Professional Level – Options Module

Time allowedReading and planning: 15 minutesWriting: 3 hours

This paper is divided into two sections:

Section A – BOTH questions are compulsory and MUST be attempted

Section B – TWO questions ONLY to be attempted

Tax rates and allowances are on pages 2–3

Do NOT open this paper until instructed by the supervisor.During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.This question paper must not be removed from the examination hall.

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Advanced Taxation(Zimbabwe)

Monday 1 June 2009

The Association of Chartered Certified Accountants

SUPPLEMENTARY INSTRUCTIONS

1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.2. Calculations and workings need only be made to the nearest $000.3. All workings should be shown.4. All apportionments should be made to the nearest month.

TAX RATES AND ALLOWANCES

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

Income tax: Individuals

1 October – 31 December 2008Band of income ($) Quantum ($) % Band tax ($) Cumulative ($)Up to 600 000 600 000 0 0 0

600 001 – 1 200 000 600 000 25 150 000 150 0001 200 001 – 2 400 000 1 200 000 30 360 000 510 0002 400 001 – 4 800 000 2 400 000 35 840 000 1 350 0004 800 001 – 8 400 000 3 600 000 40 1 440 000 2 790 0008 400 001 – 12 000 000 3 600 000 45 1 620 000 4 410 000

12 000 001 and over 47·5

Note: the AIDS levy of 3% of income tax payable, less credits remains.

Pension contributions

Maximum per year2008

$Employer’s pension fund 480 000National Social Security 3%Retirement annuity fund/ Self-employed pension fund 480 000Aggregate contributions to all above 480 000

Motoring benefitsEngine capacity deemed annual benefit

2008$

Up to 1500cc 135 0001501 – 2000cc 150 0002001 – 3000cc 210 0003001 and above 275 000

Credits2008

$Elderly person (55 years and over) 37 500Physically disabled person 37 500Blind person 37 500Medical aid society contributions 50% of amount paid in each yearMedical aid 50% of amount paid in each year

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Capital allowances 2008 2007

Special initial allowance 50% 50%Accelerated wear and tear 25% 25%

Wear and tearIndustrial building 5% 5%Commercial building 2·5% 2·5%Motor vehicles 20% 20%Movable assets in general 10% 10%

Corporation tax rate30% plus 3% Aids levy

Value added taxStandard rate 15%

Capital gains tax:Gains of up to $5 000 NilGains above $5 000 20% for all other casesDisposal of principal private residence bypersons over 55 years Nil

Capital gains withholding tax on sales proceeds %Immovable property 15Marketable securities (Listed) 5Marketable securities (Unlisted) 10

Note: The withholding tax is not a final tax. Actual liability is determined on assessment and the withholding taxis set off against the liability ascertained.

The latest annual All Items Consumer Price Indices issued by the Central Statistical Office are as follows:

Tax year Index2001 100·02002 233·22003 1 084·52004 4 880·32005 16 486·42006 184 101·12007 12 562 581·72008 Estimate 974 925 192·9

Transport Consumer Price Indices2001 100·02002 184·02003 818·02004 5 127·42005 115 220·22006 225 313·02007 24 890 041·32008 Estimate 1 803 072 110·5

3 [P.T.O.

Section A – BOTH questions are compulsory and MUST be attempted

1 The top management of the Greenfield group of companies, comprising Greenfield Flowers (Private) Limited,Greenfield Agri-products (Private) Limited and Greenfield Investments (Private) Limited have recently come back froma strategic seminar in Victoria Falls. The strategic seminar had been called to review the business operations of thegroup in the volatile Zimbabwe environment, and to map out strategies for sustaining the business in the future.

The three companies, which are wholly owned by Robert Greenfield and his wife, have operated in Zimbabwe overthe past three years and brief descriptions of their business operations and their trading conditions are as follows:

Greenfield Flowers

This company grows and exports flowers and operates a significant number of greenhouses around Harare andMarondera. The company’s revenue is mostly foreign currency and it has been doing some very profitable and briskbusiness. Financing its operations has been relatively easy because of its access to the foreign currency. Its averageyearly profits for the past two years have been US$500 000.

Greenfield Agri-products

The company grows a variety of vegetables from a number of plots near Harare and sells most of its fresh produce inthe Harare metropolitan area. Due to poor rains and unreliable supplies of municipal water over the past two years,the company has been struggling and has not been able to cover its fixed costs, which are made up of mainly labourcosts of its erratic operations.

Greenfield Investments

This company invests on the Zimbabwe Stock Exchange and in the money market. Although the company has beenmaking some substantial profits, its ability to access the funds has been severely restricted due to some bankingrestrictions in the environment.

The resolutions and action plans made at the strategy seminar include:

(i) Formation of a holding company, Greenfield Holdings Limited, to acquire 100% shareholding in the threeoperating companies currently held by Robert Greenfield and his wife, and in exchange Robert Greenfield andMrs Greenfield would be issued with equivalent new shares to be issued by Greenfield Holdings Limited. All threesubsidiary companies would then have to pay management fees to the holding company on a monthly basis.The new holding company would be expected to have been formed and to have acquired the shares in the threecompanies by January 2009. Senior management would be issued with new contracts of employment by theholding company as their services will be at group level.

(ii) As a retention incentive, senior managers will be granted share options that will enable them to acquire newshares to be issued by the holding company after six months, exercisable at the value of the holding company’sshares as at 31 January 2009. The options are to be held by a Management Trust until the exercise date in July2009.

(iii) It has been resolved that all employees will now have their salaries pegged in United States dollars and payableas follows:

30% of the monthly remuneration will now be banked offshore each month and will only be paid to theemployees at the end of each financial year, payable in cash in US$.

Of the 70% payable during the year, half of the income is payable in foreign currency in cash while the otherhalf is converted to Zimbabwe dollars at the inter-bank rate. The portion converted to Zimbabwe dollars is thensubjected to tax and the net amounts banked in the employees’ local bank accounts.

As Greenfield Agri-products and Greenfield Investments are unable to sustain foreign currency salaries, all salarieswill now be financed from Greenfield Flowers and accounted for through inter-company accounts. The inter-company accounts will be settled once economic conditions improve.

On the basis that the resolution to pay portions of salaries in foreign currency is a tax planning scheme, theemployment contracts will only mention a Zimbabwe dollar salary and will not mention the agreed paymentmethod. The remuneration paid in foreign currency and the portion to be paid at the end of the year are foraccounting purposes classified as general operating expenses.

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Required:

(a) In relation to resolution (i), comment on the tax implications of forming the holding company. Your answershould include, but not be limited to, the tax obligations that arise on the swap of shares by Mr and Mrs Greenfield and any available means of minimising the resulting tax liability, as well as the taximplications of the payment of management fees to the holding company. (11 marks)

(b) In respect of resolution (ii) explain whether or not there is a tax risk associated with the award of the sharesand outline the potential Zimbabwe Revenue Authority statutory remedy. (5 marks)

(c) Review resolution (iii) from the point of view of the companies’ professional tax advisers and state whatadvice they should give to the companies. (8 marks)

Professional marks will be awarded in part (c) for clarity, format and relevance of the advice. (2 marks)

(26 marks)

5 [P.T.O.

2 Zimbabwe Mining Syndicate (Private) Limited (‘ZMS’), a 100% subsidiary of Tantalite Resources UK plc, is acompany which has been conducting mineral exploration activities in Zimbabwe for the past few years. The companyhas discovered and tested a rich vein of tantalite in the Mvura Mountains. The feasibility assessments undertaken togauge potential costs of bringing the mine to the production stage have revealed the following:

(a) New specialised machinery has to be imported into Zimbabwe. This machinery has been ascertained to cost inthe region of US$10 000 000.

(b) It will take three years from 1 July 2008, the commencement date of the intensive development works at themining site, to reach the production stage.

(c) Working capital of US$300 000 000 will be required to finance the project.

John Boyd, the managing director of ZMS has been asked to present a paper on what he considers to be the mostappropriate and tax efficient method of raising funding for the project. He is expected to present his proposals to theparent company board in London, UK, in August 2009. In his deliberations he has identified the following methodsof funding:

(i) Raising an offshore loan of US$40 000 000 at the general Libor interest rate of 10%, repayable after five years,but with the interest being payable every six months.

(ii) Tantalite Resources plc injecting the requisite US$40 000 000 in exchange for 10% redeemable preferenceshares, redeemable after ten years.

(iii) Floatation of ZMS on the Zimbabwe Stock Exchange with the hope of raising the requisite funding.

Other information

Tantalite Resources UK plc’s share investment in ZMS is valued at US$10 000 000. John Boyd has undertaken afinancial sensitivity analysis of the three fundraising methods but before he concludes his paper he needs your inputfrom a tax perspective.

ZMS has been offered an opportunity to purchase a chrome mining claim which is 100 kilometres from the Mvuramining location. The chrome claim is currently being operated by a consortium of unskilled villagers who cannot makethe mine profitable due to a lack of appropriate mining machinery. The claim can be made profitable within a yearand the managing director of ZMS is tempted by the offer as he sees an opportunity to set off the losses on the Mvuramine against the potential profit from the chrome mine.

Required:

(a) Analyse each of the three methods of funding and from a tax perspective recommend the method youconsider best for the company. (15 marks)

(b) Explain the tax treatment of the cost of the specialised machinery as well as the development costs incurredprior to the production stage.

Note: you should assume that the requisite funding has been raised and the machinery has arrived inZimbabwe and is first brought into use exactly two years before the projected production stage is reached.

(9 marks)

(c) Explain the general statutory limitations applicable to the carrying forward of assessed tax losses and explainthe likely position of ZMS with respect to the carry forward of tax losses, should it not make a profit in thefirst ten years of operating the tantalite mine in the Mvura mountains. Comment on the potential of settingoff losses on the Mvura mine against the potential profit on the chrome claim. (7 marks)

Professional marks will be awarded in part (a) for clarity, format, identification of issues and appropriaterecommendation. (3 marks)

(34 marks)

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Section B – TWO questions ONLY to be attempted

3 James Duckworth, and his wife Jane, jointly own an investment residential property situated in Borrowdale, whichhas been leased out to a European diplomat for the past year. The diplomat was paying rentals in foreign currencyinto James and Jane’s foreign currency account with a London, UK, bank, with effect from January 2008. JamesDuckworth was submitting corporate tax returns and paying the appropriate tax (in Zimbabwe dollars) as required bylaw.

Mr and Mrs Duckworth had acquired the investment property in August 2006 at a cost of $500 000 000. In January2007 James and Jane Duckworth transferred the property into Duckworth Investments (Private) Limited (‘DIPL’), aninvestment company specifically formed to take over ownership of the property as an estate planning measure. Theissued share capital in DIPL comprises five shares of which three are registered in the name of James Duckworthwhile the other two shares are registered in the name of Jane Duckworth.

The couple had been able to transfer the property into the company without paying capital gains tax after applyingfor, and obtaining, a statutory waiver from the Zimbabwe Revenue Authority.

The couple is considering an offer from the diplomat to purchase the property for a lump sum of €250 000, payableinto an offshore account of the couple’s choice.

In an effort to avoid or reduce tax, the couple contacts you for tax advice on the following option of effecting thedisposal of their investment property: the diplomat (the buyer) will appoint a nominee and the couple will arrange forDIPL to issue 95 new shares to this nominee shareholder. On delivery of the new shares, the purchase price wouldbe paid into the couple’s offshore account. The couple would also sign a blank transfer form for the transfer of theirfive shares to the buyer’s nominee, to be effected after one year. The couple would like to know if this arrangementis above board and whether it will have unpleasant tax implications later.

Although the Duckworths are not planning to emigrate, they are of the opinion that the receipt of the proceeds offshoreis a good way of safeguarding their lives after retirement especially bearing in mind the volatile and hyperinflationaryZimbabwe operating environment.

Required:

(a) Review the proposed method of disposing of the investment property and write notes for James and JaneDuckworth advising the couple of the tax implications of the deal for them and for DIPL, specificallycommenting on:

(i) The receipt of the amount offshore from a legal point of view,(ii) The signing of blank share transfer forms;(iii) Obligations that arise as a result of the deal; and(iv) Any potential risk identified. (14 marks)

(b) Explain, from a professional point of view, your understanding of the main characteristics of a tax avoidancescheme and comment, with reasons, on the possibility of the current deal being classified as a tax avoidancescheme. (6 marks)

(20 marks)

7 [P.T.O.

4 Smoothbrew Limited (‘Smoothbrew’) is a South African registered company which has some brewing operations in anumber of countries in Southern Africa. The company has started exploring for prospects of setting up brewingbusiness ventures in Zimbabwe. In order to deal with any political, regulatory and environmental problems in theZimbabwe operating environment, the company has entered into an agreement with a Mauritius based companyTechnical Services Limited (‘Technical Services’), which has expertise in the Zimbabwean environment to act as itsinterface with the politico-legal authorities.

Technical Services Limited is a one man company which operates through its sole director, Goran Gwemende, aZimbabwean who is resident in Zimbabwe. Goran Gwemende had purchased a shelf Mauritian company for use ina tax planning scheme. The agreement between Smoothbrew and Technical Services provides for the following:

(i) Technical Services shall act as Smoothbrew’s representative in Zimbabwe in respect of any politico-legalrequirements in connection with Smoothbrew’s business operations in Zimbabwe.

(ii) The contract shall be for a period of three years from 1 January 2009.

(iii) It is especially provided that Technical Services, for the purpose of this agreement, shall only act through GoranGwemende who shall make himself available in Zimbabwe within a reasonable time when called upon bySmoothbrew from time to time, during the tenure of the contract.

(iv) The fees payable by Smoothbrew for the services to be provided shall be US$72 000 per annum, payable inmonthly instalments of US$6 000, into a South African bank account to be nominated by Technical Services.

The finance director of Smoothbrew is of the opinion that since the payment will be made from a Smoothbrew’s SouthAfrican bank account into a South African bank account nominated by the service provider, incorporated in Mauritius,there should be no significant Zimbabwean tax consequences. However, just for assurance purposes, Smoothbrewapproaches you before the commencement of the contract for a tax review of the contract.

Required:

(a) Write notes for Smoothbrew detailing what you consider to be the Zimbabwean tax implications of thecontract on Smoothbrew, if any, bearing in mind all types of taxes and outline any potential obligations thatcould arise on Smoothbrew. (10 marks)

(b) Summarise the Zimbabwean tax obligations of Technical Services in relation to the contract and clearly statewhether or not the contract is tax efficient in its present format. (10 marks)

(20 marks)

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5 The following queries have been referred to you as tax manager in an advisory firm to draft short answers for thepartners who will meet the respective clients.

(a) 60-year-old Dorothy Drew was recently widowed by the death of her husband, Dick Drew. She has just beenappointed an executor testamentary of her late husband’s estate.

The inventory of assets compiled includes the following assets

(i) Matrimonial home which was jointly owned by the two, valued at U$100 000.

(ii) A block of flats, owned by the late Dick Drew, with an estate valuation of US$650 000.

(iii) Cash at Bank amounting to $450 billion.

(iv) Stock exchange listed shares valued at $10 trillion.

(v) A greengrocer business valued at US$200 000 which the late Dick Drew was conducting in rentedpremises.

(vi) The late Dick Drew was in receipt of a monthly pension which in terms of the pension fund would devolveto the widow upon his death.

According to the last will and testament of the late Mr Dick Drew, the greengrocer business and the block of flatswere to be transferred to DD Trust and operated for the benefit of their one minor grandchild, Derek, who was10 years old at the time. The DD Trust was to be dissolved when the grandchild turns 21 years old and theproceeds shared equally between Dorothy and Derek.

The trustee of the DD Trust was Velvet Stone, who had been the family lawyer for many years, and was vestedwith discretionary powers to distribute to the Drew grandson any amount he considered reasonable each year,after providing for adequate business capital and an annuity of 20% of the net trust income payable to Dorothy,before any distribution to Derek. The annuity to Dorothy was to be paid monthly.

Required:

(i) Write brief notes on the estate duty treatment of the assets identified above. (4 marks)

(ii) Identify the taxpayer to be taxed in relation to the income accruing from the estate assets prior to andpost the confirmation of the liquidation and distribution account. (7 marks)

(b) Exotic Curios (Private) Limited was awarded a licence to sell its products in foreign currency with effect from 1 October 2008. The company’s payments for purchases for October and November 2008 included value addedtax (VAT) input tax which was paid in both foreign currency and Zimbabwe dollars.

The company is registered for VAT purposes and due to submit its value added tax return for the period ending30 November 2008.

The owner of the business, who is a friend of your organisation’s senior partner, asks for a briefing on how heshould proceed with the compilation of the VAT return, bearing in mind that the business income was receivedin both Zimbabwe dollars and foreign currency and his VAT claims were in both currencies as well.

He is particularly concerned with his possible chances of receiving his foreign currency VAT refund as clearly hehad paid more foreign currency input tax than what he had collected from his sales.

Additionally, he advises that the curio business by its very nature is difficult in terms of charging VAT. He has notcharged VAT on some of his sales and he wants to know how ZIMRA would react to this.

Required:

(i) Write brief notes on how he should draw up his VAT return, and comment on the refund issue, bearingin mind any legislative provisions or ZIMRA practice you are aware of regarding the administration ofVAT refunds. (5 marks)

(ii) Outline what ZIMRA’s reaction is likely to be in relation to the untaxed sales. (4 marks)

(20 marks)

End of Question Paper