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UKAT3043 Taxation lll (2013)

UNIVERSITI TUNKU ABDUL RAHMAN


FACULTY OF ACCOUNTANCY AND MANAGEMENT

ACADEMIC YEAR 2011/2012

BACHELOR OF COMMERCE (HONS) ACCOUNTING

YEAR 3 SEMESTER 1

Note:
Students maybe ask on any tutorial questions and spontaneous questions in the tutorial. As
such, you are expected to read the lectures and to complete all the tutorial questions before
coming to the tutorial class. This may encourage you to actively listen, participate and
fully benefit from each other in the class through the discussion and facilitation.

TUTORIAL 1 (Questions)

Q1 What is the difference between tax audit and tax investigation?

Q2 What are powers the Directors General of IRB in relation to tax investigation?

Q3What is a Capital Statement (CS) in regard to tax investigation? What are the areas
the CS covers?

Q4. State any FIVE criteria used by the Inland Revenue Board (IRB) in selecting a
taxpayer for an audit.

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TUTORIAL 2 : Tax Audit and Tax Investigation

Question 1

(a) Mr Arumugam has been carrying on a sole proprietorship business in Klang for the
past 12 years. As his tax agent, you have been submitting his annual tax returns for
him to the Inland Revenue Board (IRB) together with his accounts.

The IRB suspects Mr Arumugam of under-declaring his income and has thus issued
him a notice to furnish a capital statement for the years 2008 to 2010. Mr
Arumugam has requested you as his tax adviser to prepare the capital statement
based on the following information in respect of his assets and liabilities:

(1) A double storey bungalow located in Klang was bought in 1995 at a cost of
RM800,000. It had a market value of RM1,200,000, RM1,300,000 and
RM1,500,000 in 2008, 2009 and 2010 respectively.

(2) In 1990, Mr Arumugam inherited a shophouse located in Banting from his


grandfather who had acquired it in 1980 for RM100,000. He sold it in 2009
for RM200,000.

(3) Mr Arumugam acquired a Mercedes Benz car in the middle of 2008 on hire
purchase. He paid a downpayment of RM100,000 and took a 3-year hire
purchase loan of RM350,000. The outstanding loan balance as at end of
2008, 2009 and 2010 amounted to RM300,000, RM200,000 and
RM100,000 respectively.

(4) Mr Arumugam also bought a Toyota Camry for RM120,000 for his wife in
2006.

(5) The following savings accounts were opened in January 2010 and the
balances as at December 31, 2010 were as follows:
RM
Public Bank Bhd – self 150,000
Malayan Banking – wife 45,000
(6) Cash in hand as at end of 2008, 2009 and 2010 was estimated at RM15,000,
RM20,000 and RM30,000 respectively.

(7) Cost of jewellery belonging to Mrs Arumugam as at end of 2008, 2009 and
2010 was estimated at RM50,000, RM60,000 and RM90,000 respectively.

(8) His remisier confirmed that the cost of quoted shares held by Mr Arumugam
were as follows:
RM
December 31, 2008 900,000
December 31, 2009 1,600,000
December 31, 2010 2,000,000

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(9) Mr Arumugam recalled writing off an interest-free loan of RM100,000 in


2010. The loan was given to his mother-in-law in October 2009.

(10) Mr Arumugam has two children, both of whom are studying in the United
Kingdom. Public Bank Bhd was instructed by him to remit RM12,500 monthly
since January 2008 to each child’s bank account in the United Kingdom.

(11) Mr Aurmugam has declared income of RM300,000, RM400,000 and


RM500,000 for the years of assessment 2008, 2009 and 2010 respectively, and
paid income taxes of RM100,000 (in 2009) and RM120,000 (in 2010). His
wife had no income for the respective years of assessment.

(12) According to Mrs Arumugam, she estimated their household expenses to be


RM10,000 per month in 2008, RM15,000 per month in 2009 and RM18,000
per month in 2010.

(13) The sole proprietorship business started with a capital of RM50,000 and the
balance of the profit and loss account submitted to the IRB was RM70,000,
RM90,000 and RM120,000 as at December 31, 2008, December 31, 2009 and
December 31, 2010 respectively. The drawings account balance was
RM65,000, RM85,000 and RM95,000 as at December 31, 2008, December 31,
2009 and December 31, 2010 respectively.

Required:

Prepare Mr Arumugam’s capital statements (statements of assets and liabilities) as at


end of the years 2008 to 2010 and determine his additional income, if any, for the years
2009 and 2010.

Tutorial 3: Capital Statement

Encik Azman is the Executive Chairman of Cahaya Holdings Bhd, whose subsidiaries are
principally engaged in the property development and construction business for the past 10
years. Encik Azman was recently investigated by the Inland Revenue Board (IRB) for
under-declaring his income and has been issued a notice to furnish a capital statement for
the years 2011 to 2013. Encik Azman has requested you, as his tax adviser, to prepare the
capital statement based on the following information:

(1) Encik Azman and his brother, Encik Hassan, registered a partnership, Pembinaan
Cahaya in 2004 with a profit sharing ratio of 70:30. Encik Azman’s capital
contribution to the partnership was RM70,000. The partnership capital was
increased to RM1 million in July 2011 in order to obtain bank borrowings to
finance the projects.

In November 2012, the partnership business was transferred to a company, Cahaya


Construction Sdn Bhd (CCSB) for a consideration of RM2 million. Encik Azman
and Encik Hassan were respectively issued 1,400,000 and 600,000 shares of
RM1.00 each.

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UKAT3043 Taxation lll (2013)

(2) Encik Azman and his wife, Puan Noraini, incorporated Perumahan Cahaya Sdn
Bhd (PCSB) in 2007 with a capital of RM1 million in equal shares to undertake
property development projects in Shah Alam. PCSB incurred losses for the first 2
years but turned around in 2008 and started making huge profits from 2010. PCSB
did not pay any dividends over the years until 2012. Although Encik Azman and
his wife were directors of PCSB, they did not draw any salaries from the company
until 2013. The share capital of PCSB was increased to RM3 million on June 30,
2012 by the issuance of bonus shares.

The following transactions were extracted from the Directors’ current account with
PCSB:
Debit Credit
RM RM
January 15, 2012 Payment for credit card
expenses of Puan Noraini 5,000
March 20, 2012 Down payment for purchase
of an Alfa Romeo car for
eldest son 50,000
April 1, 2012 Cash withdrawal (unexplained) 15,000
August 20, 2012 Purchase of air tickets for
family holiday in Europe 30,000

October 2, 2012 Payment of life insurance


premium of Encik Azman 10,000
December 31, 2012 Dividend received 720,000
February 9, 2013 Contribution to political parties 60,000
May 31, 2013 Payment of Encik Azman’s
medical expenses 30,000
July 13, 2013 Remittance of university fees
for child’s education in UK 50,000
September 1, 2013 Encik Azman’s salary 80,000
December 31, 2013 Dividend received
1,080,000

The balances of Encik Azman’s current account with PCSB are:

Debit Credit
RM RM
December 31, 2011 200,000
December 31, 2012 250,000
December 31, 2013 100,000

(3) Cahaya Holdings Bhd (CHB) was incorporated on June 1, 2013 with a share
capital of 2 ordinary shares of RM1.00 each held by two individuals. On July 1,
2013, CHB acquired the entire equity interest in CCSB and PCSB and issued to
Encik Azman and Puan Noraini 10 million and 5 million CHB ordinary shares at
RM1.50 each respectively. On December 15, 2013, CHB shares were listed on
Bursa Securities and the closing price of the shares on December 30, 2013 was

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UKAT3043 Taxation lll (2013)

RM3.00 per share. On December 31, 2013, Encik Azman and Puan Noraini each
sold 2 million shares and realised a gain of RM3 million each.

(4) Encik Azman bought a 3-storey bungalow in Kenny Hills in 2010 for RM3 million.
The market value of the bungalow was RM3.5 million, RM4 million and RM4.5
million at end of 2011, 2012 and 2013. The outstanding mortgage balances of
RM1.5 million and RM1.0 million as at December 31, 2011 and December 31,
2012 on the bungalow were settled in 2013 using his lottery winnings of RM1.0
million.

(5) Encik Azman bought a BMW car in 2011 for RM700,000. The hire purchase loan
outstanding was as follows:
RM
December 31, 2011 500,000
December 31, 2012 400,000
December 31, 2013 300,000

(6) The Alfa Romeo car was purchased on March 20, 2012 for Encik Azman’s eldest
son for RM200,000 using an advance from CCSB. The balance owing was as
follows:
RM
December 31, 2012 100,000
December 31, 2013 50,000

(7) Savings account balances of Encik Azman’s eldest son as at December 31, 2013
were as follows:-
RM
Bumiputra Commerce Bank 50,000
HSBC Bank 10,000
The savings were from his son’s own income.

(8) Fixed deposit account balances of Puan Noraini with HSBC Bank are as follows:-
RM
December 31, 2011 200,000
December 31, 2012 300,000
December 31, 2013 2,300,000

(9) Cash in hand held by Encik Azman at end of 2011, 2012 and 2013 was estimated at
RM100,000.

(10) Cost of jewellery belonging to Puan Noraini was estimated at RM200,000 at end of
2011, 2012 and 2013.

(11) Encik Azman has three children, of whom the eldest is working whilst the other
two children are studying in the UK. He estimated that the overseas education
expenses of the two children are RM120,000 per child per year.

(12) Encik Azman reported the following income in his tax returns:

2012 2013
RM RM
Director’s remuneration - 80,000
Director’s fees - 20,000
Dividend income (gross) 1,000,000 1,500,000

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UKAT3043 Taxation lll (2013)

Puan Noraini has no income for the respective years of assessment.

(13) Encik Azman estimates his household expenses to be RM15,000 per month in 2012
and RM20,000 per month in 2013.

Required:

(a) Prepare Encik Azman’s capital statements (statement of assets and liabilities) as at end of
the years 2011, 2012 and 2013 and determine his additional income, if any, for the years
2012 and 2013.
(b)
TUTORIAL 4 : RPGT

1. Encik Indot transferred his house in Kuala Lumpur to his wife, Puan May on 10
March 2009 at the market value of RM300,000. The house was bought on 4 April
2008 for RM220,000.In June 2008 Encik Indot incurred RM30,000 on building
extension.
Puan May subsequently sold the house to Miss Fong on 2 March 2011 for
RM350,000. In 2006 she sold a shop house for RM350,000 which she had bought for
RM360,000. The shop house was sold within two years after the date of acquisition.
Required:
a) Compute the real property gains tax payable by Encik Indot and Puan May.

b) Advise Ms Fong of his obligations under the Real Property Gains Tax Act, 1976
(RPGT) as an acquirer of the bangalow lot and the consequences for failure to
comply with such obligations if the transaction is not exempted from RPGT.

2. On 1 June 2009 Mr Chan transferred his house in Johor Baru to his brother-in–law,
Mr Teh. The transfer follows from an agreement made verbally when they met on 2
January 2009. The consideration of RM 350,000 was fully paid 15 April 2009. The
market value was RM400,000.

The house had been purchased by Mr Chan on 11 May 2006 for RM288,000. Prior
to the disposal of the Mr Chan incurred the stamp duty on purchased RM 4,700.

Mr Teh subsequently sold the house for RM478,000 and incurred agents fees of
RM7,000 in connection with the disposal. Prior to the disposal of the house Mr Teh
spent RM28,000 on permanent renovation. The Sale and Purchase Agreement (S&P)
for this disposal was signed on 23 June 2012.

Required:
(a) In relation to the disposal by Mr Chan:
State, with reason(s), the date of disposal of the house and its disposal price
Compute the real property gains tax payable.

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(b) In relation to the disposal by Mr Teh:


1. State, with reason(s) the date of acquisition of the house and its acquisition
price.
2. Compute the real property gains tax payable on the disposal.

3. Mr Lim acquired a piece of property on January 2, 2002 for RM200,000. He


incurred RM100,000 on improving the property and such costs can be
supported by receipts.

On November 1, 2006, Mr Lim transferred the property to his 21-year old daughter
who subsequently sold it for RM600,000 on January 15, 2011. She incurred
RM20,000 in legal fees on the sale and RM40,000 on stamp duty on the original
transfer of the property from her father.

Required:
Compute the real property gains tax payable, if any, by Mr Lim and his daughter.

4. Supreme Bhd disposed of a plantation to Supreme Plantation Sdn Bhd, a subsidiary


company, on May 1, 2007 for RM2 million. The transaction was not subject to real
property gains tax (RPGT) pursuant to paragraph 17(1)(a), Schedule 2, RPGT Act,
1976. Supreme Bhd had acquired the plantation on June 15, 2000 for RM1
million. On June 30, 2010, Supreme Plantation Sdn Bhd disposed of the plantation
for RM3 million to a public listed company.

Required:
State the date of acquisition and acquisition price of the plantation for Supreme
Plantation Sdn Bhd for RPGT purposes.

Calculate the RPGT payable?

5. Alpha Sdn Bhd and Beta Sdn Bhd are both controlled companies. The following
are particulars of the companies at 31.12.2009:
Alpha Bhd Beta
Bhd
RM RM
Total Tangible Assets 1,200,000 1,200,000

Real Property (at market value) 700,000 950,000


30,000 RPC shares of Beta Sdn Bhd ? -
Total Shares Issued 120,000 120,000

Alpha Sdn Bhd acquired 30,000 shares of Beta Sdn Bhd on 20.12.2009 for RM
180,000. Beta Bhd became a Real Property Company(RPC) on 31.12.2009.

Beta Sdn Bhd issued 10,000 bonus shares to Alpha Sdn Bhd on 1.3.2012.

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Alpha Sdn Bhd subsequently sold the 40,000 shares in Beta Sdn Bhd at RM12 per
share on 3.6. 2012.

Required:

(i) State the acquisition price of the 30,000 RPC shares of Beta Sdn Bhd owned by
Alpha Bhd.
(ii) Determine when Alpha Sdn Bhd becomes a RPC and compute the real property
gains tax payable by Apha Sdn Bhd. Show all workings.

TUTORIAL 5 : RPGT

Question 1

Encik Shafik purchased and oil palm plantation Ladang Kimia, on October 15, 2008 for
RM2 million. On August 15, 2009, he transferred the plantation to Shafik Plantation Sdn
Bhd (SPSB), a company controlled by him in exchanged for 5 million shares of RM 1.00
each. On November 3, 2009, he sold 3 million of the shares in SPSB for RM 3.8 million to
Mr Teddy Wong.

On January 1, 2011, Supreme Plantation Bhd acquired the shares in SPSB from Encik
Shafik and MR Teddy Wong for a total consideration of RM 25 million. The breakdown is
as follows:
Number of Shares Consideration
Encik Shafik 2 million shares RM 10 million
Mr Teddy Wong 3 million shares RM 15 million

Other relevant information is as follows:

1. The company prepares its accounts to December 31 annually.

2. The market values of SPSB’s plantations were as follows:

December 31, 2009 RM 5 million


December 31, 2010 RM 20 million

3. SPSB is a real property company under the Real Property Gains Tax (RPGT) Act
1976 on 31.12.2010.

4. The total number of shares of SPSB at 31.12.2010 is 5 million.

Required:
Compute: The RPGT payable by Encik Shafik for:

i. Transfer of Ladang Kimia in 2009 to SPSB

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UKAT3043 Taxation lll (2013)

ii. Sale of 3 million shares in SPSB to Mr Teddy Wong


iii. Sale of 2 million shares in SPSB to Supreme Plantation Bhd
iv. The RPGT payable by Mr Teddy Wong for the sale of 3 million shares in SPSB to
Supreme Plantation Bhd.

Q2. XYZ Sdn Bhd (XYZ) is a controlled company. ABC owns shares in XYZ on
1.6.2008. XYZ is a RPC as at 21.10.2009. On 1.4.2010, XYZ disposed of its real
property assets and thus ceased to be a RPC. ABC disposes all their shares in XYZ on
2.1.2012.

1. Is the disposal of XYZ shares by ABC chargeable to RPGT?


2. How do you determine the acquisition price of the shares?

Q3.
Solid Sdn Bhd (SSB) was incorporated on May 1, 2006 as a wholly owned
subsidiary of Solid Corporation Bhd (SCB) with an issued and paid-up capital of
RM500,000 consisting of 500,000 ordinary shares of RM1.00 each. On May 23,
2006, SSB acquired a piece of land at a cost of RM1,000,000. The land was
acquired via a cash payment of RM500,000 and a loan of RM500,000 from SCB.
On November 20, 2006, the outstanding loan balance due by SSB was converted to
equity by the issuance of 500,000 ordinary shares of RM1.00 each to SCB. On
May 28, 2008, the land was revalued to RM2,000,000 and bonus shares of
1,000,000 were issued to SCB. On July 10, 2008, SSB acquired another piece of
land at a cost of RM2,000,000 financed by increasing its issued and paid-up capital
by the allotment of 1,000,000 ordinary shares of RM1.00 each at a premium of
RM1.00 per ordinary share to SCB. On March 3, 2010, all the shares in SCB were
disposed of to Trill Sdn Bhd (TSB) for consideration of RM15 million.

Required:
Compute the real property gains tax payable on the disposal of shares in SCB to
TSB.

Q4 Cleveland Sdn Bhd (CSB) holds investments in properties and shares in


subsidiaries which own real properties for business operations. However, a
property in Shah Alam which is owned by CSB is rented out to its subsidiary, C
Industries Sdn Bhd (CISB) for the manufacturing of plastic products. This property
was purchased on March 1, 2007 and its market value has appreciated substantially
since its purchase due to its proximity to the town area. As part of a scheme to
rationalise the operations of the CSB Group, the management intends to transfer
the property in Shah Alam from CSB to CISB.

Required:
Advise CSB whether the gain, if any, on transfer of the property will qualify for an
exemption from RPGT and the conditions that need to be fulfilled to qualify for
such exemption.

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TUTORIAL 6 : Tax Incentives

Q1. Sambal Malaysia Sdn Bhd (SMSB) is engaged in the business of manufacturing
sambal powder. SMSB and its subsidiaries close their accounts to December 31
annually. SMSB’s export performance for the financial years 2009, 2010 and 2011
was as follows:

Year FOB value of export sales


RM’000
2009 3,000
2010 5,000
2011 8,000

2010 2011
(RM) (RM)
Ex factory price per
2.00 2.40
packet of sambal
Cost of raw materials
1.20 1.20
per packet of sambal

In order to meet the increasing demand for its products, SMSB had incurred the
following capital expenditure in the year ended December 31, 2010 for the purpose
of increasing its production capacity:-
RM’000
Cost of land 600
Factory building (Note 1) 400
Plant and machinery (Note 2) 1,200
Generator purchased by SMSB’s
subsidiary in 2007 (Note 3) 200
Building used as child care centre 350
Motor vehicle provided to manager 280

Note:
1. SMSB relocated to a new factory for the purposes of its expansion project.
The new factory is two times bigger than the old factory.
2. The machinery is acquired under hire purchase for 24 equal instalments
commencing on January 2010.
3. The asset transferred is to replace another generator.

SMSB did not acquire any assets in the financial year ended December 31, 2011.

SMSB’s statutory income for the years of assessment 2010 and 2011 was
RM200,000 and RM1,500,000 respectively.

Required:

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UKAT3043 Taxation lll (2013)

(a) Advise SMSB of the most beneficial tax incentive which it is eligible to
claim and compute SMSB’s chargeable income based on the incentive
selected for the years of assessment 2010 and 2011.

Q2 Aeon Holdings (L) Ltd (AHL) is a company incorporated in Labuan under the
Offshore Companies Act 1990 for the purpose of holding overseas investments.
AHL does not carry out any other activities besides investment holding. AHL is
wholly owned by Aeon (M) Sdn Bhd (AMSB) which is in turn held by Aeon
Corporation (M) Sdn Bhd (ACMSB). During the year ended December 31 2008,
AMSB received dividends from AHL.

Required:
(i) State, with reasons, how AHL would be taxed under the Labuan Offshore
Business Activity Tax Act 1990.

(ii)State how your answer in (i) would be different if AHL also provides
management services in addition to investment holding activities.

(iii) State the tax treatment of dividends received by AMSB.

(iv) Assume AHL has obtained an offshore loan from T Trust Bank (L) Ltd
which is licensed to carry out offshore banking business in Labuan. AHL
has also obtained approval from the Minister of Finance to on-lend the
funds to AMSB. State, with reasons, whether AMSB is required to
withhold tax from interest payments made to AHL.

Q3

Top Plantation Sdn Bhd (TPSB) is principally an investment holding company with
its subsidiaries carrying on various types of businesses. TPSB is also engaged in
the cultivation of oil palm fruits on its plantations located in Johor. One parcel of
the plantation land measuring about 200 acres is located in a prime area near the
town of Johor Bahru and TPSB intends to transfer this parcel of land to a wholly
owned subsidiary to carry out mixed property development for a consideration to
be satisfied by the issuance of shares in the subsidiary.

Required:

(i) State the conditions under which relief from stamp duty under section 15A
of the Stamp Act, 1949 would be granted.

(ii) State whether the transfer of the 200 acres of the plantation land from TPSB
to the subsidiary qualifies for relief from stamp duty under the Stamp Act,
1949, giving reasons for your answer.
(iii) State whether the transfer of the 200 acres of the plantation land from TPSB
to the subsidiary qualifies for exemption from Real Property Gains Tax
1976. If so, state the conditions.
(iii) What would the tax implication be if a machinery would to be
transfer from TPSB to its wholly owned subsidiary.

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Q4. D Sdn Bhd is a resident company in Malaysia and carried on the business of
manufacturing furniture for the domestic as well as overseas markets. To expand the
market, in the year of assessment 2011 the company conducted a series of negotiations and
signed a contract selling new products to new customers abroad. The following expenses
were incurred
Type of expenses RM
Travel fare (economy class) for 2 person. 15,000
Cost of accommodation for 5 days for 2 person 7,000
Sustenance for 5 days for 2 person 2,000

What is the amount of the total tax deductible expenses for the above mentioned expenses?

Tutorial 7 : Income

Q1 Duplo Sdn Bhd (DSB) has been engaged in general trading for many years. In
2000, it diversified into agricultural activities through the acquisition of a rubber
estate in Shah Alam, Selangor. The estate was classified as a fixed asset in DSB’s
balance sheet. In 2009, DSB applied to the relevant authorities for conversion of
the estate for commercial use. After obtaining approval for the conversion in
December 2011, DSB applied for a housing developer’s licence. Before DSB
could commence development works on the land, it encountered financial
difficulties and sold the land in November 2012 for a profit of RM10 million. DSB
had no previous dealing in land.

Required:

State your arguments for and against the taxability of the profit on sale of the land.

Q2 High Class Housing Sdn Bhd has been a property developer for many years. It has
developed 50 units of shophouses in the commercial district of Damansara, Kuala
Lumpur for sale. However, it managed to sell only 30 units of these shophouses.
Out of the remaining units, the company decided to retain 5 units for its own use
as office premises. The balance of 15 units were rented out whilst the company
continued to advertise for their sale. The 15 units continued to be classified as
stock-in-trade whilst the other 5 units were reclassified from stock-in-trade to
fixed asset in the balance sheet.

The Inland Revenue Board has requested the company to state its reasons whether
section 24(2) of the Income Tax Act, 1967, which relates to withdrawal of stock-in-
trade, should be applied to the 20 units.

Required:

Advise the company, with reasons, whether section 24(2) of the Act would apply to
the 20 units of shophouses.

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Q3 Hi-Tech Group Bhd (HGB) is principally an investment holding company and


provides management services to its subsidiaries. HGB obtains loans from
financial institutions at competitive rates and on-lends the funds to its subsidiaries
at a mark-up for their working capital requirements. HGB has a team of 5
experienced finance personnel to manage and monitor the funds closely to ensure
efficient utilisation of resources. Surplus funds of HGB are placed in short-term
deposits to earn interest income. HGB derives management fees from the provision
of management services and interest income from the lending of funds to the
subsidiaries.

Required:

State your arguments for and against the treatment of the interest income received
by HGB as business income under section 4(a) of the Act.

Q4 Edar Sdn Bhd (Edar) was granted sole distributorship rights to sell Wigley Ltd’s
widgets in Malaysia. Edar has other distributorship rights apart from the rights
granted by Wigley Ltd.

Three years later, Wigley Ltd agreed to pay a lump sum compensation of RM2
million to Edar to allow Wigley Ltd to appoint other additional agents in Malaysia.

Required:

State the arguments for and against the taxability of the compensation received by
Edar.

Q5 Mast Shipping Sdn Bhd (MSS) carries on a shipping business. In 2011, it bought a
second-hand ship and sent it to a shipyard for repair. The time stipulated for
completion of the repairs was exceeded and the shipyard paid a compensation of
RM300,000 to MSS. The compensation was calculated by reference to the
estimated profit which would have been earned had the ship been used for MSS’s
business during the additional time taken for the repairs.

MSS entered into contracts with a petroleum company for the supply of diesel for
its ships at a predetermined price for 2 years. It was later found that the diesel due
under these contracts was in excess of its requirements. MSS thus allowed another
company to take delivery of the surplus diesel in return for a sum of RM1 million.

Required:

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State, with reasons, whether the amounts of RM300,000 and RM1 million are
taxable.
Q6 HGD Sdn Bhd (HGD) is principally engaged in the mixed development of a
township in Shah Alam. As part of its master plan submitted to the Government
authorities, two parcels of land within the township were designated for the
construction of petrol stations. These parcels of land, although reflected in the
accounts as land held for development, are intended for development as petrol
stations and are not for sale to the general public. HGD entered into two
agreements with Petronas Bhd (Petronas) for a 30-year lease of these parcels of
land for the construction of two petrol stations. The land was not reclassified into
fixed assets in HGD’s accounts upon its lease to Petronas.

Required:

State your arguments for and against the applicability of the stock withdrawal
provision under section 24(2) of the Act in respect of the lease of the two parcels of
land to Petronas.

Q7 Quality Homes Sdn Bhd (QHSB) has been engaged in the property development
business for the past 20 years. In 2007, it acquired 500 acres of estate land in
Perak primarily with the objective of developing it into a township, knowing that
the Government had indicated its intention to compulsorily acquire some parts of
the land about 5 years ago. The land was immediately classified as “fixed assets”
in the accounts. On July 1, 2007, 200 acres of the land were transferred to
“current assets” and development on the land commenced thereafter. The
remaining 300 acres of the land continued to be reflected as “fixed assets” and
harvesting of oil palm fruits continued until December 2011 when it was
compulsorily acquired by the Government and compensation of RM10 million was
received.

Required:

State your arguments for and against the taxability of the compensation of RM10
million.

Q8
Ace Sdn Bhd, a manufacturing company, has the following bank overdraft facility &
investments as at December 31, 2011:
RM
A. Bank overdraft 450,000

Interest on overdraft per Income Statement 28,000

B. Investments Dividend
Shares (Portfolio) Units Cost Income

ABC Bhd (pioneer status) 10,000 10,000 8,000

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exempt
PQR Sdn Bhd (single tier) 20,000 20,000 2,000
XYZ Bhd (imputation)(gross) 15,000 15,000 1,000
45,000

Properties Rental Allowable


Cost Income Expenses

House 60,000 10,000 3,000


Flat 55,000 2,500 1,500
115,000

Loans/Advances Amount Income

Loan to subsidiary A 35,000 2,200


Advances to subsidiary B 5,000 Nil
40,000
Required:
(i) Compute interest to be restricted under Section 33(2)
(ii) Compute interest applicable to:
a. Shares
b. Loan/Advances
c. Properties.
(iii) Compute statutory income for dividend, interest and rental income for the year
of assessment 2011. (9 marks)

Tutorial 8: Business Deduction

Q1 Express Road Transport Sdn Bhd (ERTSB) is engaged in the transportation and
freight forwarding business. It owns a fleet of vehicles for distributing goods for its
customers. In the course of distributing the goods, its drivers often exceed the speed
limit along the highways, resulting in fines being imposed on them. Although the
company policy is that all its drivers must observe the law by complying with the
speed limits, ERTSB was imposed with substantial fines by the authorities each year
due to the drivers exceeding the speed limit in order to meet delivery times.
Required:

State your arguments for and against the deductibility of the fines paid by ERTSB.

Q2 DX Sdn Bhd (DXSB), a company engaged in the timber extraction and saw milling
business, paid RM3 million to the Sabah State Government for a concession to
extract timber for a period of 5 years. The sum of RM3 million is determined by
reference to the estimated volume of timber logs that can be extracted during that
period. In addition, there is an annual royalty payable to the State Government. As
part of the agreement, DXSB can only extract not more than 200 million cubic

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UKAT3043 Taxation lll (2013)

meters of timber logs from the land during the period. The timber extracted was
sold as timber logs or used in the saw milling business.

Required:

State, with reasons, your arguments for and against the deductibility of the RM3
million paid to the Sabah State Government.

Q3 Able Sdn Bhd (Able) entered into an agreement on August 25, 2009 with its main
competitor, Kane Sdn Bhd (Kane) under which Able agreed to pay Kane RM1
million annually over a period of 5 years if Kane closed down its manufacturing
business and obtained its supply of materials for a period of 5 years from Able at a
pre-agreed price.

Able subsequently sub-contracted the supply contract to Bon Sdn Bhd (Bon) in
exchange for amounts payable by Bon based on the volume of materials supplied
by Bon to Kane.

Required:

State your arguments for and against :


(i) the deductibility of the payment made by Able to Kane; and
(ii) the taxability of the receipts by Able from Bon.

Q4 Pindah Sdn Bhd (Pindah), an existing manufacturing company, is proposing to


construct a new factory at a different site currently occupied by squatters. In order
to proceed with the construction, Pindah paid compensation to the squatters to
vacate the land.

During construction, the owner of a neighbouring building commenced legal


proceedings to stop the construction on the grounds that the construction would
cause damage to his property. Pindah agreed to settle the case out-of-court and paid
compensation to the neighbour.

Required:

State, with reasons, whether the payments made by Pindah qualify for deduction as
a revenue expense or otherwise under the Act.

Q5 VGT Sdn Bhd (VGT) operates cinemas in the Klang Valley under an exclusive
contract with SCG Sdn Bhd (SCG) which has the sole rights to distribute Hong
Kong SCG films in the Klang Valley. VGT has had this arrangement for the past 15
years.
A new company has submitted an application to SCG to be allowed to screen Hong
Kong SCG films in the Klang Valley. VGT took legal action to prevent SCG from
approving the application.
Required:

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UKAT3043 Taxation lll (2013)

Explain with reason(s), whether the legal costs incurred by VGT will qualify for
tax deduction.

Q6 Mr Tan has come to seek your advice on the tax affairs of A Sdn Bhd and its wholly
owned subsidiaries (B Sdn Bhd, C Sdn Bhd, D Sdn Bhd and E Sdn Bhd). A Sdn Bhd
is owned exclusively by Mr A, Mrs A and their daughter Miss A. The A Sdn Bhd group
has a 31 December year end. Mr Z outlines the following to you:

(a) B Sdn Bhd manufactures microchips and has been undertaking this activity for
many years. Later in the year 2009, B Sdn Bhd will commence production of a new
memory chips (not a promoted product) and will require a new automated production
line costing RM5 million. Mr Tan is proposing to put the production line and
the manufacturing operations in C Sdn Bhd which to date has not
:
commenced operations. - •' s

Required:

Mr Tan wants to know if this proposal is tax efficient. What is your advice?

(b) D Sdn Bhd has been manufacturing flash micro chips (not a promoted product) for
the last five years. In the year ended 31 December 2006, D Sdn Bhd purchased a
newly contracted factory to further increase production by 30%. The factory was
put into use immediately.

Mr Tan is thinking of rationalising the holding of the group's properties. D Sdn Bhd
would transfer its new factory to E Sdn Bhd, which is currently dormant and
whose only asset is RM2 in cash, before the end of 2009. D Sdn Bhd would
subsequently rent the factory from E Sdn Bhd.

Required:
t

(i) What are the tax issues for D Sdn Bhd associated with the proposed transfer?

(ii) What are the tax issues (including stamp duty and real property gains tax) for E
Sdn Bhd?

TUTORIAL 9,10 : Corporate Tax System

Question 1

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UKAT3043 Taxation lll (2013)

The existing group structure of K Industries Sdn Bhd and its subsidiaries (KI Group of
Companies) is as follows:

K Industries Sdn Bhd


(KI)

100%

K Marketing Sdn Bhd K Engineering


(KM) (KE)

100% 100%

K Products Sdn Bhd Kwheel Sdn


Bhd Bhd

(KP) (KW)

All the companies in the KI Group have a December 31 financial year-end and a paid-up
capital of more than RM2.5 million in ordinary shares.

KI is principally providing management support services to its subsidiaries. The


shareholders of KI are members of the family of Dato’ K. Management fees charged by KI
to its subsidiaries were insufficient to recover the costs incurred in providing the
management services.

KM is engaged in marketing the Group’s products principally for export to the US and
European markets. Its marketing fees are charged based on 2% of the annual sales turnover
of the subsidiaries to which it provides marketing services. This basis of charge resulted in
substantial profits in some years and significant losses in other years.

KP is engaged in the manufacturing of brake discs and pads. Due to the slowdown in the
automotive industry and stiff competition, it has been incurring significant losses over the
years. Besides significant unutilised losses, KP has unutilised reinvestment allowances and
capital allowances due to the expansion programme in the last 4 years.

KE provides engineering and technical services to the subsidiaries in the Group. Its fees
are charged based on cost plus 5% markup and it makes a small profit annually.

KW is engaged in the manufacturing of wheel hubs for many models of motor vehicles. In
view of the wide usage of its products, it is a highly profitable business. It has been paying
high income taxes after it pioneer status expired 2 years ago. Although it enjoys
reinvestment allowance for its expansion programmes, the taxes remain high. It has
significant balances in its exempt income account arising from the pioneer status and
reinvestment allowance incentives enjoyed over the years.

Required:

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UKAT3043 Taxation lll (2013)

Advise how the KI Group of Companies could re-organise itself to achieve greater tax
efficiency. If your recommendation includes any transfers of shares and/or assets, state
whether these would qualify for exemption from real property gains tax and/or stamp duty,
as the case may be.

Question 2

The existing group structure of Tenaga Holdings Sdn Bhd (TH) and its subsidiaries (TH
Group of Companies) is as follows:

Tenaga Holdings Sdn Bhd


(TH)

100%

Tenaga Marketing Tenaga Southern Tenaga Development


Sdn Bhd (TM) Sdn Bhd (TS) Sdn Bhd (TD)

100% 100%

Tenaga Pipes Tenaga Northom


Sdn Bhd (TP) Sdn Bhd (TN)

51%

Tenaga China
(TC)

TH is an investment holding company providing management support services to its


subsidiaries without charging any service fees. The shareholders of TH are Mr Lee and his
wife. TH does not have any external borrowings as it has substantial cash reserves.

TM is a profitable marketing company trading in steel pipes.

TP has carried on a highly profitable steel pipes manufacturing business in Trengganu since
2006. TP now plans to embark on an expansion project to meet the increasing demand for its
products. The new plant would cost about RM50 million and TP proposes to borrow RM30
million from TH at an interest rate of 5% per annum whilst the remaining RM20 million
would be financed by operating leases to be obtained from a leasing company. TP has a
substantial amount of unabsorbed capital allowances.

TS operates a profitable supermarket chain in the southern region of Malaysia.

TN operates a supermarket chain in the northern region. Due to the stiff competition from
other supermarkets in the region, TN has been incurring substantial losses from its operations.
TN also has substantial unabsorbed capital allowances brought forward from the year of
assessment 2010.

TC is a highly profitable trading company in China. It has been distributing substantial


dividends to TN.

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UKAT3043 Taxation lll (2013)

Required:

Advise how the TH Group of Companies could re-organise itself to achieve greater Malaysian
income tax efficiency.

Question 3
The existing group structure of J Holdings Sdn Bhd (JH) and its subsidiaries (JH
Group of Companies) is as follows:

J Holdings Sdn Bhd


(JH)

100%

J Development J Shoes J Marketing


Sdn Bhd (JD) Sdn Bhd (JS) Sdn Bhd (JM)

100% 100%

J Products J Footware
Sdn Bhd (JP) Sdn Bhd (JF)

51%

J China
(JC)

JH is an investment holding company not listed on Bursa Malaysia. It is providing


management support services to its subsidiaries without charging any service fees.
The shareholders of JH are Mr Jones and his wife. JH obtained external borrowings
to finance investment in JS and JD.
Both JS and JD are companies operating under the single tier system and JS pays
substantial dividends to JH..

JP is a loss-making manufacturing company in household products.

JF has carried on a highly profitable footware manufacturing business in Pahang


since 2006. JF now plans to embark on a moderisation project to meet the
increasing demand for its products. The new plant would cost about RM40 million
and JF proposes to borrow RM5 million from JH at an interest rate of 5% per
annum whilst the remaining RM35 million would be financed by operating leases
to be obtained from a leasing company. JF has a substantial amount of unabsorbed
capital allowances and reinvestment allowances.

JM is the marketing arm of JF to the European market. The company is profitable


and intends to expand its export to United States in the current financial year.

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UKAT3043 Taxation lll (2013)

JS carried on the manufacturing of shoes. Due to the stiff competition from other
competitors in recent years, JS has been incurring substantial losses from its
operations since 2010. JS also has no unabsorbed losses and unabsorbed capital
allowances but has substantial credits in its exempt account due to reinvestment
allowances. The company also has substantial retained earnings.

JC is a highly profitable trading company in China. It has been distributing


substantial dividends to JF.

JD is currently experiencing loss in its property development business. Mr Jones


plans to inject a piece of land in Klang Valley into JD for development following
the rise of demand for housing in that area. Mr Jones acquired the land 4 years ago
and he proposes to dispose of the land to JD at cost.

The paid up ordinary share capital of all companies in the JH group is above
RM2.5 million except JM.

Required:

Advise how the JH Group of Companies could re-organise itself to achieve greater
Malaysian income tax efficiency.

TUTORIAL 11 : Unit Trust & REIT

Question 1

People Unit Trust (resident in Malaysia) was formed on 1.4.1988. It invests its funds locally
in blue chip shares and fixed deposits. Its profit and loss account for the year ended
31.3.2011 was as follows :

Income: RM
Dividends ( Malaysia; net ) 900,000
Dividends ( Malaysia; Pioneer exempt income) 100,000
Interest (Note 1) 200,000
Dividends (China) 100,000
Rent (Note 2) 300,000
Gains from sale of Investments 1,000,000 2,600,000

Less: Expenses
Share registration expenses 48,000
Fund manager’s remuneration 130,000
Audit & Secretarial 15,000
Trustee fees 50,000
Entertainment 2,000
Postage & Stationery 6,000

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UKAT3043 Taxation lll (2013)

Bank charges 5,000


Depreciation 6,000 262,000
Net profit: 2,338,000

Notes:

1. Interest is paid in respect of debentures approved by the Securities Commission.


The debenture is not a convertible loan stock.

2. A centralised air conditioner was installed for RM 400,000 in 2008 at the premises
rented out in Malaysia.

Required:

For the year of assessment 2011, compute :

i. The fraction of permitted expenses;

ii. The tax payable by People Unit Trust for the year of assessment 2011.

Question 2

The income statement of RE Trust (REIT for the year ended 31 December, 2012
shows the following:
RM’000
Income
Gross rental income 25,000
Less: Operating expenses (8,000)
-----------
Net rental income 17,000
Interest income (from local banks) 200
Realised loss on sale of quoted securities (1,500)
Gross dividend income (tax exempt) 150
-----------
15,850
Expenditure
Manager’s fee (2,000)
Trustee’s fee (100)
Professional fees (all deductible) (1,165)
Printing, stationery & postage (all deductible) (300)
Provision for unrealised loss on revaluation of quoted
securities written back 2,000
-----------
Profit before taxation 14,285
-----------

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UKAT3043 Taxation lll (2013)

In the year 2012, REIT acquired an industrial building from AR Sdn Bhd who
owns more than 50% units trust of REIT. The building was constructed by AR Sdn
Bhd for RM 3,000,000. The building was not used as an IB by REIT.

The total income distributed to unitholders amounted to RM12,500,000.

Required:

(i) Compute the amount of tax payable (if any) by REIT for the year of
assessment 2012.
(4 marks)

(ii) State how the unitholders of REIT would be taxed. Assume the unitholders
comprise of resident individuals, resident and non-resident companies.

Question 3

(a) Explain the taxation of income of an REIT under the Income Tax Act 1967?
(b) State the different types of distribution by the REIT to the various categories of
unitholders? Explain how would each category of the unitholder be taxed on those
distributions?

Tutorial 12 : Individual Tax Planning

Q1 Mr Jack, an expatriate consultant has been offered an appointment as regional director


in a MNC in Malaysia in 2011. He is expected to be paid an annual salary of
RM300,000 per annum and a contractual bonus of RM60,000 in the year 2013.
Jack is married and would be expecting his first child in 2013 which will cost him
RM12,000.
He complains that his Malaysian tax payable is high and wants the company to
restructure his remuneration to reduce his Malaysian tax liability.
Mr Jack was interviewed with a view to restructure his remuneration package for the
year 2013. From the interview , it is found that certain of his expenses[ in the year
2011] as follows may be use to restructure the package:
RM
1. Rental : unfurnished portion 36,000
2. Rental: fully furnished portion 12,000
3. Petrol ( including official trips) 8,400
4. Leave passage to home country 14,000
5. Gardener 6,000
6. Driver 13,200
7. Bank loan for house ( RM300,000) : interest 15,000

Required:
i. Set out a tax efficient remuneration package for Jack such that there is no increase
in cash outlays and no loss to the employer in adopting such a package. Use some
or all of the components stated without bringing in new ones.

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UKAT3043 Taxation lll (2013)

ii. Compute on a full year basis the tax payable of Jack under the restructured
remuneration package for the year of assessment 2013.

iii. Amount of tax savings from the restructured remuneration package for the year of
assessment 2013.

Q2 Excel Sdn Bhd proposes to appoint En Ramli as its managing director at a salary
RM288,000 per annum.
The company expects him to be responsible for his own expenses as follows:
RM
1. Rent a fully furnished house (furnished portion RM6,000) 72,000
2. Salary of a domestic servant 14,400
3. Car fuel 3,600
4. Child care expenses for his 5 year old daughter 4,800
5. Mobile phone bills for one unit 6,000
6. Leave passage to Kuching (3 times a year with family) 12,000

Other information:
En Ramli is married with 2 school going children. He contributes to the Employment
Provident Fund (EPF) at a rate of 11%. His wife is not working.

Required:
iv. Set out a tax efficient remuneration package for En Ramli such that there is no
increase in cash outlays and no loss to the employer in adopting such a package.
Use some or all of the components stated without bringing in new ones.

v. Compute on a full year basis the tax payable of En Ramli under the restructured
remuneration package for the year of assessment 2013.

vi. Amount of tax savings from the restructured remuneration package for the year of
assessment 2013.

Q3. On 2.1. 2011, James was offered Employee Share Option Scheme (ESOS) at RM2 per
share for 2,000 units every year for 3 years.

The date of option offered and exercisable and the market value is as follows:

Date of option offered & No of units Market value per Unit


exercisable (RM)

2.1.2011 2,000 2.80

2.1.2012 2,000 3.20

2.1.2013 2,000 3.50

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UKAT3043 Taxation lll (2013)

James exercised his option by purchasing 3,000 units on 25.3.2012 and another 2,000
units on 15.2.2013.The market value of the shares at 25.3.2012 and 15.2.2013 are
RM3.00 and 3.30 respectively.
Required:
1. Compute the taxable value from the share benefits for YAs 2012 and 2013.

2. Advise the responsibility of the James in relation to the share benefits

TUTORIAL 13 : Shipping

Question 1

Pacific Crown Line Limited, a shipping company resident in Austria, derived gross
freight income of RM760,000 from Malaysia for the ended December 31, 2011.

Under the double taxation agreement between Austria and Malaysia, income
derived by an enterprise of Austria from the operation of ships in international
traffic may be taxed in Malaysia but the tax chargeable in Malaysia on that income
shall be reduced by an amount equal to 50% of such tax.

Required:

Compute the Malaysian tax payable by Pacific Crown Line Limited on the income
derived from Malaysia for the year of assessment 2011

Question 2.

Shipline Sdn Bhd is a Malaysian resident shipping company which has three ships.
Two of the sea going ships, Vessel A and B, are registered under the Malaysian
Shipping Ordinace, 1952 for transporting of cargo. The third vessel, Vessel C, is
registered in Hong Kong.

The company provided the following information for the year ended December 31,
2012:

Vessel A Vessel B Vessel C


RM’000 RM’000 RM’000

Freight income from transporting cargo 600 - -


Voyage charter hire charges - 200
-
Freight forwarding charges - - 200
Less:
Operating expenses:

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UKAT3043 Taxation lll (2013)

Repair and maintenance 80 40 20


Crew expenses 120 80 100
Fuel 100 115 20
Drydocking expenses 50 40 20
Depreciation 30 10 10
Salaries, wages & allowances 30 20 10
Other operating expenses
(fully deductible) 10 10 15
------- ------ -----
420 315 195
------ ------
-----
Net profit/(loss) before taxation 180 (115) 5
----- ------ ----
Capital allowances 50 10 2
==== ==== ====

Required:

i. Explain the scope of income tax that applies to a Malaysian resident shipping company.
ii. Explain the scope of income tax that applies to a non resident shipping company.
iii. Compute the chargeable income and exempt income of Shipline Sdn Bhd for the year
of assessment 2012.

Question 3.

A vessel registered in Hong Kong owned by Moon Sail Ltd, a non resident shipping
company, derived the following gross income from Malaysia:

Date Called at Port Klang Amount (RM)

2.2.2010 (First Call) 400,000


3.5.2012 1,000,000
5.8.2012 6,000,000

The acceptable certificate issued by Hong Kong’s tax authority in respect of year
ended 31.12.2012 contained the following information:

World gross income RM 178,500,000


World adjusted income RM 158,000,000
Tax depreciation RM 152,000,000

Required

Assuming that the basis period for a year of assessment is the basis year:

(i) Compute the Malaysian tax payable for the years of assessment 2010 and
2012 on the basis that no acceptable certificate was issued by Hong Kong’s
tax authority.

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UKAT3043 Taxation lll (2013)

(ii) Compute the Malaysian tax payable for the year of assessment 2012 on the
basis that the acceptable certificate was issued by Hong Kong’s tax
authority.

(iii) Explain the term “acceptable certificate” in relation to a non-resident


operator.

Question 4

SL Sdn Bhd, is a resident shipping company which has 4 ships. The adjusted
income and capital allowance are as follows for the years of assessment 2011 and
2012:

YA 2011 2012

Adj Inc/(loss) CA Adj Inc/(loss) CA

M’sian Ship 1
(800,000) (500,000) 1,300,000 300,000
(Exempt)

M’sian Ship 2
3,500,000 (700,000) (500,000) 400,000
(Exempt)

Non M’sian 3 500,000 120,000 400,000 112,000

Non M’sian 4 400,000 108,000 450,000 110,000

Compute the chargeable income and exempt income of SLSdn Bhd for the years of
assessment 2011 and 2012.

TUTORIAL 14 : Leasing & OHQ

Question 1

(a )List three examples of when a lease will be deemed to be a sale under the Income Tax
Leasing Regulations, 1986.

(b) Explain the tax treatments of the lease payments made by the lessee and the amount
received by the lessor if :

i. The arrangement is a lease arrangement

27
UKAT3043 Taxation lll (2013)

(3 marks)

ii. The arrangement is a sale arrangement

(c) Integrity Leasing Sdn Bhd operates both leasing and hire purchase activities. The
following information was given in relation to year of assessment 2012:

Leasing Hire
Purchase
RM RM
Gross income 800,000 400,000
Adjusted income (before taking into account interest and
Common expense) 200,000 100,000
Capital allowance on:
-leased assets 80,000 Nil

Common expenses (excluding interest costs): 60,000


Interest costs: 45,000
Common capital allowances: other assets 30,000

Required:

Compute the aggregate income for Integrity Leasing Sdn Bhd for the year of assessment
2012 as stipulated in the Income Tax Leasing Regulations 1986.

Q2 The directors of Cekap Furniture Sdn Bhd (CFSB) are proposing to acquire new
machineries costing RM2 million for their furniture business in the basis period for
the year of assessment 2013. CFSB will lease the machineries under an operating
lease from a finance company for a period of 5 years at a monthly lease rental of
RM35,000.

i. Advise CFSB on the tax implications for financing the machineries under
lease.

ii. Explain the tax implications on the lessor for financing the machineries
under lease.

iii. Explain the tax implications if CFSB decides to finance the machineries
under hire purchase instead of leasing.

iv. Explain the tax implications if CFSB decides to purchase them outright by cash
instead of leasing. The amount of cash is obtained through a bank borrowing.

v. In respect of the tax implications in (i), (ii) and (iii), state with reasons which
alternative should CFSB opt for if the company is a profitable company and
eligible for reinvestment allowance.

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UKAT3043 Taxation lll (2013)

Question 3

RH Ltd , a Canadian multinational company, intends to use Malaysia as a platform for providing
management, administration and technical support to its related group entities in Singapore,
Thailand, Hong Kong and Malaysia. They intend to set up a new subsidiary, NewCo, to conduct
those activities and also extend loans to their related companies.

Required:

(a) What tax incentive may NewCo be granted? Advise RH Ltd on the eligibility conditions
associated with that tax incentive of NewCo? State the period of exemption and the income
exempted which NewCo would enjoy under that tax incentive?

29