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ADVANCED TAXATION (MARKS 100)
(3 hours)
Q.1 Styles & Styles, Inc. (SSI) is the parent company of a leading foreign group involved in the manufacturing and sales of consumer products all around the world. They are considering an option to enter into the Pakistani market. Based on data obtained through a market survey, they are in the process of preparing financial projections for a proposed local subsidiary in Pakistan, Styles & Styles Pakistan (Pvt) Limited (SSPL).
Under the proposed business model, business of SSPL is likely to be set-up as under:-
(i) SSPL would be incorporated with a share capital of Rs 100 million to be wholly owned through a UAE based group company Styles & Styles FZE. The investment in SSPL would be financed by the UAE company through an interest bearing loan agreement with SSI; (ii) SSPL would be involved in commercial imports as well as local manufacturing of certain products for which the raw material would be imported from group companies; (iii) To set up the manufacturing plant in Pakistan, certain second-hand plant and machinery will be imported from an unrelated supplier outside Pakistan. To save bank charges/commission etc. it was agreed that LC would not be opened and the payment will be remitted directly through bank, 30 days after the import of plant. The supplier is insisting that payment be made without deduction of withholding tax; (iv) Construction of factory building is likely to be carried out by a leading Pakistani engineering company. A contract in this regard would be signed shortly after the incorporation of SSPL and thereafter a mobilization advance of Rs 50 million will be paid; and (v) A foreign currency loan of US $ 75 million would also be provided by SSI, directly to SSPL. The loan would be payable over a period of five years carrying an arm’s length interest rate.
Required: The group wants to determine Pakistan tax implications, if any, and have requested you to advise on the following issues:
(a) Treatment of income tax paid at the import stage. (b) Tax depreciation on the plant. (c) Deduction of tax on interest paid by SSPL to SSI. (d) Taxability of interest received by SSI. (15)
Q.2 The concept of representatives has recently been introduced in the Sales Tax Act, 1990 through the Finance Act, 2008. You are required to explain the following:
(a) Who can be treated as the representative of a non-resident person? (b) Under what circumstances, a representative may become personally liable for the payment of any tax due by the non-resident? (10)
Q.3 PSK is a public listed company engaged in manufacturing and sale of goods. Extracts from the financial statements of the company for tax year 2008 are given below:
Rupees Sales:
- local sales out of manufactured/packed goods 924,306,
- local sales of imported finished goods 127,721,
- export sales 25,157, Cost of goods sold 665,875, Administration expenses 169,453, Distribution and marketing cost 37,024, Other income 4,628, Financial charges 909,
Following further information is available
(i) All exports were made through confirmed LCs except export to Afghanistan amounting to Rs. 1,610,000 which was received in Pak Rupees and no tax was deducted by the Banks. (ii) Certain goods imported from Dubai were later exported to Malaysia, at a price of Rs. 752,100. Tax deducted on such goods at the import stage amounted to Rs. 25,000 whereas tax deducted from export proceeds amounted to Rs. 7,521. The transaction is included in export sales. (iii) Imported goods are sold without any further processing, at a mark-up of 15% of cost. (iv) Cost of export sales is Rs. 14,645,500. (v) Distribution and marketing costs relate to local sales only. (vi) Other income consists of the following:
Rupees Return on Pakistan Investment Bonds (PIBs) 3,480, Gain on sale of scrap 972, Duty drawback on exports 149, Bad debts previously written off, now reversed 27,
(vii) Financial charges include amortization of premium on PIBs amounting to Rs. 70,900.
(viii) Data related to depreciation is as under: Tax depreciation 51,281, Accounting depreciation: Cost of goods manufactured 10,338, Administrative expenses 4,756, Distribution and marketing expenses 2,141,
(ix) Information relating to provisions and right-offs, included in administration expenses, is as under: Provision for slow moving stock 6,200, Provision for bad debts 227, Stock written off 366, Bad debts written off 38,
Required: You are required to compute the company’s taxable income and tax liability (gross) for the tax year 2008. (20)
(ii) On review of the wealth reconciliation for tax year 2004, it was noticed that Mr. Bilal borrowed Rs. 1 million from his friend who is a foreign national. The amount was received in cash while his friend was on a visit to Pakistan and is still outstanding. (iii) In tax year 2005, Mr. Bilal’s father who was settled in Dubai had sent an amount of US$ 10,000 through banking channel which was encashed into Pak rupees @ 60.15. This receipt was disclosed in his wealth statement but no explanation has been given to the authorities so far.
Required: Advise Bilal about the tax implications, in each of the above situations. (08)
Q.8 Zeta Pakistan Ltd is principally engaged in the purchase, manufacture and supply of taxable goods and is registered under the Sales Tax Act, 1990. During the usual course of business, it also carried out the following transactions during the year:
(i) Use of taxable goods for internal testing, training and evaluation purposes. The goods included own manufactured as well as locally procured goods. (ii) Free replacement of faulty parts of goods which had been sold under warranty. (iii) Destruction of damaged goods. (iv) Payment of sales tax on diesel purchased and used in generation of electricity. The electricity produced is mainly used in production. However, part of it is also used in finished goods warehouses and workers canteen. (v) An amount of Rs 300,000 was paid to the company’s customs agent on import of raw material used.
Required : Comment on the chargeability of sales tax in the above situations. (12)
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