W is a business in Country X, that uses locally grown fruit and vegetables to make country wines

| March 13, 2016

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W is a business in Country X, that uses locally grown fruit and vegetables to make
country wines. During 2009 W paid $30,000 plus VAT for the ingredients and other
running costs.
When the wine is bottled W pays $1 tax per bottle to the tax authority. During 2009 W
produced 10,000 bottles.
W sold all the wine to retailers for an average price of $8.05 per bottle, including VAT at
standard rate.
Required:
(i) Explain the difference between unit taxes and ad valorem taxes, using the
scenario above to illustrate your answer.
(3 marks)
(ii) Calculate the amounts of indirect tax payable by W for the year ended 31
December 2009.
(2 marks)
(Total for sub-question (b) = 5 marks)Financial Operations 9 May 2010
(c) H, an entity, carries out business in Country X, buying and selling goods.
The senior management of H meet regularly in the entity’s offices in Country X.
H owns 100% of S, an entity that buys and sells goods in Country Y. The senior
management of S meet regularly in the entity’s offices in Country Y. S reported a profit
of $500,000 for 2009 and received an income tax bill from Country Y’s tax authority for
$100,000.
S has declared a dividend of $200,000 and is required to deduct tax at 10% before
remitting cash to overseas investors, such as H.
Assume Country X and Country Y have a double tax agreement based on the
Organisation for Economic Co-Operation and Development (OECD) – Model Tax
Convention.
(d) AB’s profits have suffered due to a slow-down in the economy of the country in which it
operates. AB’s draft financial statements show revenue of $35 million and profit before
tax of $4 million for the year ended 31 December 2009.
AB’s external auditors have identified a significant quantity of inventory that is either
obsolete or seriously impaired in value. The audit senior has calculated the inventory
write-down of $1 million. AB’s directors have been asked by the audit senior to record
this in the financial statements for the year ended 31 December 2009.
AB’s directors are refusing to write-down the inventory at 31 December 2009, claiming
that they were not aware of any problems at that date and furthermore do not agree
with the auditor that there is a problem now. The directors are proposing to carry out a
stock-take at 31 May 2010 and to calculate their own inventory adjustment, if required.
If necessary the newly calculated figure will be used to adjust inventory values in the
year to 31 December 2010.
TURN OVER
Required:
Explain the terms “competent jurisdiction” and “withholding tax”. Illustrate how each
relates to the H group.

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