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Fundamentals Level – Skills Module, Paper F6 (POL)                                           December 2011 Answers
Taxation (Poland)                                                                               and Marking Scheme

                                                                                                        Marks
1   Forward Sp. z o.o.

    (a)   Corporate income tax (CIT) 2010
                                                                               PLN          PLN
          Gross income per accounts                                                      12,542,500
          Advance payment, excluded from taxable revenue                       12,000                    0·5
          Polish dividend, excluded in full from taxable revenue            1,500,000                    0·5
          US dividend, already included gross in revenue
          (no adjustment needed)                                                    0              0       1
          Interest on tax refunded, excluded from tax revenue                  14,500                    0·5
          Free of charge benefit (taxable)                                                   65,000        1
          Non-deductible impaired debt provisions
          (173,000 – 75,000)                                                                 98,000      1·5
          Impaired debt expired, previously accounted as
          deductible cost (additional taxable revenue)                                       14,800        1
          Motor car depreciation                                 W1                           7,000      1·5
          Additional depreciation                                W2         4,500,000                    4·5
          Representation (dinner and alcohol excluded
          from tax costs)                                                                    35,400      0·5
          Motor car insurance                                    W3                           5,500      1·5
          Expenses on private vacation of owner (not
          deductible for company)                                                            25,000      0·5
          VAT not recovered due to VAT regulations, eligible
          as a tax deductible cost (no adjustment needed)                            0            0        1
          Donation                                                                            3,000      0·5
          Interest on late payment of invoices (trade
          payables), deductible cost (no adjustment necessary)                       0             0     0·5
          Interest accrued not deductible
          (545,800 – 420,000)                                                                125,800       1
                                                                            ––––––––––   –––––––––––
          Sum of adjustments                                                 6,026,500   12,922,000
                                                                            ––––––––––   –––––––––––
                                                                                          (6,026,500)
                                                                                         –––––––––––
          Income                                                                           6,895,500
          Donation relief                                                                     (3,000)    0·5
                                                                                         –––––––––––
          Tax basis                                                                        6,892,500
                                                                                         –––––––––––
          Tax at 19%                                                                       1,309,575     0·5
          Tax credit for US Dividend                                                         (50,000)      1
                                                                                         –––––––––––
          CIT for the year ended                                                           1,259,575
          Tax advances paid to date                              W4                       (1,159,480)    1·5
                                                                                         –––––––––––     –––
          Tax payable to Tax Office                                                          100,095      21
                                                                                         –––––––––––     –––
          Workings:
          W1
          Motor car depreciation
          Accounted as cost in books 15,000
          Allowed 20,000 x 4 x 20% x 6/12 = 8,000.
          Adjustment 15,000 – 8,000 = 7,000.
          W2
          Additional depreciation
                                                                                             PLN
          Trucks (reducing balance method)
          1,000,000 x 20% x 2 x 6/12                                                        200,000
          Building (depreciated with 1·2 factor due to conditions of use)
          165,000,000 x 2·5% x 1·2 x 4/12                                                 1,650,000
          Production line (reducing balance method)
          53,000,000 x 10% x 2 x 3/12                                                      2,650,000
                                                                                          ––––––––––
                                                                                           4,500,000
                                                                                          ––––––––––


                                                                 13
                                                                                                                           Marks
      W3
      Motor car insurance
      Accounted as cost 9,000
      Allowed (20,000 x 4)/120,000 x 7/12 x 9,000 = 3,500
      Adjustment 9,000 – 3,500 = 5,500
      W4
      Tax advances paid
      Tax payable is CIT after adjustments less advances paid during the year only. The tax cost account also
      comprises other items, i.e. WHT and penalties, which need to be excluded.
      Advances: (1,450,000 – 50,000 – 240,520) = 1,159,480

(b)   The accounting provision for impaired receivables (bad debts) may be treated as a tax deductible cost if:
      –    the receivable was connected with an event which has been treated as a taxable revenue when
           accounted for (i.e. in principle only trade/sales receivables qualify as potential tax deductible bad debts),
      –    the debtor has died or filed for bankruptcy or ceased economic activity,
      –    a bankruptcy/settlement procedure is started,
      –    a post court ruling execution is started,
      –    the receivable is disputed in court.
      Only THREE required, 1 mark each                                                                         Maximum       3
                                                                                                                           –––

(c)   In principle (save for the special regulations applicable to banks) only non-recoverable trade/sales receivables
      may be recognised as impaired debts for tax purposes.                                                                0·5
      Since a non-performing loan granted several years ago is not accounted for as revenue (sale) the precondition
      for the recognition of a tax deductible impaired debt cost is not met. Thus it cannot be accounted as a cost
      for tax purposes even if it is properly proven that the loan receivable will not be recovered.                       1·5
                                                                                                                           –––
                                                                                                                             2
                                                                                                                           –––
      Tutorial note: the special regulations applicable to banks do not apply since Forward is not a bank.

(d)   The Polish CIT Act allows for:
      –    a one-off write-off up to €50,000 in the first year of operations for all taxpayers (or for small tax payers
           in all years of operation),
      –    a one-off write-off for assets individually worth less than PLN 3,500,
      –    a write-off of the remaining, not depreciated, part of the value of an asset physically destroyed,
      –    a write-off of the remaining, not depreciated, part of the value of an asset sold.
      Only TWO required, 1 mark each                                                                           Maximum       2
                                                                                                                           –––

(e)   The Polish CIT Act allows for the following methods of depreciation other than the straight-line and one-off
      write-off methods:
      –    reducing balance depreciation,
      –    individually established depreciation rates for second-hand assets,
      –    individually established amortisation rates for intangibles,
      –    specific depreciation rules for ships under construction,
      –    specific depreciation rules for assets obtained in privatisation process.
      Only TWO required, 1 mark each                                                                           Maximum       2
                                                                                                                           –––
                                                                                                                            30
                                                                                                                           –––




                                                                14
                                                                                                                 Marks
2   Mr Roman

    (a)   Personal income tax (PIT) advances 2010
          Earnings to the end of June 2010 are:
                                                         PLN
                                                        90,000     gross pay (6 x 15,000)                        0·5
                                                         5,000     relocation allowance (35,000 – (2 x 15,000)   1·0
                                                       –––––––
                                                        95,000
                                                       (13,025)    social security at 13·71%                     0·5
                                                          (668)    Costs                                         0·5
                                                       –––––––
                                                        81,307     PIT second threshold
                                                       –––––––
          Thus for first seven months advances would be withheld at 18%                                          0·5
                                                                                                      PLN
          January to July salary                                                                    105,000
          Relocation allowance                                                                         5,000
                                                                                                    ––––––––
          Social security base                                                                      110,000      0·5
          Social security
          13·71% on 94,380                                                                           (12,939)    0·5
          2·45% on excess                                                                               (383)    0·5
                                                                                                    ––––––––
          HSC base                                                                                    96,678
          Costs (111·25 x 7)                                                                            (779)    0·5
                                                                                                    ––––––––
          Taxable income                                                                              95,899
                                                                                                    ––––––––
          PIT at 18% – (556*7/12)                                                                     16,938     0·5
          less HSC at 7·75%                                                                           (7,493)    0·5
                                                                                                    ––––––––
          Advances paid                                                                                9,445
                                                                                                    ––––––––
          August to December salary                                                                   75000      0·5
          Gift                                                                                          900      1·0
          Excess per diem
          (3000 – (24 x 16))                                                                           2,616     1·0
          Hotel bills reimbursed                                                                           0     0·5
          Training related to duties                                                                       0     0·5
          Training unrelated to duties                                                                 7,000     0·5
                                                                                                    ––––––––
          Social security base                                                                       85,516
                                                                                                    ––––––––
          Social security at 2·45%                                                                    (2,095)    0·5
                                                                                                    ––––––––
          HSC base                                                                                   83,421
          Costs (111·25 x 5)                                                                            (556)    0·5
                                                                                                    ––––––––
          Taxable income                                                                             82,865
                                                                                                    ––––––––
          PIT at 32% – (556*5/12)                                                                    26,285      0·5
          less HSC at 7·75%                                                                           (6,465)    0·5
                                                                                                    ––––––––
          Advances paid                                                                              19,820
                                                                                                    ––––––––
                                                                                                                 –––
          Total advances paid                                                                        29,265       12
                                                                                                                 –––




                                                             15
                                                                         Marks
(b)   Personal income tax (PIT) 2010
                                                               PLN
      Gross salary                                           180,000
      Benefits:
      Relocation allowance                                      5,000
      Excess per diem                                           2,616
      Gift                                                        900
      Training not related to duties                            7,000
                                                             ––––––––
      Total emoluments (as per part (a))                     195,516     0·5
                                                             ––––––––
      Social security:
      at 13·71% on 94,380                                     (12,939)   0·5
      on excess at 2·45%                                       (2,478)   0·5
                                                             ––––––––
      HSC base                                               180,099
      Costs of employment                                      (1,335)   0·5
      Assignment with Regres (50% cost deduction)               5,000      1
      Rent of apartment (10,000 – (6,000 + (988*40*1·5%)))      3,407      2
      Sale of car (100,000 – (30,000 + 35,000))                35,000      1
                                                             ––––––––
      Total income                                           222,171
                                                             ––––––––
      Half income                                            111,085     0·5
                                                             ––––––––
      PIT:
      On first 85,528                                         14,839
      On excess at 32%                                          8,178
                                                             ––––––––
                                                              23,017     0·5
                                                             ––––––––
      x2                                                                 0·5
                                                              46,034
      Less
      Child relief                                             (2,224)     1
      HSC on employment at 7·75% (as per part (a))            (13,958)   0·5
      HSC on assignment at 7·75%                                 (775)     1
                                                             ––––––––
      Tax for the year                                         29,077
      Advances withheld (29,265 + 125)                        (29,390)     1
                                                             ––––––––
      Tax due/(refund)                                           (313)   0·5
                                                             ––––––––
      Interest income taxed separately – PLN                             0·5
      Tax withheld by bank at 19%                              4,750       1
                                                                         –––
                                                                          13
                                                                         –––
                                                                          25
                                                                         –––




                                                      16
                                                                                                                  Marks
3   Mediabazar Sp. z o.o.

    (a)   Value added tax (VAT) June 2010
                                                    VAT rate                                          VAT PLN
          Output VAT
          Sales of products                            22%     1,580,000     x 22/122                 284,918     0·5
          Export of products                            0%       500,000     x 0%                            0    0·5
          Sales of financial services                exempt      540,000     exempt                          0    0·5
          Intra community purchase of goods            22%       700,000     x 22%                    154,000     0·5
          Import of services                           22%       200,000     x 22%                     44,000       1
          Goods given free of charge                   22%       120,000     x 22/122                  21,639       1
                                                                                                      ––––––––
          Total                                                                                       504,557
                                                                                                      ––––––––
          Input VAT
          Purchase of products                           22%       800,000   x 22/122                  144,262    0·5
          Purchase of store furniture                    22%       150,000   x 22/122                   27,049    0·5
          Purchase of courier services                   22%        15,000   connected to exempt sales        0     1
          Purchase of server                             22%        80,000   x 22/122 x 80%             11,541      1
          Intra community purchase of goods              22%       700,000   x 22%                     154,000      1
          Import of services                             22%       200,000   x 22% x 80%                35,200      1
                                                                                                       ––––––––
          Total                                                                                        372,052
                                                                                                       ––––––––
          Excess of output VAT (payable to tax office)                                                132,505
                                                                                                      ––––––––    –––
                                                                                                                    9
                                                                                                                  –––

    (b)   Year-end adjustment for June 2010
                                                                                                         PLN
          VAT on purchases of services related to mixed supplies                                       44,000
                                                                                                       –––––––
          Recovered at 80% ratio                                                                       35,200
          Allowed recovery at actual 70% ratio                                                         30,800
                                                                                                       –––––––
          Correction (additional VAT payable)                                                            4,400      1
                                                                                                       –––––––
          VAT on purchases of fixed assets related to mixed supplies                                   14,426
                                                                                                       –––––––
          Recovered at 80% ratio                                                                       11,541
          Allowed recovery at actual 70% ratio                                                         10,098
                                                                                                       –––––––
          Difference                                                                                     1,443      1
          First correction out of five                                               x 1/5
          Correction (additional VAT payable)                                                             289       2
                                                                                                       –––––––    –––
                                                                                                                    4
                                                                                                                  –––

    (c)   Adjustment on sale of server in February 2011
          VAT on purchases of fixed assets related to mixed supplies                                   14,426
                                                                                                       –––––––
          Recovered at 80% ratio                                                                       11,541
          Allowed recovery at sale 100%                                                                14,426
                                                                                                       –––––––
          Difference                                                                                    (2,885)     1
          Outstanding corrections cumulated (5 – 1)                                  x 4/5
          Correction (additional VAT recoverable)                                                       (2,308)     1
                                                                                                       –––––––    –––
                                                                                                                    2
                                                                                                                  –––
                                                                                                                   15
                                                                                                                  –––




                                                                   17
                                                                                                                         Marks
4   Mr Jan Planer

    Option 1 Limited liability company
    Total tax and social security burden for Mr Planer
                                                                                                             PLN
    CIT                                                                                                     14,541       0·5
    Social security (employer)                                                                               2,867       0·5
    Social security (own)                                                                                    2,139       0·5
    PIT                                                                                                      1,627       0·5
    PIT on dividend                                                                                         11,778       0·5
                                                                                                           –––––––
    Total                                                                                                   32,952
    Saving on interest                                                                                     (15,000)      0·5
                                                                                                           –––––––
    Net burden                                                                                              17,952
                                                                                                           –––––––
    Option 2 Individual business activity
    Total tax and social security burden for Mr Planer
                                                                                                             PLN
    PIT                                                                                                    12,347        0·5
    Social security                                                                                          8,318       0·5
                                                                                                           –––––––
                                                                                                           20,665
                                                                                                           –––––––
    Difference (saving): 20,665 – 17,952 = 2,713                                                                         0·5
    While the total tax burden on operations via a corporate entity at PLN 32,952, is PLN 12,287 higher as compared
    to that for an individual business activity of PLN 20,665, the reduction of financing costs by PLN 15,000 will
    make up for this difference, yielding an overall net benefit of PLN 2,713. Thus, assuming the reduction of
    financing costs and assuming that there will be no other significant additional costs arising from operating via a
    limited liability company, option 1 may be recommended as more beneficial.                                           1·5
    Workings:
    W1 Option 1
                                                                                                             PLN
         Operating income                                                                                 150,000
         Financing costs                                                                                   (55,000)      0·5
         Salary                                    (1,300 x 12)                                            (15,600)        1
         Social security (employer)                (15,600 x 18·38%)                                        (2,867)        1
                                                                                                          ––––––––
         Tax base                                                                                           76,533
                                                                                                          ––––––––
         CIT                                       19%                                                     (14,541)      0·5
                                                                                                          ––––––––
         Net profit = dividend                                                                              61,992
                                                                                                          ––––––––
         PIT
         Revenue                                                                                           15,600        0·5
         Social security (15,600 x 13·71%)                                                                  (2,139)      0·5
         Lump sum costs                                                                                     (1,335)      0·5
                                                                                                          ––––––––
         Tax base                                                                                          12,126
                                                                                                          ––––––––
         Tax                                       18%                                                       2,183
         Less                                                                                                 (556)
                                                                                                          ––––––––
         Tax due                                                                                             1,627       0·5
                                                                                                          ––––––––
         PIT on dividends                          (61,992 x 19%)                                           11,778         1




                                                                 18
                                                                                                                               Marks
    W2 Option 2
          Social security contributions
          Basis = 3,600 x 12 x 60% = 25,920                                                                                      1
          Contributions = 25,920 x 32·09% = 8,318                                                                              0·5
                                                                                                                   PLN
          PIT
          Operating income                                                                                      150,000
          Financing costs                                                                                        (70,000)      0·5
          Social security                                                                                         (8,318)      0·5
                                                                                                                ––––––––
          Tax base                                                                                                71,682
                                                                                                                ––––––––
          Tax                                         18%                                                         12,903
          Less                                                                                                      (556)
                                                                                                                ––––––––
                                                                                                                  12,347       0·5
                                                                                                                ––––––––       –––
                                                                                                                                15
                                                                                                                               –––


5   Matejko Sp. z o.o.

    (a)   Deductible interest
          El Greco and Durer both qualify as entities triggering the thin capitalisation restrictions for Matejko (creditors
          are direct parent and sister company with shareholding >25%).                                                          1
          Interest paid as at 31 December 2010 is PLN 975,000                                                                    1
          (9,000,000 x 5% x 2) + (3,000,000 x 10% x 3/12)
          Qualifying debt as at 31 December 2010 is PLN 12,975,000                                                               1
          (9,000,000 + 3,000,000 + 975,000)
          Tutorial note: some interpretations issued by the tax authorities state that the interest is not taken into
          account in the calculation of qualifying debt. Marks awarded for answers using either interpretation.
          Qualifying equity is PLN 2,000,000 (only registered share capital counts, registered capital covered by a debt
          to equity swap or contribution of non-depreciable intangibles is not allowed as qualifying equity).                    2
          Maximum allowed debt to equity ratio is 3:1
          Thus interest allowed is PLN 450,867                                                                                   1
          (975,000 x (3 x 2,000,000/12,975,000))
          Regarding the loan from Zurbaran, only arm’s length interest is tax deductible. Thus interest allowed is
          PLN 2,000,000 (20,000,000 x 10%).                                                                                      1
          Interest on the loan from Kossak is PLN 800,000 (8,000,000 x 10%) and is fully tax deductible.                         1
          Total deductible interest for 2010 is therefore PLN 3,250,867.
                                                                                                                               –––
                                                                                                                                 8
                                                                                                                               –––

    (b)   Withholding tax remittable
          Withholding tax on the interest to El Greco is PLN 45,000 (900,000 x 5%). Based on the Interest and
          Royalty (I&R) Directive implemented into Polish law the withholding tax rate to be used is 5%, since Matejko
          is subsidiary of El Greco holding >25% of its shares.                                                                1·5
          Withholding tax on interest to Durer is PLN 3,750 (75,000 x 5%).
          In this case the 5% rate results either from the DTT or the I&R Directive.                                             1
          Withholding tax on the interest to Zurbaran is PLN 800,000 (20,000,000 x non-qualifying interest 20% x
          WT 20%). Interest in excess of arm’s length level does not benefit from DTT protection.                              1·5
          No withholding tax is due on the interest payments to a Polish entity (Kossak).                                        1
                                                                                                                               –––
                                                                                                                                 5
                                                                                                                               –––

    (c)   A taxpayer is obliged to calculate and pay tax on its own behalf.                                                      1
          A tax remitter is obliged to calculate, withhold and remit tax on behalf of another person or company.                 1
                                                                                                                               –––
                                                                                                                                 2
                                                                                                                               –––
                                                                                                                                15
                                                                                                                               –––

                                                                    19

				
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