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Examiner's Report - F6 (MLA) June 2016: Analysis of Maltese Taxation Exam, Lecture notes of Accounting

June 2016. Examiner's report – F6 (MLA) June 2016. 1. General Comments. There were two sections in the examination paper and all of the questions were ...

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Examiner’s report
F6 (MLA) Taxation
June 2016
Examiner’s report F6 (MLA) June 2016 1
General Comments
There were two sections in the examination paper and all of the questions were compulsory.
Section A consisted of 15 multiple choice questions of two marks each, which covered a broad
range of syllabus topics. Section B had four questions worth 10 marks each and two longer
questions worth 15 marks, each testing the candidates’ understanding and application of key areas
in Maltese taxation.
The following paragraphs report on each section and focus on some of the key learning points.
Specific Comments
Section A
Section A questions seek to provide a broad coverage of the syllabus; accordingly, candidates
should study all areas of the F6 MLA syllabus in order to be in a good position to answer Section A
questions correctly.
It was pleasing to note that all candidates attempted all of the questions. Overall performance in
this section has continued to improve over the previous session and many candidates are
achieving a good mark in Section A. A good performance in Section A greatly facilitates the task of
obtaining an overall pass in this exam, and therefore candidates are encouraged to devote due
importance to this section, which accounts for 30% of the overall mark allocation.
The following sample question is reviewed with the aim of giving future candidates an indication of
the types of questions asked and guidance on dealing with such exam questions.
Sample Question for Discussion
This question tested the ability of candidates to recognise that the so-called remittance basis of
taxation is no longer applicable to persons whose spouse is both ordinarily resident and domiciled
in Malta. A majority of candidates overlooked this and incorrectly answered the question on the
basis that the remittance basis continues to apply even in such situations. The correct answer was
D
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Examiner’s report

F6 (MLA) Taxation

June 2016

General Comments There were two sections in the examination paper and all of the questions were compulsory. Section A consisted of 15 multiple choice questions of two marks each, which covered a broad range of syllabus topics. Section B had four questions worth 10 marks each and two longer questions worth 15 marks, each testing the candidates’ understanding and application of key areas in Maltese taxation. The following paragraphs report on each section and focus on some of the key learning points. Specific Comments Section A Section A questions seek to provide a broad coverage of the syllabus; accordingly, candidates should study all areas of the F6 MLA syllabus in order to be in a good position to answer Section A questions correctly. It was pleasing to note that all candidates attempted all of the questions. Overall performance in this section has continued to improve over the previous session and many candidates are achieving a good mark in Section A. A good performance in Section A greatly facilitates the task of obtaining an overall pass in this exam, and therefore candidates are encouraged to devote due importance to this section, which accounts for 30% of the overall mark allocation. The following sample question is reviewed with the aim of giving future candidates an indication of the types of questions asked and guidance on dealing with such exam questions. Sample Question for Discussion This question tested the ability of candidates to recognise that the so-called remittance basis of taxation is no longer applicable to persons whose spouse is both ordinarily resident and domiciled in Malta. A majority of candidates overlooked this and incorrectly answered the question on the basis that the remittance basis continues to apply even in such situations. The correct answer was D

It is imperative that candidates are up to speed with pertinent developments which fall within the syllabus, as long as the relevant legislation was passed before the cut-off date as described in the study guide, namely the 30th^ of September of the year preceding the exam sitting. Section B Question One This 10-mark question required the computation of the tax payable upon five distinct immovable property transfer transactions. While a good number of candidates performed very well in this question, it was evident that some candidates are not yet up to speed with the revised immovable property transfer tax regime. This is a core topic in the syllabus, with which candidates are expected to be very well versed. It is pertinent to highlight that as from 1 January 2015, specifically in relation to immovable property which is situated in Malta, the former dual system consisting of a 12% final withholding tax on the transfer value or the application of income tax on the capital gain has been replaced by a single final withholding tax system. The withholding tax rate is generally of 8%, albeit the applicable tax rate differs in certain circumstances. Candidates are again reminded to be mindful of relevant legislative changes that are passed before the cut-off date. Question Two This 10-mark question dealt with the taxation of dividend income and capital gains for a company registered in Malta, which is in turn was owned by an individual who is neither ordinarily resident nor domiciled in Malta. The question specifically stated that where applicable, the company always elects to apply the participation exemption. However, some candidates appeared to overlook this instruction and unnecessarily suggested the alternative treatment of paying tax and claiming a full tax refund instead. Furthermore, in this question, some candidates failed to recognise that the participation exemption can apply to domestic participating holdings as well as to branches established outside Malta. Further, many candidates developed their answer beyond the requirements of the question to also include the tax accounting for the dividend income and capital gains in the question. While the tax account applicable to each particular stream of income and gains could be relevant insofar as it determines the applicable shareholder tax refund upon a dividend distribution, the question requirements clearly did not refer to tax accounting. In this respect, it is important for candidates to carefully read the question posed and clearly answer that and only that which was asked for. Question Three This 10-mark question tested candidates’ applied knowledge of value added tax (VAT) by requiring the calculation of output tax chargeable on nine distinct and varied transactions. The transactions were presented in tabular format, setting out the nature and value of each supply, as well as the pertinent attributes of both the supplier and the customer in each transaction.

Question Five This 15-mark question set out the scenario of a local group of companies whereby one company provides loan financing to another company, enabling the latter to finance the acquisition of a commercial real estate asset in Malta. This asset is in turn leased to a third company within the group, which is a company actually engaged in trade. Part (a) carried 13 marks and required income tax computations (including tax accounting) for each of the aforementioned three companies forming part of the group. Most candidates did well in the corporate income tax computations, although a number of candidates failed to apply the specific tax computation rules applicable to the company which derives income exclusively from the rental of the immovable property asset situated in Malta, applying instead the usual tax computation format consisting of adjusting the accounting profit figure for tax purposes. While this format is not of itself incorrect, candidates who started with the accounting profit figure rather than the rental income figure and then taking the specific deductions applicable in this case tended to get confused and to fail to correctly apply the specific tax computation rules relating to income from immovable property situated in Malta. Furthermore, performance on the tax accounting aspects was mixed, and a common mistake was failing to correctly apply the annual market rent allocation, and others failing to allocate income from the financing of immovable property situated in Malta to the immovable property account. Part (b) carried 2 marks and related to the application of VAT to the letting of property described in the scenario. It was pleasing to note that many candidates answered this part of the question correctly, reaffirming the comments made in relation to Question 3 that candidates appear to be devoting the required attention to VAT in their studies. Question Six This 15-mark question consisted of individual income tax computations for two brothers who are both ordinarily resident and domiciled in Malta. This question was generally answered well, with most candidates demonstrating a good appreciation of the basic concepts of individual tax computations including the taxation of fringe benefits, part-time income and capital gains. Some common areas of weakness were the incorrect application of the 15% part-time tax rate where the main and part-time employers are related parties, the failure to take into account the tax exempt portion of the fringe benefit consisting of a long service award, and the incorrect application of the capping applicable to the deduction in respect of home for the elderly fees.