Module D 2012.06_COmment

Module D (June 2012 Session) Page 1 of 6

Qualification Programme Examination Panelists Report

Module D Taxation

(June 2012 Session)

(The main purpose of the following report is to summarise candidates common weaknesses

and make recommendations to help future candidates improve their performance in the

examination.)

(I) Section A Case Questions

General Comments

The case study tested the candidates knowledge in a generic business context from

different tax perspectives. The questions comprehensively covered the computation

of tax liabilities, an elaboration of a tax efficient planning scheme, an identification of

tax implications on consulting fee income, as well as an evaluation of PRC Business

Tax and Value Added Tax exposures on sales income derived by a PRC entity.

Candidates performance with regard to the scope of profits tax was generally

satisfactory. However, the results related to PRC tax and elaboration of an efficient

planning scheme from salaries tax perspectives were below expectations. Many

candidates were not familiar with the PRC tax regime, and they also could not

understand the respective questions about the tax planning scheme. In this regard,

substantial marks were lost in these questions, which then affected overall

performance in this section.

Specific Comments

Question 1(a) 3 marks

This question tested the candidates ability to calculate depreciation allowance.

Performance was generally satisfactory. However, common mistakes were found in

the incorrect calculation of principal repayment, especially due to applying the

incorrect number of instalment months. Also, some candidates did not show their

working for the computation of initial allowance.

Question 1(b) 8 marks

Candidates generally were able to demonstrate the technique for calculating profits

tax liabilities as required in the question. The majority of the candidates were familiar

with the layout for profits tax computation. Performance in this question was also

satisfactory. However, some candidates did not use profit before taxation to compute

the assessable profits. Some candidates concluded their computation on assessable

profits without calculating the profits tax liabilities. In addition, some candidates

wrongly focused on writing detailed explanations with respect to their tax treatments,

which were not required by the question.


Question 1(c)(i) 4 marks

This question tested the candidates knowledge of the taxability of interest income.

Candidates were generally able to apply the relevant interest income exemption

order and were able to obtain high marks. However, some candidates wrongly

focused on the provision of credit test, which was irrelevant to this question. Some

candidates seemed to have mixed up their answer on the deductibility of interest

instead.

Question 1(c)(ii) 4 marks

This question was aligned with Question 1(c)(i) and tested the candidates knowledge

on the deductibility of interest expenses. The performance of the candidates was

less satisfactory compared to Question 1(c)(i). Quite a number of candidates

wrongly applied subsections of section 16(2) of the Inland Revenue Ordinance (IRO)

when tackling the respective interest expenses as stated in the question. Some

candidates did not understand the inter-relationship of interest income taxability and

interest expense deductibility under the interest income exemption order. Some

other candidates just copied the IRO without appropriately applying it to the question.

Question 2 6 marks

This question tested candidates knowledge of PRCs Business Tax and Value

Added Tax. The question was straightforward, but it appeared that candidates were

not familiar with the respective tax regime. Some candidates simply copied the law

from the study materials without any relevant application to the question. Some other

candidates did not attempt this question and left this question totally blank. This

indicated that they were not familiar with PRC tax.


This question required candidates to identify a tax efficient rental reimbursement

scheme for replacing the prevailing cash allowance received by the director as

stipulated in the case question. Candidates generally managed to outline the

framework of the scheme, and accordingly obtained satisfactory marks. However,

the elaborations provided by candidates were not comprehensive, and lacked a

coherent and systematic discussion. Some candidates wrongly focused on

discussing the provision of other forms of benefit-in-kind to the director, which were

not directly relevant to this question.



This question required the candidates to identify the circumstances under which a

rental reimbursement scheme is tax efficient for the taxpayer. However, the results

for this question were not satisfactory. Most of the candidates did not understand the

question and provided irrelevant answers.

Question 3(c) 7 marks

This question tested the candidates knowledge in identifying the requirements of

arranging a proper rental reimbursement scheme accredited by the Inland Revenue

Department (IRD). The results for this question were also not satisfactory.

Candidates generally did not have sufficient knowledge of the respective

documentation and required control for a proper rental reimbursement scheme.

Some candidates who attempted this question were on the right track, but they could

only provide a very brief analysis without detailed elaboration. Some candidates

wrongly approached the question by discussing anti-avoidance provisions in the IRO

or the procedures to apply for an advanced ruling.


This question tested the candidates ability to differentiate contract of service and

contract for service with the support of a relevant court case. The results for this

question were fair. Some candidates could distinguish between the two by the

appropriate citing of a court case for illustration purposes.


This question tested the candidates knowledge in identifying the parameters for

evaluating the taxability of consultancy income from a contract of service or contract

for service perspective. Information relevant to the questions was comprehensively

elaborated in the IRDs Departmental Interpretation and Practice Notes (DIPN) No.

25 (November 2011). Candidates who analyzed the required information mentioned

in DIPN 25 could generally obtain high marks for this question. Some candidates

wrongly interpreted the questions by focusing on the discussion regarding the source

of income or the locality of employment income.

It was also noted that some candidates only managed to mention three kinds of

information which indicated that these candidates were not aware of the recently

revised DIPN 25 (November 2011) which mentions four kinds of information.


(II) Section B Essay/Short Questions

General Comments

The general performance of candidates in this section was satisfactory. There was a

mix of technical and practical issues. Candidates who performed well were those

who could analyse and apply tax rules in a practical manner. For Questions 5 and 6,

which required the direct application of tax principles on income from employment

and gains from property transaction, most candidates did not encounter any

problems and scored very well. However, when dealing with Questions 7 and 8,

which called for a discussion on depreciation allowance and upfront payment for

insurance agent, quite a divergent performance was observed. As future

practitioners, candidates are advised to give considerable attention to these

complicated tax issues. They are also advised to have better time management,

which is vital to their overall scoring in the examination.

Specific Comments

Question 5(a) 3 Marks

This was a rather straightforward question which required candidates to evaluate the

source of Barrys employment with A Inc. Their performance in this question was

satisfactory. Most candidates were able to identify the three main factors for

determining the source of employment and apply them to Barrys case.

Question 5(b) 3 Marks

This question tested candidates knowledge about the taxability of a contractual

termination payment. The relevant and latest authority on this issue is Fuchs, Walter

Alfred Heinz v CIR, FACV 22/2009, unreported, 1 February 2011, a Court of Final

Appeals decision. However, most candidates could not quote the Fuchs case to

support their explanation. Some candidates even misunderstood the question as

one on salaries tax exemption for overseas services and therefore failed this

question in its entirety.

Question 5(c) 8 Marks

This question required candidates to ascertain whether, when and how the gain

realized by Barry from the exercise of the share option should be assessed to

salaries tax. The overall performance was satisfactory. Most candidates could

mention that Barry' share option had been granted subject to his service during a

vesting period, and that the gain realized therefrom should be assessed on a time

apportionment basis. However, not many were able to compute the assessable

amount by working out the number of days spent in Hong Kong during the vesting

period correctly.


Question 5(d) 6 Marks

This question asked candidates to draft a notice of objection on behalf of Barry.

Many candidates performed well in this question, except that some candidates failed

to recognize that the notice should be drafted in the capacity of Barrys

representative, not Barry himself. There were also candidates who did not set out all

relevant grounds of objection and did not mention that Barry had to submit a

completed tax return to validate his objection. They thus lost marks on these points.


Another straightforward question requiring candidates to determine whether a

residential flat held by Douglas was trading stock or capital asset. Many good

answers were provided in this question. Those who did not score well failed to

identify all the relevant factors such as no trading history and the vendors financial

ability to hold the flat on a long-term basis. Some candidates even included in their

answers a discussion on the source of profits, which is irrelevant and a complete

waste of time.

Question 6(b) 6 Marks

This question aimed at testing the candidates stamp duty knowledge with regard to

share transactions. The performance was not satisfactory because they were only

able to point out some basic stamp duty requirements for the sale and purchase of

shares between Douglas and Frank. Most of them failed to invoke section 24(1) and

deem the amount of the loan undertaken by Frank as part of the consideration for

stamp duty computation.

Question 7 7 Marks

This question asked candidates to determine (a) whether the paintings introduced by

Gary into his two businesses were plant and in turn entitled to depreciation

allowance, and (b) how the depreciation allowance, if any, should be computed,

taking into account the fact that the paintings had been used by Gary for private

purposes. Most candidates were not able to grasp the gist of issue (a), however,

they could still distinguish the tax treatments between the painting used to decorate

the chamber and that for the restaurant. As for issue (b), quite a number of

candidates failed to recognize that the paintings had been used by Gary for private

purposes and therefore even if they were to be entitled to depreciation allowance, no

initial allowance could be granted and notional allowances for the years of private

use should be included in the calculation of the 2010/11 annual allowance.



This question required candidates to ascertain whether the initial signing fee

received by an insurance agent should be chargeable to profits tax and if so, when it

should be brought into the tax charge. These issues have been well settled in

Lo Tim Fat v CIR 6 HKTC 725. However, many candidates did not seem to have

any knowledge about this court case. Most of them could only mention that the initial

signing fee was a trading receipt and should be taxable. As for the timing of

assessment, quite a number of candidates claimed that the fee should be assessed

in equal shares over five years, having regard to Herberts contingent liability for

repayment. However, such treatment has been rejected in Lo Tim Fats case.

Question 8(b)(i) 3 Marks

This question called for a discussion on the tax representatives ethical obligations in

the event that irregularities were found in Herberts tax affairs. Most candidates did

well in this question. They pointed out that the representative should advise Herbert

of the irregularities and recommend him to report the irregularities to the IRD. Those

who scored well could even mention that the representative had no obligation to IRD

without Herberts consent.

Question 8(b)(ii) 3 Marks

This was another question on ethical obligations, where Herbert asked the tax

representative to submit fictitious invoices and receipts. Many candidates mentioned

that the representative should decline to act on Herberts request and cease to

represent Herbert if he insisted to do so. However, not many could point out that the

tax representative should also advise Herbert of the seriousness and consequences

of his proposed act, and disassociate themselves from the fictitious documents.

(III) Conclusion and Recommendation

A comprehensive understanding on all the areas of tax covered in the syllabus is a

prerequisite for attempting the examination. During the examination, candidates

should read the questions carefully, and provide answers with adequate contents in

accordance with the marks assigned to the questions. Prior to writing their answers,

candidates should give thought to the construction of their answers to each and every

single part of a question. Good management of the time spent on each question is

also essential for candidates to tackle the examination in a satisfactory manner.

Module D 2012.06_COmment

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