Professional Level – Options Module ... - Home | ACCA Global · Professional Level – Options Module Time allowed: 3 hours 15 minutes This question paper is divided into two sections:

Professional Level – Options Module

Time allowed: 3 hours 15 minutes

This question 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 question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall. Pape

r P6 (SG

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Advanced Taxation(Singapore)

Thursday 8 December 2016

The Association ofChartered Certified

Accountants

SUPPLEMENTARY INSTRUCTIONS1. You should assume that the tax rates and allowances for the year of assessment 2016 will continue to apply for

the foreseeable future.2. All apportionments should be made to the nearest month.3. Calculations and workings need only be made to the nearest $.4. All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions

Goods and services taxStandard rate 7%Registration threshold $1 million

Buyer’s stamp duty for all properties

Purchase price or market valueFirst $180,000 1%Next $180,000 2%Remaining amount 3%

Additional buyer’s stamp duty for residential properties

Foreigners and entities buying a first and subsequent residential property 15%Singapore permanent residents buying a first residential property 5%Singapore permanent residents buying a second and subsequent residential property 10%Singapore citizens buying a second residential property 7%Singapore citizens buying a third and subsequent residential property 10%

Seller’s stamp duty for residential properties

Property disposed of within one year of purchase 16%Property disposed of within more than one year and up to two years of purchase 12%Property disposed of within more than two years and up to three years of purchase 8%Property disposed of within more than three years and up to four years of purchase 4%

Seller’s stamp duty for industrial properties

Property disposed of within one year of purchase 15%Property disposed of within more than one year and up to two years of purchase 10%Property disposed of within more than two years and up to three years of purchase 5%

Stamp duty on transfer of shares

Purchase price or net asset value of the shares 0·2%

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Corporate income tax Rate – Year of assessment 2016 17%

Corporate income tax rebate (capped at $20,000) 30%

Partial tax exemption $First $10,000 of chargeable income is 75% exempt 7,500Next $290,000 of chargeable income is 50% exempt 145,000

––––––––Total 152,500

––––––––

Full tax exemption for new start-up companies $First $100,000 of chargeable income is 100% exempt 100,000Next $200,000 of chargeable income is 50% exempt 100,000

––––––––Total 200,000

––––––––

Central Provident Fund (CPF)Contributions for individuals below the age of 50 years and earning more than $750 per month

Employee EmployerRates of CPF contributions 20% 17%

Maximum monthly ordinary wages (OW) attracting CPF $5,000

For the year 2015 (i.e. from 1 January 2015 to 31 December 2015)Maximum annual ordinary wages (OW) attracting CPF $60,000Maximum annual additional wages (AW) attracting CPF $85,000 less OW subject to CPF

Personal income tax for the year of assessment 2016

Chargeable income Tax rate Tax$ % $

On the first 20,000 0 0On the next 10,000 2·0 200

––––––––– –––––––On the first 30,000 200On the next 10,000 3·5 350

––––––––– –––––––On the first 40,000 550On the next 40,000 7·0 2,800

––––––––– –––––––On the first 80,000 3,350On the next 40,000 11·5 4,600




––––––––– –––––––On the first 320,000 42,350Above 320,000 20·0

3 [P.T.O.

Personal income tax reliefs for the year of assessment 2016

Earned income relief Standard (max) Handicapped (max)Below 55 years $1,000 $4,00055 to 59 years $6,000 $10,00060 years and above $8,000 $12,000

Spouse relief $2,000 $5,500

Qualifying child relief (per child) $4,000 $7,500

Working mother’s child relief (WMCR) % of mother’s earned incomeFirst child 15%Second child 20%Third and subsequent child 25%

Maximum cumulative WMCR 100%Maximum relief per child $50,000

Parent relief Standard (max) Handicapped (max)Not living in the same household $5,500 $10,000Living in the same household $9,000 $14,000

Grandparent caregiver relief $3,000

Dependent handicapped sibling relief $5,500

Life assurance relief $5,000 (max)

Voluntary CPF contribution of self-employed Capped at $31,450 or 37% of assessable trade income whichever is lower

Course fees $5,500 (max)

NSman Non-key appointment Key appointmentholder holder

Active NSman $3,000 $5,000Non-active NSman $1,500 $3,500Wife/widow/parent of NSman $750 $750

Foreign maid levy $6,360 (max)

Supplementary retirement schemeForeigners $29,750 (max)Singaporeans and Singapore permanent residents $12,750 (max)

4

This is a blank page.Question 1 begins on page 6.

5 [P.T.O.

Section A – BOTH questions are compulsory and MUST be attempted

1 You should assume today’s date is 1 December 2014.

Unique Bakery (Singapore) Pte Ltd (UBSPL) is a company incorporated and tax resident in Singapore since January2001. UBSPL’s consistently profitable bakery business has grown over the years and has a current staff strength of150. Now, rather than employ more staff to help in the preparation of its cakes and pastries, UBSPL is looking atautomating its business.

UBSPL’s last board of directors’ meeting approved the following:

– To incorporate a wholly-owned subsidiary in Singapore, Fragrance Catering Pte Ltd (FCPL), to take over the assetsof the catering business currently provided by an unrelated service provider, HCB Pte Ltd (HCB). HCB is also aSingapore incorporated company which is registered for GST in Singapore. Besides catering equipment, HCB alsoowns an industrial property in Singapore. FCPL will apply for GST registration prior to taking over the assets(machinery and property) of HCB.

– To upgrade UBSPL’s kitchen machinery by purchasing the latest automated equipment.

– To accept a bank loan facility of $20 million extended by a local bank at an annual interest rate of 8%. The loanis expected to be drawn down on 1 January 2015 and will be utilised as follows:

– $2 million to pay for the latest automated kitchen machinery. This loan is expected to be fully repaid afterthree years;

– $3 million to invest in 100% of the ordinary shares in FCPL;

– $7 million to invest in 100% of the ordinary shares in Wasabe Pudding Ltd (WPL), a company incorporatedin Country W; and

– $4 million to on-lend to FCPL and $4 million to on-lend to WPL. Both these loans will have an annualinterest rate of 6% and no fixed repayment period.

The corporate tax regime in Country W levies tax at 10% on taxable income of up to $200,000 and at 20% on taxableincome in excess of $200,000.

The cost of the automated kitchen machinery, if purchased outright and funded by the bank loan, is $2 million.However, if UBSPL were to lease the machinery, this $2 million portion of the bank loan would not be needed.Instead, lease payments commencing on 1 January 2015 would be made under one of the following methods:

(1) Under an operating lease, there would be an annual payment of $0·8 million payable for three years. The lessorwill maintain and repair the machinery. At the end of the three-year period, the machinery would revert back tothe lessor.

(2) Under a hire purchase arrangement, a monthly payment of $50,000 would be payable for 44 months. Duringthe lease period, UBSPL will maintain and repair the machinery. Of the total hire purchase payments of $2·2 million, the hire purchase interest component is $200,000 and the remaining $2 million would becapitalised as non-current assets.

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Required:

As the tax adviser to Unique Bakery (Singapore) Pte Ltd (UBSPL), write a letter to the board of directors advisingon the tax implications of the following matters:

(i) The income tax deductibility of the interest incurred on the $20 million loan, including any transfer pricingconcerns, where applicable. (15 marks)

(ii) The various tax issues relevant to UBSPL arising from its purchase of the catering equipment and propertyfrom HCB Pte Ltd. (6 marks)

(iii) The income tax treatment and the relative merits (both tax and non-tax) of acquiring the latest automatedkitchen machinery through each of the three options:

– outright purchase;– operating lease; and– hire purchase.

Note: You should ignore the time value of money and support your answers with calculations. (10 marks)

Professional marks will be awarded in question 1 for the appropriateness of the format, presentation and structureof the letter, the effectiveness with which the information is communicated and its logical flow. (4 marks)

(35 marks)

7 [P.T.O.

2 Lawrence, aged 49, is married to Josephine, aged 48. The couple are both Singaporeans and they have a daughter,Joanna, who graduated from a local university in 2013 and started working in 2015.

Lawrence has been employed for many years with a foreign multinational corporation based in Singapore, but isworried that his Singapore employment may be relocated to a low cost country. His annual remuneration for thecalendar year 2015 was $200,000.

Josephine is a successful free-lance home tutor but has not set up any form of legal entity to carry on her self-employment. All of her students travel to the couple’s bungalow house to receive tuition from her. Her tuition feesfor the entire year 2015 totalled $600,000 and she is finding it hard to cope with an increased student population.

Lawrence and Josephine have accumulated savings from their past incomes and apart from their fully paid forbungalow, which is jointly owned, they are now considering buying a property estimated to cost $2 million by drawingdown on their joint account. The property will be rented out to yield rental gross income, estimated at $100,000 ayear. They intend to pass the ownership of the property to Joanna eventually so it does not matter to them who ownsthe property initially.

When approached by her parents, Joanna, who studied a basic tax course in her university days, provided them withsome tax planning tips as follows:

For her father, LawrenceJoanna explained that, as a general rule, all benefits-in-kind are taxable unless they are exempted from income taxas provided in the Income Tax Act. To minimise taxation on his employment income, she advised him to negotiatewith his employer to do the following:

1. Arrange for a portion of his salary to be paid into a bank account maintained in Brunei, as Brunei has no personalincome tax and he will not have to pay Singapore tax on this portion of his salary. This is justifiable as thecompany has a small sales office in Brunei and Lawrence has to make occasional business trips there.

2. Receive his annual bonus in alternative forms such as annual long service awards, Chinese New Year redpackets, birthday gifts, door gifts and lucky draw prizes at the company’s annual dinner and dance, holidayreimbursements, discounts to purchase company products and full or partial subsidies for all courses.

3. Include an addendum to his employment contract stating that in the event that the company decides to relocate,he will be paid a severance package computed based on his number of completed years of service.

For her mother, Josephine1. Joanna advised that since Josephine is carrying on a business, she is entitled to claim business expenses. This

would include travelling and entertainment expenses. A reasonable estimate for each will be 10% of herearnings. In addition, she could also claim a deduction on the utilities, telephone and rental expenses of thebungalow.

2. For her tax reporting, Joanna told her mother that as a self-employed person, she does not need to prepare astatement of accounts or keep proper records of her business transactions. Instead, she only needs to report afour-line statement showing revenue, gross profit/loss, allowable business expense and adjusted profit/loss. In thepast, Josephine has merely reported a two-line statement which is acceptable only for annual revenue notexceeding $100,000.

For both her parentsJoanna advised them to buy a commercial property in order to avoid the additional buyer’s stamp duty applicable tothe purchase of a second or subsequent residential property.

Also, in order to claim input tax on the goods and services tax (GST) which may be chargeable by the seller, shefurther advised her mother to register her tuition business for GST.

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Required:

(a) Comment on the validity of each of the tax planning tips raised by Joanna including recommending anyalternative tax planning ideas, where applicable. (22 marks)

(b) State the potential consequences for Lawrence and Josephine of following the advice given by their daughter,Joanna. (3 marks)

(25 marks)

9 [P.T.O.

Section B – TWO questions ONLY to be attempted

3 As a Singapore company internationalises its operations to venture offshore, it often has to grapple with the issue ofpermanent establishment (PE). Where a PE is triggered in any jurisdiction outside Singapore as a result of certainactivities carried out in that jurisdiction, then the tax authorities in that jurisdiction may seek to tax a portion of thebusiness profits earned by the Singapore company. This is so whether or not the Singapore company has establishedlegal entities in that foreign jurisdiction.

Scaling Pte Ltd (SPL) is a company incorporated and tax resident in Singapore. SPL sells computer products and alsoprovides on-site maintenance and other services, some of which can be undertaken in Singapore. To service itscustomers in Country X, SPL maintains a warehouse in Country X to keep spare computer parts and also regularlysends its maintenance staff to Country X to attend to customers.

Required:

(a) Identify and briefly explain any FIVE circumstances in which a permanent establishment (PE) may becreated by a Singapore company in a jurisdiction outside Singapore under a typical double taxationagreement based on the OECD Model Convention. (10 marks)

(b) In relation to Scaling Pte Ltd (SPL), explain any THREE actions which SPL might take to reduce the risk thatit will be regarded as having an overseas PE in Country X. (6 marks)

(c) Assuming that SPL is regarded as having an overseas PE in Country X, state the basis on which the taxpayable by the PE will be determined and the action, if any, which SPL might take to minimise the overseastax cost. (4 marks)

(20 marks)

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4 (a) You should assume today’s date is 1 December 2014.

Clarity Seminars Pte Ltd (CSPL), a company incorporated in Singapore, specialises in conducting financeworkshops for both Singaporeans and foreigners. CSPL is registered for goods and services tax (GST) inSingapore.

Due to its past successes in attracting participants, CSPL is considering engaging Steve Gordon, a professorworking at a university in the United States, on a one-year contract to render services in Singapore. Starting from1 January 2015, subject to sufficient sign-ups, Steve may be expected to travel to Singapore at least once everymonth, to conduct five-day workshops on behalf of CSPL. For each trip Steve makes to conduct a five-dayworkshop, CSPL will pay a fixed fee of $30,000 and in addition, CSPL will bear all of his airfare andaccommodation expenses, estimated to be $9,000 per trip.

CSPL has the choice of either engaging the foreign university who will send its employee, Steve, to conduct theworkshops or engaging Steve directly, in which case he will perform the services in his own capacity.

No comprehensive tax treaty has been concluded between Singapore and the United States.

Required:

(i) Explain the Singapore individual income tax implications for Steve Gordon under each of the alternativeoptions being considered by Clarity Seminars Pte Ltd (CSPL). (7 marks)

(ii) Explain the Singapore corporate income tax, goods and services tax and withholding tax implications forCSPL of the proposal to run the seminars and arrange for Steve to deliver them. (6 marks)

(b) Edmund Maid Agency Pte Ltd (EMAPL) is a company incorporated and registered for goods and services tax inSingapore. EMAPL’s office unit, a property with an annual value of $60,000, was purchased in 2015 andEMAPL has claimed the input tax on the purchase of this property as well as input tax of $140 per month onthe common expenses, such as maintenance services and utilities expenses.

During the quarter ended 30 September 2016, EMAPL allowed its related company, R Pte Ltd (RPL), to occupyone-fifth of the office unit rent free. In addition, EMAPL did not re-bill RPL for its share of the common expensesrelating to the property.

Required:

(i) Explain the goods and services tax (GST) implications for Edmund Maid Agency Pte Ltd (EMAPL) arisingfrom allowing R Pte Ltd (RPL) to occupy part of its business premises rent free. Support yourexplanations with relevant calculations. (5 marks)

(ii) State the circumstances in which EMAPL would not be required to deem a supply of services as a resultof the free usage of its property by RPL. (2 marks)

(20 marks)

11 [P.T.O.

5 Company One and Company Two were two unrelated companies incorporated in Singapore. On 1 July 2014,Company One was amalgamated with Company Two to form a new company, Company Three. Both Company Oneand Company Two were liquidated following the amalgamation in order for it to qualify for the new tax frameworkunder a statutory voluntary amalgamation, effective from 1 July 2014.

All three companies had/have a common accounting year end of 31 December. The table below shows the renovationand refurbishment (R&R) costs incurred by each of the three companies for each of the relevant years of assessment(YA):

Company YA 2013 YA 2014 YA 2015 YA 20161 January to 1 July to30 June 31 December2014 2014

One $30,000 $90,000 – – –Two – $60,000 – – –Three – – – $160,000 $240,000

Required:

(a) Explain, together with supporting calculations, the allowable deductions for renovation and refurbishmentcosts (R&R) available to each of Company One, Company Two and Company Three for each of the years ofassessment 2013 to 2018 inclusive. (10 marks)

(b) Explain the tax consequences arising from a qualifying amalgamation on each of the following items:

– capital allowances;– assets on capital account;– assets on revenue account;– impairment for accounts receivable; and– unabsorbed loss items. (10 marks)

(20 marks)

End of Question Paper

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Professional Level – Options Module ... - Home | ACCA Global · Professional Level – Options Module Time allowed: 3 hours 15 minutes This question paper is divided into two sections: