position:
€
120,000
95,000
4,600
––––––––
219,600
––––––––
1,200
218,400
––––––––
219,600
––––––––
Immovable property asset at historical cost
Other tangible assets
Working capital
Share capital (1,200 shares of €1 each)
Retained earnings
Additional information:
1.
The immovable property asset was acquired by IL during 2004, and was valued by an architect at €335,000
as of 15 October 2015.
2.
IL does not hold any investments in other companies.
3.
IL’s average annual profits before tax between 2010 and 2014 are €25,000.
4.
Charles’ marginal rate of income tax is 35%.
Required:
Calculate the tax payable by Charles on the sale of his 50% shareholding in Irons Limited.
(10 marks)
12
This is a blank page.
Question 5 begins on page 14.
13
[P.T.O.
5
Monica Graham and her husband, James Graham, are resident outside the European Union. Between them, the
couple own all of the shares in Graham Enterprises Limited (GEL), a private limited liability company domiciled in
Malta and managed and controlled in Malta. The objects of GEL are to own and manage the overseas investment and
business interests of the Graham family.
As at 1 January 2015, GEL owned the following assets:
1.
A 7% equity shareholding in Anglia Limited (AL), a non-Maltese trading company domiciled and tax resident in
the European Union which operates a chain of restaurants. The equity shares confer full voting rights and a full
right to profits available for distribution, but carry no rights to assets available for distribution on an eventual
winding up of the company. The investment in AL was made on 15 May 2013 at a cost of €1,245,000.
2.
A 95% equity shareholding in Orient Limited (OL), an investment company domiciled and tax resident outside
the European Union. The shares confer full equity rights. The income of OL consists entirely of passive interest
which does not suffer any foreign tax because OL benefits from a full tax exemption in its country of residence.
The investment in OL was made on 30 June 2011 at a cost of €795,000.
3.
A small office situated in Malta having an area of 55 square metres. The office was acquired on 15 February
2013 at a cost of €195,000 and is used wholly and exclusively for the purposes of providing management
services to AL.
During the year ended 31 December 2015, GEL derived the following:
1.
Net dividend income from AL of €124,400. This dividend was declared on 30 June 2015 and received by GEL
on 15 July 2015. No withholding tax was suffered on this dividend, which was paid out of profits which had
suffered underlying corporate tax at the rate of 25%.
2.
Management fee income totalling €44,500 in respect of the provision of management services to AL during
2015.
3.
A capital gain arising from the sale on 1 August 2015 of a 50% shareholding in OL, for a consideration of
€525,000. No foreign tax was suffered on this gain.
4.
Dividend income from OL of €32,600. This dividend was declared on 31 October 2015 and received by GEL
on 30 November 2015. No withholding tax was suffered on this dividend.
During the year ended 31 December 2015, GEL incurred outsourced consultancy costs for the services of an advisory
company based in Malta of €13,500 and office maintenance costs of €3,200. These costs were incurred exclusively
in the production of the management fee income.
GEL had no other income or expenditure in the year ended 31 December 2015.
Additional information:
1.
None of the companies (GEL, AL and OL) are property companies.
2.
GEL has not made an election to allocate any Maltese taxed account or foreign income account profits to the
immovable property account.
3.
The memorandum and articles of association of GEL do not contain an express clause empowering GEL to receive
income which specifically falls to be allocated to the foreign income account.
4.
GEL applies the participation exemption where available.
GEL does not have any distributable profits brought forward from previous years, and will distribute all of its
distributable profits for the year ended 31 December 2015 by way of a dividend to its shareholders, who have been
duly registered with the Inland Revenue for the purpose of making tax refund claims.
14
Required:
In respect of Graham Enterprises Limited (GEL) for the year of assessment 2016:
(a) Compute the chargeable income, the tax charge, if any, and the distributable profits arising from each of the
company’s four sources of income and gains. In the case of any source you treat as exempt, clearly identify
the reason for the exemption.
Note: You should use the most beneficial method of taxation, taking into account the combined position of the
company and its shareholders.
(9 marks)
(b) Allocate the distributable profits to the appropriate tax accounts and calculate the income tax refunds
claimable by the company’s shareholders, if any, when the profits are distributed by way of dividend.
Note: Ignore deferred taxation.
(6 marks)
(15 marks)
15
[P.T.O.
6
Theresa and Maria are two unmarried sisters who are both ordinarily resident and domiciled in Malta. They live
together in the family home, and do not have any children. Since 1 February 2015, they have carried on the business
of a fine arts shop, jointly, in partnership, sharing profits and losses equally.
The partnership has not elected to be treated as a company for tax purposes, and constitutes the sole source of income
for both Theresa and Maria.
The summarised statement of profit or loss of the partnership for its first financial period ended 31 December 2015
is as follows:
Note
€
Turnover
Cost of sales
Gross profit
Less: Administration, selling and distribution expenses:
Bad debts written off
Increase in provision for doubtful debts
Depreciation
Surplus on disposal of shop furniture
Unrealised loss on exchange
Utility costs
Wages and salaries
Social security contributions
Other expenses (all tax deductible)
1
2
3
4
€
457,600
(235,340)
––––––––
222,260
(1,400)
(2,100)
(2,600)
2,200
(400)
(2,010)
(70,000)
(3,350)
(4,860)
–––––––
(84,520)
––––––––
137,740
Operating profit
Finance income
Finance expenses
5
6
2,151
(1,235)
–––––––
916
––––––––
138,656
––––––––
Net profit before tax per financial statements
Notes:
(1) Depreciation represents the accounting depreciation on the shop furniture and fixtures, which were purchased by
the partners on 15 February 2015 at a cost of €25,000.
(2) An item of shop furniture, which had been bought on 15 February 2015 at a cost of €4,000 (included in the
€25,000 referred to in note 1, above), became surplus to requirements. Maria and Theresa were fortunate in
that they were able to sell this on 30 November 2015 for a consideration of €6,200, which is in excess of the
amount originally paid for it.
(3) Wages and salaries comprise the partners’ salaries and drawings, as follows:
€
Salaries
Theresa
Maria
€
25,000
25,000
–––––––
50,000
Drawings
Theresa
Maria
7,500
12,500
–––––––
20,000
–––––––
70,000
–––––––
16
(4) Social security contributions represent the amounts paid in respect of the partners’ Class 2 contributions, as
follows:
€
1,675
1,675
––––––
3,350
––––––
Theresa
Maria
(5) Finance income consists of the following:
Local bank interest income (gross) subject to the investment income provisions
Interest received from the Value Added Tax (VAT) Department on an overdue VAT refund
€
975
1,176
––––––
2,151
––––––
(6) Finance expenses consist of the following:
€
Interest payable to the partners
Theresa
Maria
€
665
320
––––
Interest paid to a supplier in respect of the late payment of a trade debt
985
250
––––––
1,235
––––––
Required:
(a) Calculate the chargeable income derived from the partnership for the year of assessment 2016.
Note: You should start the computation with the net profit before tax figure of €138,656 and list all of the
items referred to in the question, indicating by the use of zero (0) any which do not require adjustment for tax
purposes.
(9 marks)
(b) Show the allocation of the partnership’s chargeable income between Maria and Theresa, and calculate their
individual chargeable incomes and income tax charges for the year of assessment 2016.
(6 marks)
(15 marks)
End of Question Paper
17