F - 19.pdf - AdvancedTaxation SuggestedAnswer Ans.1(a Thin capitalization Rule Where a foreign controlled resident company(other than a financial

F - 19.pdf - AdvancedTaxation SuggestedAnswer Ans.1(a Thin...

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Advanced Taxation Suggested Answer Final Examinations – Summer 2009 Page 1 of 8 Ans.1 (a) Thin capitalization Rule Where a “foreign controlled resident company” (other than a financial institution or a banking company) or a branch of a foreign company operating in Pakistan, has a foreign debt to foreign equity ratio in excess of three to one (3:1) at any time during a tax year, a deduction shall be disallowed for the profit on debt paid by the Company in that year on that part of the debt which exceeds the three to one ratio. (b) Joy Limited Calculation Of Thin Capitalization Rupees in million Accounting Year 31-12-2009 31-12-2010 31-12-2011 Tax Year 2010 2011 2012 (i) Foreign Debt: Existing loan from DSI Loan 300 250 200 Less: Repayment 50 50 50 Balance at year end 250 200 150 Maximum amount of existing foreign debt, due during the year 300 250 200 New foreign debt from DSI long term loan (To date position) 1,250 5,000 5,000 Amount of Foreign Debt (at any time in a tax year) 1,550 5,250 5,200 (ii) Foreign Equity of Joy Limited: Paid up capital owned by DSI & SWI (A) 500 500 500 Opening Retained earnings (B) 500 1,200 2,050 Proportionate share of DSI and SWI in profit for the tax year 700 850 1,000 Closing retained earnings 1,200 2,050 3,050 Total Foreign Equity of Joy Limited (A+B) 1,000 1,700 2,550 (Paid-up capital + opening Retained Earnings) (iii) Admissible / Inadmissible interest expense: Loan + Equity 2,550 6,950 7,750 Admissible foreign debt (ii x 3) 3,000 5,100 7,650 Amount in Excess of permissible limit - 150 - Interest expense 150 520 515 Admissible / Inadmissible interest expense 150 (15) 515 (c) Loan from unrelated foreign company If Joy acquires a new loan from another foreign company not related to the Green Sea Group, than provisions of thin capitalization rule would not be applicable, provided that such other foreign company does not have similar outstanding debt obligation to DSI or SWI (i.e. foreign controller of Joy Limited) or a non-resident associate of the foreign controller.. ALTERNATIVE FOR FIRST SENTENCE OF THE ABOVE PARAGRAPHS Thin capitalization rule is applicable only when a company acquires a foreign loan form a non-resident person (i.e. a foreign controller) or its associates. Ans.2 (a) Triangle Limited can adjust the losses surrendered by ABC Limited against its income under the head “Income from Business” in the tax year and the following two tax years subject to the following conditions: (i) there is continued ownership of fifty-five percent of the share capital of ABC Limited for five years, if Triangle Limited is a listed company or seventy-five percent or more in the case of its being an unlisted company; (ii) Any of the company is not engaged in the business of trading. (iii) If Triangle Limited is an unlisted company with seventy-five percent of ownership of share capital of ABC Limited it should get itself listed within three years from the year in which loss is claimed;
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