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Part 2 Examination – Paper 2.3(RUS)
Business Taxation (Russia)                                                                                           June 2006 Answers

1   (a)   Profits tax liability for ZAO Kroll:                                                                          MRR
          Domestic sales 35,400*100/118                                                                                30,000
          Export sales                                                                                                  2,540
          Direct expenses:
          Cost of goods qualified for profits tax (Note 1)                                                            (16,320)
          Transport expenses (Note 2)                                                                                    (935)
          Indirect expenses:
          Wages and salaries (all indirect, since Kroll is a trading company)                                           (3,507)
          Unified social tax 3,507*26%                                                                                    (911·8)
          Depreciation for the trade fixed assets purchased in 2006 (Note3)                                               (113·4)
          Initial 10% write off for the trade fixed assets 991·2*100/118*10%                                               (84)
          Depreciation for the administrative fixed assets (Note 4)                                                        (13·5)
          Initial 10% write off for the administrative fixed assets 424·8*100/118*10%                                      (36)
          Initial 10% write off for capital improvements 590*100/118*10%                                                   (50)
          Depreciation for capital improvements (Note 5)                                                                   (26·2)
          Non-operational expenses:
          Bad debts expenses (Note 6)                                                                                    (208·3)
          Interest expenses (Note 7)                                                                                     (760·9)
          Rent expenses 11*0,3363*100/118                                                                                   (3·1)
                                                                                                                       –––––––––
          Taxable profit before loss c/f                                                                                9,570·8
          Loss carried forward (50%) (Note 8)                                                                          (4,785·4)
                                                                                                                       –––––––––
          Taxable profits                                                                                               4,785·4
                                                                                                                       –––––––––
          Tax at 24%                                                                                                    1,148·5
                                                                                                                       –––––––––
          Note 1 Cost of sold merchandise goods
          (1,200 + 21,240*100/118)*0·85= 16,320
          Note 2 Allocation of transportation costs:
          Total transport costs 118*100/118 + 1,180*100/118 = 1,100
          Goods for sale 1,200 + 21,240*100/118 = 19,200
          16,320/19,200*1,100 = 935
          Cost of goods sold/Goods for sale * total transportation costs = deductible transportation costs.
          Note 3 Depreciation for the trade fixed assets:
          (991·2*100/118 – one off w/o 84)*20%/12*9 months = 113·4
          Note 4 Depreciation for the administrative fixed assets:
          (424·8*100/118 – one-off w/o 36)*10%/12*5 months = 13·5
          Note 5 Depreciation for the capital improvements:
          Treated as depreciable property for the lessee, if the lessor agreed to them, but their cost is not reimbursed by the lessor.
          (590*100/118 – 50)*1/120*7
          Note 6 Calculation of bad debt provision as at 31 December 2006:
          82·6*100% + 216*50% + 96*0% = 82·6 + 108 = 190·6
          Employee debt should be excluded from bad debt (only customer’s debts qualified for this)
          The amount is limited to 10% of revenue: 190·6 is less than 10%* 32,540 = 3,254
          Total bad debt expenses: bad debt written off + bad debt provision = 190·6 + 17·7 = 208·3
          Note 7 Calculation of interest expenses and sum differences
          ZAO Kroll calculates deductible interest on a quarterly basis taking into account foreign gains/losses. The Central Bank interest
          rate is based on the loan issuance date due to the lack of a special provision in the loan agreement. Deductible interest will
          be less than the maximum allowed interest for loans issued in UE of 1·1 of the Central Bank’s rate of 50%.
          Sum differences on the principal loan amount and on loan interest will be accrued only when the loan principal and loan
          interest are paid (in full or in part). Since no payments of interest and no repayments of loan principal were made in 2006,
          no sum differences should be recognised in 2006.
          Interest expenses recognised on the last day of each tax period (quarter):
          Since UE is linked to the USD, and interest should be accrued on each quarterly reporting date, we should use the foreign
          exchange rate at the end of each quarter.
          3rd quarter (8 July–30 September):700 UE *(24 + 31 + 30)/365*8%*27·5 = 358·6 RR
          4th quarter (1 October–31 December) 700 UE *(31 + 30 + 31)/365*8%*28·5 = 402·3 RR
          Total interest for the year = 760·9 RR




                                                                   15
          Note 8
          Maximum losses available to be carried forward based on FIFO: 2,700 + 3,000 = 5,700 mln RR
          Losses allowed to be carried forward: 50%* 9,570·8 = 4,785·4 mln RR: 2,700 from 2002 + 2,085·4 from 2003.

    (b)   Accruals method for VAT since 1 January 2006 but transitional rules should be applied for 2005:
                                                                                                       mRR
          Output VAT
          VAT on sales 30,000*18%                                                                     5,400
          VAT on payment (reduction of balance of accounts receivable)
          for pre-2006 sales (4,720 – 2,360)*18%                                                       424·8
          VAT on 2006 domestic prepayments received 10,266*18/118                                    1,566
          VAT on written off bad debts 17·7*18/118                                                        2·7
                                                                                                   ––––––––––––––
          Total output VAT                                                                           7,393·5
          Input VAT
          Less: recovery of VAT on 2005 prepayments 8,260*18/118                                     (1,260)
          Less VAT recovered on pre-2006 purchases (2,650 – 795)*18%                                   (333·9)
          Less VAT on merchandise goods 21,240*18/118                                                (3,240)
          Less VAT on direct transport expenses 1,180*18/118                                           (180)
          Less VAT on trade and administrative fixed assets (991·2 + 424·8)*18/118                     (216)
          Less VAT recovered on capital construction 5,900*18/118                                      (900)
          Less VAT recovered on capital improvement 590*18/118                                          (90)
          Less VAT on rent 0,3363*18/118 * 11 months                                                     (0·5643)
                                                                                                   ––––––––––––––
          Total input VAT                                                                            (6,220·4)
          VAT payable                                                                                1,173·1
                                                                                                   ––––––––––––––


2   (a)   (i)   Personal income tax liability withheld by employer (‘Landiker’) at 13%:
                                                                                                    RR
                Gross salary accrued 80,000*100/87*12                                            1,103,448
                Less:
                Standard personal allowance applies up to 20,000 RR threshold                           N/A
                Standard children allowance applies up to 40,000 RR threshold                           N/A
                Employer’s insurance contributions to non-state pension fund – not taxable                0
                Bonus trip to Italia                                                                 50,000
                Imputed interest on corporate loan (Note 1)                                         419,302
                No housing incentive since title of ownership only since 2007                             0
                                                                                                 ––––––––––
                Taxable income subject to 13%                                                     1,572,750
                Tax withheld at 13%                                                                (204,458)
                Note 1
                Imputed interest on corporate loan:
                7 March–6 July 2006
                Deemed interest 1,500,000*3/4*50%*(25 + 30 + 31 + 30 + 6)/365= 188,014
                Actual interest 1,500,000*9%*122/365 = 45,123
                7 July–31 December 2006
                Deemed interest 2,000,000 *3/4*50%*(25 + 31 + 30 + 31 + 30 + 30)/365 = 363,699
                Actual interest 2,000,000 *9%*177/365 = 87,288
                Imputed interest income: 188,014 + 363,699 – 45,123 – 87,288 = 419,302




                                                                 16
          (ii)   Final settlement of Pavel’s personal tax liability based on his 2006 personal tax return:
                                                                                                             RR
                 Income subject to 13%
                 Employment income (including bonus trip)                                             1,153,448
                 Imputed interest income on corporate loan                                              419,302
                 Inherited plot of land from his close relative (father) not taxable                           0
                 Medical deduction for his father’s medical treatment 38,000 out of 50,000               (38,000)
                 No educational deduction for his wife                                                         0
                 Medical deduction for his sister                                                              0
                 No housing incentive since title of ownership only since 2007                                 0
                                                                                                      ––––––––––
                 Taxable base at 13% rate                                                              1,534,750
                 Tax to be paid at 13% rate                                                            199,517·5
                                                                                                      ––––––––––
                 Tax withheld at source at 13%                                                        (204,457·5)
                                                                                                      ––––––––––
                 Tax refund at 13% rate                                                                      (4,940)
          (iii) Final settlement of Julia’s personal tax liability based on her personal income tax return:
                                                                                                             RR
                 Income subject to 13%
                 Income from sales of her paintings                                                        300,000
                 Children allowance (not applicable as she does not have relevant income,
                 in September her income exceeds 40,000)
                 If Julia chooses to claim the deduction of actual costs confirmed with documents,
                 she would be able to deduct only the sum of:
                 – 10% gallery’s fee                                           30,000
                 – Unified social tax (10% * (300,000 – 30,000))               27,000
                                                                               –––––––
                                                                               57,000, i.e. 19% of gross income.
                 It is therefore more beneficial for her to claim the professional deduction for
                 painters (30%) in the amount of                                                           (90,000)
                 No charity deduction for the paintings since it is allowed only for cash contributions          0
                 Apartment sales proceeds 2,500,000*60%                                                  1,500,000
                 Property deduction of full proceeds as owned for more than three years                 (1,500,000)
                                                                                                        ––––––––––
                 Taxable base at 13% rate                                                               210,000
                 Tax to be paid at 13% rate                                                              27,300
                                                                                                      ––––––––––
                 Tax withheld by art gallery                                                                none (see the question)
                 Tax payment                                                                             27,300
                 Income subject to 35% in respect of new car prize in lottery:
                 Market value of prize with VAT                                                        1,000,000 RR
                 Less exempt amount                                                                       (4,000) RR
                                                                                                      ––––––––––
                 Total income subject to 35%                                                             996,000 RR
                                                                                                      ––––––––––
                 Tax to be paid at 35% rate                                                             348,600 RR
                                                                                                      ––––––––––
                 Total tax payable by Julia upon her tax declaration                                    375,900 RR

    (b)   If the prize is granted as a benefit-in-kind (Nissan car) and there are no cash payments from RidM to Julia then the personal
          income tax withholding is not performed by the tax agent. If the tax withholding is not possible within the next 12 months
          the tax agent must report on this in writing to the tax authority within one month starting from the day of granting the above
          benefit-in-kind.


3   (a)   The new transitional rule for the VAT unrecovered balances as at 1 January 2006 in respect of materials/services acquired
          before 1 January 2005 for capital construction for own needs is as follows:
          Input VAT should be recovered under one of the following conditions:
          (1) if the relevant construction assets are completed and recorded in the accounts, provided that these assets will be used
              in VAT taxable operations or
          (2) upon the realisation of the non-completed capital construction objects.




                                                                   17
    (b)   The new rule says that the date of the VAT tax base will be the last day of each reporting month.
          September VAT liability:
          Building cost: 354,000*100/118 + 400,000 + 118,000*100/118 + (400,000*26%) = 904,000
          Output VAT: 904,000*18%                                                                                   162,720
                                                                                                                   ––––––––
          Input VAT on claimed materials and services:
          (354,000 + 118,000)*18/118                                                                                 (72,000)
          Recovery of VAT balance in respect of transitional rules for input VAT claimed by construction third party
          before 2005 – from the month when put into use:
          295,000*18/118                                                                                             (45,000)
          Recovery of VAT balance in respect of transitional rules for input VAT claimed by third party constructors
          from 2005 – evenly during the year 2006 unless put into use earlier:
          800,000/12                                                                                                 (66,667)
                                                                                                                   ––––––––
          Total input VAT:                                                                                         (183,667)
          VAT refund for September                                                                                  (20,947)
          October VAT liability:
          Building cost = (236,000 + 177,000)*100/118 + 350,000*26% + 350,000 = 791,000
          Output VAT: 791,000*18%                                                                                  142,380
                                                                                                                   ––––––––
          Input VAT:
          (236,000 + 177,000)*18/118                                                                                (63,000)
          Recovery of September self-assessed VAT on capital construction                                          (162,720)
          Recovery of VAT balance in respect of transitional rules for input VAT claimed by third party
          constructors from 2005:
          Input VAT on the fixed asset built in March 2005 was 72,000 RR (472,000*18/118). However,
          in January–September 2006 Skladvest recovered nine twelfths of it, therefore in October upon its
          being put into use Skladvest may recover only the remaining balance of:
          (72,000*(12 – 9)/12)                                                                                      (18,000)
          The remaining VAT balance as of 1 January 2006 should be recovered evenly:
          (800,000 – 72,000)/12                                                                                     (60,667)
                                                                                                                   ––––––––
          Total input VAT:                                                                                         (304,387)
          VAT refund for October                                                                                   (162,007)


4   (a)   2006 Income subject to 13% rate:
                                                                                                        in RR
          Salary (10,875*100/87)*12                                                                    150,000
          Financial aid 3,000*4                                                                         12,000
          Business trip expenses:
          Flight tickets – not taxable                                                                        0
          Taxi bill – not taxable                                                                             0
          Hotel bill – not taxable                                                                            0
          Hotel telephone bills – not taxable for business calls                                              0
          Restaurant bills 200*36                                                                         7,200
          Museum tickets 70*36                                                                            2,520
          Less:
          Deduction on financial aid to employee                                                         (4,000)
          Standard allowance only for January (income less than 20,000 RR)                                 (400)
          Children allowance for widow should be doubled 1200*3                                          (3,600)
          (for Jan–March cumulative income 37,500 RR less than 40,000 RR)
          Educational deduction maximum 38,000 out of 45,000                                            (38,000)
          Less per diem allowance (for 3 nights) 77*3 *36 + 100 (for last night)                         (8,416)
                                                                                                       ––––––––
          Total income subject to 13% rate                                                             117,304
                                                                                                       ––––––––
          Tax at 13% rate                                                                                15,250
                                                                                                       ––––––––
          Income subject to 35% rate:
          Imputed interest on interest free loan:
          50,000*3/4* (50% – 0%)*(30 + 31 + 31 + 30 + 31 + 30 + 31)/365                                 10,993
                                                                                                       ––––––––
          Tax at 35%                                                                                      3,848
                                                                                                       ––––––––
          Total tax                                                                                     19,098
                                                                                                       ––––––––


                                                                 18
    (b)   Unified Social Tax on Isedora’s income for the year 2006:
          Only her salary will be subject to UST:
          150,000*26% = 39,000 RR
          Financial aid – not taxable for UST since source of finance is profits after tax
          Business trip benefits (tickets, accommodation, calls, taxi to airport) excluded from UST under Tax Code provisions – sub point
          2 point 1 Article 238
          Restaurant bills and museums tickets are excluded from UST base since they are treated as non-deductible expenses.
          Imputed interest income should also be excluded from UST base since this item does not constitute remuneration from
          employer.


5   (a)   Option 1. Loan from Russian bank but guaranteed by the foreign company TMM which owns 60% share in Alfa-Julietta.
          Thin capitalisation rules will be applied if the following conditions are met:
          (1) share of ownership of the foreign company-guarantor is more than 20% (this criterion has been met by the bank’s loan
              as TMM owns 60% of Alfa-Julietta)
          (2) controlled debt compared to the net assets at the end each reporting period is more than 3:
              Option 1                   Formula                           1 quarter       2 quarter       3 quarter      4 quarter
          [A] date of receiving the loan                                  08.01.2006
          [B] Loan amount, USD                                             3 100 000 3 100 000 3 100 000                 3 100 000
          [C] interest rate per annum                                             5·5%          5·5%            5·5%          5·5%
          [D] date of thin cap test                                       31.03.2006 30.06.2006 30.09.2006              31.12.2006
          [E] forex rate at this date                                            28·61         28·80           28·85         28·90
          [F] # of days in the quarter   for 1 quarter: [D] – [A]                    82            91              92           92
          [G] own capital, RR            [assets] – [liabilities] + [tax
                                         liabilities]                    200 100 000 30 200 000 30 200 000              30   200   000
          [H] loan principal amount, RR [B]*[E]                           88 691 000 89 280 000 89 435 000              89   590   000
          [I] accrued interest, RR       [H]*[C]*[F]/365                   1 095 881 1 224 237 1 239 839                 1   241   987
          [J] total controlled debt, RR [H] + [I]                         89 786 881 90 504 237 90 674 839              90   831   987
                                         Is less than                      is less than is more than is more than
          [K] 3 times own capital, RR [G]*3                              600 300 000 90 600 000 90 600 000              90 600 000
          Conclusion                                                       No thin cap    no thin cap        thin cap       thin cap
          [L] Thin cap ratio             [J]/([G]*60%*3)                              1              1         1,668          1,671
                                                                           –––––––––– –––––––––– ––––––––––              ––––––––––
          [M] Interest deduction, RR     [I]/[L]                           1 095 881 1 224 237              743 289        743 289
                                                                           –––––––––– –––––––––– ––––––––––              ––––––––––
                                                                                             Total interest deduction    3 806 696
                                                                                                                         ––––––––––
                                                                                                                         ––––––––––
          Option 2. 2,100,000 USD loan from Tessa and 1,000,000 from sister company LLL
          Tessa’s indirect holding ratio is 0·6*0·70 = 0·42 or 42% > 20%, therefore Tessa’s loan meets the 20% control test.
          Since LLL is affiliated with TMM, the LLL’s loan also meets the 20% control test and the indirect holding ratio for LLL’s loan
          is the same as in Option 1, i.e. 60%.
               Option 2                          Formula                                    2 quarter          3 quarter    4 quarter
          [A] date of receiving the loans                                                  01.04.2006                 n/a 15.10.2006
          [B1] 1st loan amount, USD                                                         2 100 000         2 100 000 2 100 000
          [B2] 2nd loan amount, USD                                                                                        1 000 000
          [C] interest rate per annum                                                               5·5%            5·5%         5·5%
          [D] date of thin cap test                                                         30.06.2006 30.09.2006 31.12.2006
          [E] forex rate at this date                                                              28·80           28·85        28·90
          [F1] # of days in the quarter                                                                90              92           92
          [F2] # of days of 2nd loan           for 4 quarter: [D] – [A]                                                             77
          [G] own capital, RR                  [assets] – [liabilities] + [tax liabilities] 30 200 000 30 200 000 30 200 000
          [H1] 1st loan principal, RR          [B1]*[E]                                     60 480 000 60 585 000 60 690 000
          [H2] 2nd loan principal, RR          [B2]*[E]                                                  0              0 28 900 000
          [I1] accrued % on 1st loan, RR       [B1]*[E]*[C]*[F1]/365                            820 208         839 891      841 346
          [I2] accrued % on 2nd loan, RR       [B2]*[E]*[C]*[F2]/365                                     0              0    335 319
          [J] total controlled debt, RR        [H1] + [H2] + [I1] + [I2]                    61 300 208 61 424 891 90 766 665
                                               is less than                                  is less than is more than
          [K] 3 times own capital, RR          [G]*3                                        90 600 000 90 600 000 90 600 000
               Conclusion                                                                    No thin cap      no thin cap     thin cap
          [L1] 1st loan's thin cap ratio       [J]/([G]*42%*3)                                           1              1       2,385
          [L2] 2nd loan's thin cap ratio       [J]/([G]*60%*3)                                           1              1       1,670
                                                                                             –––––––––– –––––––––– ––––––––––
               1st loan interest deduction, RR [I1]/[L1]                                        820 208         839 891      352 717
               2nd loan interest deduction, RR [I2]/[L2]                                                 0              0    200 822
                                                                                             –––––––––– –––––––––– ––––––––––
                                                                                                 Total interest deduction 2 213 638
                                                                                                                           ––––––––––
                                                                                                                           ––––––––––
                                                                   19
    (b)   Total interest accrued in Option 1 is 4,801,944 RR, of which deductible interest is 3,806,696 RR (79·27%). Total interest
          accrued in Option 2 is 2,836,764 RR, of which deductible interest is 2,213,638 RR (78·03%). 79·27% > 78·03%,
          therefore Option 1 is more preferable in terms of minimising the effect of thin capitalisation rules in 2006.


6   (a)                                               Entrepreneur           Entrepreneur            Purchasing director
                                                      (deduction of        (20% deduction)       up to May
                                                      actual costs)                                                from June
          Gross salary 90,000 * 7 mths                                                                              630,000
          Business income for 12 mths                  1,500,000             1,500,000
          Business income for 5 mths                                                              625,000
          Professional deduction                                              (300,000)
          Sports membership                                                                                            16,000
          Business expenses:
          Employees’ salary for 12 mths                 (360,000)
          Employees’ salary for 5 mths                                                           (150,000)
          UST on salary (all in 26% band)                 (93,600)                                (39,000)
          Exit pay (not subject to UST)                                                           (60,000)
          Depreciation –                                 (15,583)                                  (5,667)
          Rent office 28,000*12 mths                    (336,000)
          Rent office 28,000*5 mths                                                              (140,000)
                                                       –––––––––           ––––––––––           –––––––––
          Business income                               694,817             1,200,000             230,333
          UST on business income                         (41,416)             (57,520)*           (23,033)
          Taxable income                                653,401            1,200,000              207,300             646,000
                                                                   *(no deduction of UST)
          Tax at 13%                                      (84,942)           (156,000)            (26,949)            (83,980)
          Depreciation for 2006: (60,000*20% + 50,000*10%) = 17,000 RR*11/12 = 15,583 RR
          Depreciation for February–May 2006: (60,000*20% + 50,000*10%)*4/12 = 5,667 RR
          UST with actual expenses: 280,000*10% + 320,000*3·6% + 94,817*2% = 41,416 RR
          UST with 20% deduction: 280,000*10% + 320,000*3·6% + (1,500,000 – 600,000)*2% = 57,520 RR
          UST payable by Sergei if he ceases business in May: 230,333*10% = 23,033 RR
          His bonus will be accrued and paid in March 2007, therefore is not included in 2006 tax base.

    (b)                                                 Option 1               Option 2              Option 3
                                                      Entrepreneur           Entrepreneur       Purchasing director
                                                    (actual expenses)      (20% deduction)
          Cash income                                  1,500,000             1,500,000             1,255,000
          Non-cash benefits                                     0                      0              16,000
          Business cash expenses                        (789,600)             (789,600)             (389,000)
          (not including Sergey’s own
          taxes and depreciation)
          Business capex                                 (110,000)            (110,000)              (110,000)
          PIT                                              (84,942)           (156,000)              (110,929)
          UST paid by Sergey                               (41,416)            (57,520)               (23,033)
          (Note: UST on his salary is the employer’s cost)
                                                        –––––––––            ––––––––––             –––––––––
          Total net disposable income                     474,042              386,880               638,038
          Under option 3 Sergey would have the biggest net disposable income, therefore option 3 is the most preferable for Sergey in
          2006.


7   (a)   Existing asset 1
          Immediate 10% write off: 472,000*100/118 + 236,000*100/118 = 600,000*10% = 60,000 RR
          Old monthly depreciation 590,000*100/118*10%/12= 4,166·7 RR
          Depreciation before modernisation for the four months of 2006:
          4,166·7*4 = 16,666·8 RR
          K = 1/(120 + 60)*100 = 0·5555%
          Monthly depreciation amount would be: (500,000+ (600,000 – 60,000))*0·5555% = 5,777·2 RR
          Depreciation for the year 2006 under new useful life after modernisation:
          5,777·2*8 = 46,217·6 RR
          Should be accrued from the month following the modernisation i.e. from May 2006
          Total 2006 depreciation of the existing asset: 16,666·8 + 46,217·6 = 62,884·4 RR




                                                                20
      Production line appears on the balance sheet of ‘Siesta’:
      Tax depreciation per month:
      1,168,200*100/118*10%/12 = 8,250 RR
      Tax depreciation for the whole year 2006: 12*8,250 = 99,000 RR
      10% immediate write-off of capital improvements: 354,000 *100/118 * 10% = 30,000 RR
      Depreciation of capital improvements – (354,000*100/118 – 30,000)/3/12 = 7,500 RR per month
      Reimbursed in May, therefore depreciation should be accrued from May 2006:
      8*7,500 = 60,000 RR
      Total 2006 depreciation and write-off of the production line: 99,000 + 30,000 + 60,000 = 189,000 RR
      New minivan:
      10% immediate write-off: 507,400*100/118 = 430,000*0·10 = 43,000 RR
      Since the cost of the minivan is more than 400,000 RR, the monthly depreciation should be calculated using the 0·5 ratio:
      (430,000 – 43,000)*0·5*14·28%/12 = 2,302·65 RR
      Total depreciation and write-off for the year 2006 (June-December):
      7 months*2,302·65 = 16,118·55 + 43,000 = 59,118·55 RR

(b)   If the lessor Siesta approved but did not reimburse the cost of the capital improvements to the lessee under the rental
      agreement, the capital improvements should be subject to depreciation by the lessee only during the rent period. In this case
      the useful life of the leased fixed assets would be based on the fixed assets classification approved by the Russian
      Government, which does not necessarily match the rent period.
      In respect of the lessee, depreciation starts from the 1st day of the month following the month of putting the fixed asset into
      use.
      The lessee has a right to apply the 10% write-off to the cost of capital improvements incurred by him.
      The lessor would not have a right to depreciate the capital improvements in the above scenario.




                                                              21
Part 2 Examination – Paper 2.3(RUS)
Business Taxation (Russia)                                                                              June 2006 Marking Scheme

                                                                                                                 Marks
1   (a)   Correct domestic sales net of VAT                                                                       1/
                                                                                                                    2
          Correct export sales (no VAT)                                                                           1/
                                                                                                                    2
          Ignore cash collections received related to 2006 sales                                                  1/
                                                                                                                    2
          Cost of inventory sold (net of VAT – 1/2, correct calculation 1/2)                                       1
          Total transportation cost net of VAT                                                                     1
          Application correct ratio cost of sales/goods for sale to the total transportation costs                 1
          Wages and salaries (all direct costs, no pro-ration)                                                    1/
                                                                                                                    2
          Unified Social Tax under correct rate                                                                   1/
                                                                                                                    2
          Correct depreciation of the trade fixed assets
          (1/2 net of VAT value, 1/2 for applying correct tax rate, 1/2 for correct number of months)             11/2
          Correct depreciation of the administrative fixed assets
          (1/2 net of VAT value, 1/2 for applying correct tax rate, 1/2 for correct number of months)             11/2
          Immediate 10% write-off for trade fixed assets, capital improvements, administrative fixed assets
          (1/2 for both trade and admin assets, 1 per capital improvements)                                        2
          Exclusion of 10% write-off from depreciable value of fixed assets (1/3 per each: trade assets,
          admin.fixed assets, capital improvements)                                                                1
          Capital improvements depreciation for the leasee (since lessor does not reimburse)
          (1/2 – net of VAT, 1/2 – correct depreciation rate , 1/2 – number of months)                            11/2
          Bad debt provision:
          calculation of bad debt provision (1/2 for 100%, 1/2 for 50%)                                            1
          using VAT inclusive amounts                                                                              1/
                                                                                                                     2
          the amount is limited by 10% of accruals sales less VAT                                                  1/
                                                                                                                     2
          ignore employee debt for the bad debt provision                                                          1/
                                                                                                                     2
          total amount of bad debt expenses – bad debt provision + bad debts write off                             1/
                                                                                                                     2
          Interest expenses for the third quarter (1/2 for correct days, 1/2 for correct exchange rate)             1
          Interest expenses for the last quarter (1/2 for correct days, 1/2 for correct exchange rate)              1
          Stating reasons for non-inclusion of sum differences                                                      1
          Rent expenses (1/2 for correct months + 1/2 net of VAT)                                                   1
          Profits tax base before loss c/f                                                                         1/
                                                                                                                     2
          Losses carried forward (1/2 for FIFO basis used, 1/2 for 50% of taxable profit)                           1
          Correct profits tax rate                                                                                 1/
                                                                                                                     2

          Subtotal                                                                                                 22

    (b)   VAT on sales on accruals                                                                                 1/
                                                                                                                     2
          Zero VAT on export sales                                                                                 1/
                                                                                                                     2
          VAT on cash collections received related to pre-2006 sales                                               1
          VAT on prepayments received                                                                              1/
                                                                                                                     2
          Output VAT on written off bad debts                                                                      1
          VAT recovered on 2005 prepayments                                                                        1/
                                                                                                                     2
          VAT recovered on pre-2006 purchases                                                                      1
          VAT on merchandise goods (full amount including unpaid goods)                                            1/
                                                                                                                     2
          VAT on direct transport expenses                                                                         1/
                                                                                                                     2
          VAT on purchased fixed assets                                                                            1/
                                                                                                                     2
          Input VAT on capital construction costs incurred and invoiced in 2006
          (1/2 net of VAT value, 1/2 for correct amount of incurred and claimed in invoices VAT)                   1
          Input VAT on capital improvements                                                                        1/
                                                                                                                     2
          Input VAT on rent expenses                                                                               1/
                                                                                                                     2
          Total VAT payable                                                                                        1/
                                                                                                                     2

          Subtotal                                                                                                 9
          Total                                                                                                    31




                                                                 23
                                                                                                                Marks
2   (a)     (i)     Personal income tax liability withheld by employer (‘Landiker’) at 13%:
                    Pavel’s gross salary accrued                                                                 1/
                                                                                                                   2
                    Standard personal allowance – not applicable                                                 1/
                                                                                                                   2
                    Children allowance – not applicable                                                          1/
                                                                                                                   2
                    No medical deduction at source (if specifically stated in the answer)                        1/
                                                                                                                   2
                    Voluntary insurance contributions by employer not included                                   1/
                                                                                                                   2
                    Included in income bonus trip to Italia                                                      1/
                                                                                                                   2
                    Imputed interest on corporate loan:
                    Up to 6 July 2006:
                    Correct deemed interest (1/2 for correct number of days, 1/2 for correct CBR rate)           1
                    Correct actual interest                                                                      1/
                                                                                                                   2
                    From 7 July to 31 December:
                    Correct deemed interest (1/2 for no changes in CBR rate, 1/2 for correct days)               1
                    Correct actual interest                                                                      1/
                                                                                                                   2
                    Housing incentive – not applicable since ownership in 2007                                   1
                    Taxable income subject to 13% (Deemed interest included in 13%-rate tax base)                1/
                                                                                                                   2
                    Tax withheld at 13%                                                                          1/
                                                                                                                   2

                    Subtotal                                                                                     8
            (ii)    Final settlement of Pavel’s personal tax liability based on his 2006 personal tax return:
                    Inherited plot of land from his close relative (father) not taxable                           1
                    No educational deduction for his wife                                                         1
                    Medical deduction for his father                                                              1
                    No medical deduction for his sister                                                          1/
                                                                                                                   2
                    Housing incentive – not applicable since ownership in 2007                                   1/
                                                                                                                   2
                    Correct taxable base at 13% rate                                                             1/
                                                                                                                   2
                    Tax to be paid at 13% rate                                                                   1/
                                                                                                                   2
                    Less tax withheld by employer at 13%                                                         1/
                                                                                                                   2
                    Tax refund                                                                                   1/
                                                                                                                   2

                    Subtotal                                                                                     6
            (iii) Final settlement of Julia’s personal tax liability based on her personal income tax return:
                  Income subject to 13%
                  No deduction of gallery’s commission fee and UST                                              11/2
                  Children and standard allowances not applicable                                                1
                  Professional deduction as painter (30%)                                                        11
                  No charity deduction for the paintings since it is allowed only for cash contributions        1/
                                                                                                                  2
                  Sales proceeds for the apartment (fraction 60%)                                               1/
                                                                                                                  2
                  Property deduction equal to the sales proceeds for more than three years                       1
                  Income subject to 35% in respect of new car prize in lottery:
                  Market value of prize with VAT                                                                 1/
                                                                                                                   2
                  Less exempt amount                                                                             1
                  Application of 35% rate                                                                        1/
                                                                                                                   2
                  Tax to be paid                                                                                 1/
                                                                                                                   2

                    Subtotal                                                                                     8

    (b)     Obligations of RidM                                                                                  2
            Total                                                                                                24




    1   If the candidate applies 20% deduction for Julia as individual entrepreneur full mark will be given.




                                                                          24
                                                                                                                 Marks
3   (a)   For the first condition – recorded in the accounts and used in VAT taxable operations (1/2 for each)    1
          For the second condition – realisation of the non-completed capital construction objects                1
          Subtotal                                                                                                2

    (b)   September VAT liability:
          Output VAT on self-construction in September (1 for the right month of inclusion into
          tax base, 1/2 for the material and service costs net of VAT, 1/2 for UST included)                      2
          Input September VAT:
          Input VAT for September materials and subcontractors services (1/2 per each)                            1
          Recovery of VAT accrued before 2005 (1/2 for the right sum, 1 for the right month)                     11/2
          Recovery of VAT accrued during 2005 (one twelfth)                                                       1
          VAT refund for September                                                                               1/
                                                                                                                   2

          October VAT liability:
          Output VAT on self-construction in October (split as above)                                             2
          Input October VAT:
          Input VAT for October materials and subcontractors services (1/2 per each)                              1
          Recovery of September self-assessed VAT on capital construction                                         1
          Recovery of input VAT related to the second fixed asset (1/2 for claiming the deduction
          upon being put into use, 1 for application of three twelfth fraction)                                  11/2
          Recovery of one twelfth of the remaining part of VAT accrued in 2005)                                    1
          VAT refund for October                                                                                  1/
                                                                                                                    2

          Subtotal                                                                                                13
          Total                                                                                                   15


4   (a)   Taxable income for Isedora at 13% PIT rate:
          Gross up salary                                                                                         1
          Financial aid (correct months)                                                                          1/
                                                                                                                    2
          Business trip expenses:
          Flight tickets, taxi bill and hotel bill – not taxable                                                  1
          Hotel telephone bills – not taxable for business calls                                                  1/
                                                                                                                    2
          Restaurant bills taxable                                                                                1/
                                                                                                                    2
          Museum tickets taxable                                                                                  1/
                                                                                                                    2
          Less:
          Deduction on financial aid                                                                               1
          Standard allowance                                                                                       1
          Children allowance (1 – for number of months, 1 – for double limit)                                      2
          Educational deduction                                                                                    1
          Less per diem allowance limit (for three nights)                                                         1
          Tax at 13% rate                                                                                         1/
                                                                                                                    2
          Income subject to 35% rate:
          Imputed interest on interest free loan                                                                  1
          Tax at 35%                                                                                              1/
                                                                                                                    2

          Subtotal                                                                                                12

    (b)   UST liability for Isedora’s income:
          UST correct tax base (only for salary)                                                                  1/
                                                                                                                    2
          UST correct rate                                                                                        1/
                                                                                                                    2
          Exclusions:
          Comment on financial aid source of finance – profits after tax                                          1/
                                                                                                                    2
          Comment on excluded items – accommodation, per diems, tickets                                           1/
                                                                                                                    2
          Comment on excluded items – restaurant bills and museum tickets                                         1/
                                                                                                                    2
          Comment on excluded item – imputed interest income                                                      1/
                                                                                                                    2

          Subtotal                                                                                                3
          Total                                                                                                   15




                                                                 25
                                                                                          Marks
5   Option 1 – loan from bank guaranteed by foreign company TMM
    20% control test and TMM’s holding ratio                                               1/
                                                                                             2
    Correct rouble loan amounts at quarter end dates (foreign exchange rates)               1
    Inclusion of accrued interest in controlled debt                                        1
    Correct calculation of accrued interest (number of days)                                1
    Correct net assets (deducting tax liabilities – 1/2)                                    1
    Comparison of total controlled debt with three times net assets                         1
    Correct capitalisation ratio                                                            1
    Correct interest deductible                                                            1/
                                                                                             2

    Option 2 – two loans from TMM and LLL
    Tessa’s indirect holding ratio                                                         1/
                                                                                             2
    Holding ratio for LLL’s loan                                                           1/
                                                                                             2
    Correct rouble loan amounts at quarter end dates (foreign exchange rates)               1
    Correct calculation of accrued interest (number of days)                              11/2
    Comparison of total controlled debt with three times net assets                         1
    Correct capitalisation ratios (1 for each loan)                                         2
    Correct interest deductible                                                            1/
                                                                                             2

    Comparison of options                                                                  1
    Total                                                                                  15


6   (a)     Gross salary as director (in option 3)                                         1/
                                                                                             2
            Business income for January-May (in option 3)                                  1/
                                                                                             2
            Professional deduction 20% (if lost supporting documents)                      1
            Including sports club membership into taxable income (in option 3)             1/
                                                                                             2
            Business expenses (if supported with documents):
            Employees’ salaries                                                            1/
                                                                                             2
            UST on salaries                                                                1/
                                                                                             2
            Depreciation for furniture and computer                                        1
            Office rent                                                                    1/
                                                                                             2
            Re-calculation of salary, UST and rent expenses for 5 months in option 3       1
            Recalculation of depreciation for 5 months in option 3                         1/
                                                                                             2
            Exit compensation in option 3 (1/2 – for not subject to UST)                    1
            UST on business income (1 per each – in options 1 and 2, 1/2 – in option 3)   21/2
            No deduction of UST if 20% professional deduction is claimed                    1
            Tax at 13%                                                                     1/
                                                                                             2
            Comment on bonus not relevant for the year 2006                                1/
                                                                                             2

            Subtotal                                                                       12

    (b)     Income                                                                         1/
                                                                                             2
            Less expenses without depreciation                                             1
            Less business capital expenses                                                 1/
                                                                                             2
            Less PIT and UST paid by Sergey                                                1/
                                                                                             2
            Comment on the preferable option                                               1/
                                                                                             2

            Subtotal                                                                       3
            Total                                                                          15




                                                                 26
                                                                                                                 Marks
7   (a)   (1) Existing asset:
          Net of VAT cost of materials, net of VAT cost of services                                               1/
                                                                                                                    2
          Immediate 10% write off                                                                                  1
          Depreciation before modernisation (1/2 for net of VAT and 1/2 for the correct number of months)          1
          New depreciation rate in % – formula                                                                    1/
                                                                                                                    2
          Depreciation after modernisation (1/2 for exclusion of 10% and 1/2 for the correct number of months)     1
          Production line:
          Immediate 10% write-off of capital improvements net of VAT                                              1
          Tax depreciation of historic cost (1/2 net of VAT, 1/2 – correct rate)                                  1
          Depreciation of capital improvements (1/2 for the exclusion
          of 10% written-off, 1 for correct rate, 1/2 for correct number of months)                               2
          New mini-van:
          Immediate write-off 10% of minivan’s cost net of VAT                                                    1
          Depreciation of the new minivan (1/2 for the exclusion of 10% written-off,
          1/ for correct rate, 1 for 0·5 ratio and 1/ for the correct number of months)                          21/2
            2                                        2

          Subtotal                                                                                                12

    (b)   Comment on the limitation of depreciation period to the rent period                                     1
          Comment on the application of the statutory tax useful lives                                            1/
                                                                                                                    2
          Comment on right to immediate 10% write-off for lessee                                                  1/
                                                                                                                    2
          Comment on the day when depreciation starts for the lessee                                              1/
                                                                                                                    2
          Mention no right to depreciate the asset in the hands of the lessor                                     1/
                                                                                                                    2

          Subtotal                                                                                                3
          Total                                                                                                   15




                                                                 27

				
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