Answers

Fundamentals Level – Skills Module, Paper F6 (ROM) June 2011 Answers

Taxation (Romania) and Marking Scheme

Marks
1 Peach Ltd and Apricot Ltd

(a) Corporate income tax liability for Peach Ltd

2010 2011
Lei Lei
Total revenues 104,500 125,000 ½
Total expenses 30,300 58,900 ½
Non-taxable revenues 5,000
Dividend revenue – 5,000 1
No reference to interest revenue ½
Tax depreciation (W1) – 1,500 1
Legal reserve (W2) 400 0 2
Non-deductible expenses 3,475 8,232
Birth benefit expense (W3) 300 1
Accounting depreciation 2,000 1
Allowance expense (W4) 275 – 1
Meals for business partners (W5) – 1,632 1
Corporate income tax expenses 1,200 4,300 ½
Sponsorship expense 2,000 – ½
Taxable income 77,275 67,832 ½
Income tax at 16% 12,364 10,853
Credit for sponsorship (W6) 200 1½
Final income tax liability 12,164 10,853 ½
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Note: Candidates were not penalised if they calculated minimum tax or used the split year treatment for
2010, however there were no additional marks available for such treatment.

(b) Corporate income tax liability for Apricot Ltd

2010 2011
Lei Lei
Total revenues 30,000 60,000 ½
Total expenses 14,500 77,200 ½
Non-taxable revenues – –
Legal reserve (W2) 775 – 2
Non-deductible expenses 2,750 17,200
Interest expense (W7) 2,750 0 2
Service expense (W8) 15,000 1
Corporate income tax expenses – 2,200 ½
Taxable income 17,475 0 ½
Income tax at 16% 2,796 0
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Note: Candidates were not penalised if they calculated minimum tax or used the split year treatment for
2010, however there were no additional marks available for such treatment.

(c) The difference in income tax to be paid when settling the annual corporate income tax
Peach Ltd Apricot Ltd
2010 2011 2010 2011
Income tax declared at the quarterly deadlines 1,200 4,300 0 2,200 2
Income tax liability for the year 12,164 10,853 2,796 0
Difference in income tax to be paid/received 10,964 6,553 2,796 (2,200)
Deadline for paying the difference 25 25 25 n/a 2
April April February
2011 2012 2011
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(d) Interests and/or penalties due by Peach Ltd
The difference of income tax due = 6,553 lei
The deadline date is 25 April 2012
The payment date is 15 July 2012
Number of days of delay (26 April to 15 July inclusively) = 81 days ½
As Peach Ltd paid the tax due more than 30 days after the maturity it will have to pay both interest and
penalties for the late payment of the tax. ½
Interest = 6,553 lei x 0·04%/day x 81 days = 212 lei ½
Penalties = 6,553 x 5% = 328 lei ½
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Total value of interest and penalties to be paid = 212 + 328 = 540 lei 2
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(e) Tax on dividend withheld by Apricot Ltd for the dividends paid in 2011
(i) The conditions needed to exempt the dividends from taxation are:
– Peach Ltd should have a minimum participation of 10% in Apricot Ltd’s equity; ½
– Peach Ltd should have held the above minimum participation in Apricot Ltd’s equity for at least
two years ending on the day when the dividends are paid. ½
The second condition is not fulfilled, thus Apricot Ltd must withhold dividend tax at 16% on the
dividends paid to Peach Ltd. 1
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(ii) Net dividends paid by Apricot Ltd to Peach Ltd = 5,000 lei
Gross dividend – 16% x gross dividend = Net dividend
⇒ Gross dividend = 5,000/(1 – 0·16) = 5,952 lei ½
Tax on dividends = 16% x 5,952 = 952 lei ½
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(f) Carry forward of losses

Starting with the tax losses recorded in 2009, tax losses can be carried forward and offset by the future tax
profits for seven consecutive years. ½
Previous tax losses may be carried forward for only five consecutive years. ½
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WORKINGS
(1) Tax depreciation
The tax value of the asset = 120,000 lei
The tax depreciation period = 40 years
The annual tax depreciation = 120,000/40 = 3,000 lei
Number of months of depreciation in 2011 = 6 months
The tax depreciation in 2011 = 3,000 x 6/12 = 1,500 lei
(2) Legal reserve
Peach Ltd’s deductible legal reserve in 2010
Accounting profit before corporate income tax = 104,500 – 29,100 = 75,400 lei
This legal reserve may be deducted when computing the taxable income in an amount which should
not exceed any of the limits:
– 5% x (accounting profit before tax – non-taxable revenues + expenses related to non-taxable
revenues) = 5% x (75,400 – 0 + 0) = 5% x 75,400 = 3,770 lei;
– 20% x share capital = 20% x 2,000 = 400 lei;
– deduction to legal reserve = 400 lei
⇒ a legal reserve of 400 lei may be deducted for tax purposes

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Peach Ltd’s deductible legal reserve in 2011
As Peach Ltd deducted its legal reserve up to the maximum limit in 2010 there will be no legal reserve
to be deducted in 2011.
Apricot Ltd’s deductible legal reserve in 2010
Accounting profit before corporate income tax = 30,000 – 14,500 = 15,500 lei
This legal reserve may be deducted when computing the taxable income in an amount which should
not exceed any of the limits:
– 5% x (accounting profit before tax – non-taxable revenues + expenses related to non-taxable
revenues) = 5% x (15,500 – 0 + 0) = 5% x 15,500 = 775 lei;
– 20% x share capital = 20% x 4,500 = 900 lei;
– deduction to legal reserve = 775 lei
⇒ a legal reserve of 775 lei may be deducted for tax purposes
Apricot Ltd’s deductible legal reserve in 2011
Accounting profit before corporate income tax = 60,000 – 75,000 = –15,000 lei
Thus no legal reserve may be deducted this year.
(3) Birth benefit expense
The birth benefit granted to the employee is a social expense which may be deducted up to maximum
2% x salary expense = 2% x 30,000 = 600 lei.
The birth benefit recorded by Peach Ltd in 2011 is 900 lei
The deductibility limit for social expense = 600 lei
Non-deductible social expenses (900 – 600) = 300 lei
(4) Allowance expense
The allowance expense may be deducted up to maximum 2·5 x the maximum allowance for public
institutions employees x number of employees receiving the allowance x number of days = 2·5 x
13 lei/day/person x 1 person x 10 days = 325 lei
The allowance expense recorded by Peach Ltd is 600 lei
Thus, the deductibility limit for allowance expenses = 325 lei
Non-deductible allowance expenses (600 – 325) = 275 lei
(5) Meals for business partners
The expense with meals for business partners is a protocol expense. This may be deducted up to
maximum 2% x (taxable revenues – expenses related to taxable revenues less protocol expense and
corporate income tax expense) = 2% x (120,000 – 58,900 + 3,000 + 4,300) = 2% x 68,400 =
1,368 lei
The expense with meals for partners recorded by Peach Ltd is 3,000 lei
Thus, the deductibility limit for protocol expenses = 1,368 lei
Non-deductible protocol expenses (3,000 – 1,368) = 1,632 lei
(6) Sponsorship expense
The sponsorship expense is entirely non-deductible but the company may have a tax credit for the
expense if it was made according to the sponsorship law. Thus only for the 200 lei given to the school
contest Peach Ltd may have a tax credit. The tax credit is limited to:
Minim (20% of the income tax; 3‰ of the sales revenue; legal sponsorship) = minim (20% x 12,364;
3‰ x 100,000; 200) = minim (2,473 lei; 300 lei; 200 lei) = 200 lei
(7) Interest expense
Apricot Ltd’s interest expense in 2010 is for a loan taken from its shareholder which is a company that
is not specialised in giving loans. So the rules for deduction of the interest are as follows:
(i) the part of the interest which exceeds the reference rate set by the National Bank of Romania
(NBR) is entirely non-deductible
(ii) the part of the interest which is below the reference rate set by the National Bank of Romania is
fully deductibile in 2010. No reference needs to be made to the debt-to-equity ratio as this loan
is a short-term loan (three months)
Interest recorded in 2010 = 100,000 x 18% x 3/12 = 4,500 lei
Interest recalculated at the NBR reference rate 100,000 x 7% x 3/12 = 1,750 lei

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Thus, the deductibility limit for interest expenses = 1,750 lei
Deductible interest expenses = 1,750 lei
Non-deductible interest expenses (4,500 – 1,750) = 2,750 lei
Apricot Ltd’s interest expense in 2011 is for a loan taken from a bank, thus the interest expense is
entirely tax deductible.
(8) Service expense
Apricot Ltd bought consultancy services from Peach Ltd for 40,000 lei. If it had bought these services
from an independent company and not from its shareholder it would have paid only 25,000 lei. Thus,
the difference of 15,000 lei (40,000 – 25,000) is an expense made in the favour of the shareholder
which is non-deductible.
As this amount was taxed as revenue by Peach Ltd, it will not be treated as a dividend and Apricot Ltd
need not compute tax on dividends for it.

2 Mr and Mrs Melon

(a) Mr Melon’s income tax liability for his employment activity in April 2011
lei
Gross salary 2,700
Basic salary 1,300 ½
Fidelity bonus 100 ½
Gift vouchers (W1) 300 1
Voluntary pension contribution paid by Water Ltd (W2) 800 1
Course in painting 200 1
No reference to the course in agriculture ½
Social contributions (W3) (396)
Social security contribution (10·5%) (252) ½
Health care insurance contribution (5·5%) (132) ½
Unemployment contribution (0·5%) (12) ½
Net employment income 2,304
Other deductions (1,740)
Personal deduction (W4) (60) 1½
Facultative pension contribution paid by Mr Melon (W2) (1,680) 1
Taxable base 564
Income tax (16%) 90 ½
The employer, Water Ltd is liable to withhold the tax from Mr Melon’s salary and pay it to the state budget. 1
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(b) The alternative systems of taxation for rental income

(1) General rule:
The taxpayer will make prepayments during the tax year and carry out final tax settlement (pay the
difference between the final income tax liability and the prepayments made) after the year end. 1
The tax base should be determined using lump-sum expenses. ½
Prepayments = 16% x (estimated gross revenue – 25% of estimated gross revenue)
Final tax = 16% x (final gross revenue – 25% x final gross revenue)
However, if (i) the rent is in RON, (ii) no adjustment is made to it during the year and (iii) the taxpayer
does not apply either of the options presented in (2) and (3) below, then the prepayments made during
the year become final tax. 1
(2) Compulsory exception:
If an individual has concluded more than five rental contracts he/she must still make prepayments
during the tax year and pay the difference between the final income tax and prepayments after the year
end, but the tax base will be determined using the real system. 1
Prepayments = 16% x (estimated gross revenue – estimated deductible expenses)
Final tax = 16% x (final gross revenue – final deductible expenses, recorded in accounting books)

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(3) Optional exception:
An individual can opt for the use of the real system, even if he/she does not fulfil the condition for
applying the real system. ½
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(c) Mr Melon’s income tax liability for other revenues

Mr Melon’s taxable revenues, other than the ones from employment are:
– the rent revenue obtained from renting the car to Water Ltd;
– the interest revenue obtained from the bank
Income tax liability for the rent revenue received in 2011
Gross revenue = 12 x 1,700 lei = 20,400 lei 1
Deductible lump-sum expenses = gross revenue x 25% = 5,100 lei 1
Net revenue = gross revenue – deductible lump-sum expenses = 20,400 – 5,100 = 15,300 lei
Income tax liability for rent revenue = 16% x net revenue = 16% x 15,300 = 2,448 lei ½
Mr Melon has the obligation to pay and declare the tax on his rental income. 1
Mr Melon has to fill in and submit a tax declaration for the rental income within 15 days after signing the
rent contract, i.e. by 15 January 2011. 1
The tax for 2011 must be paid in four quarterly instalments by 15 March, 15 June, 15 September,
15 December 2011 respectively. ½
The tax paid during the year is final tax and no later adjustment is necessary. ½
Income tax liability for the interest revenue received in 2011
Income tax liability for the interest revenue = 16% x 2,000 = 320 lei ½
The bank has the obligation to pay and declare the tax on the interest income. Mr Melon has no obligation
in this respect. 1
The declaration and payment must be made by 25 May 2011. 1
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(d) Mrs Melon’s income tax liability in April 2011

Mrs Melon has pension revenue for which she is not liable to pay income tax as the revenue is below
1,000 lei ½
For the intellectual property revenue the payer of the revenue shall withhold prepayments of 10% of the gross
revenue = 400 x 10% = 40 lei 1
In 2012 the final tax for intellectual property will be computed as follows:
Gross revenue = 400 lei
Lump-sum expenses = 20% x 400 = 80 lei
Taxable base = 400 lei – 80 lei = 320 lei
Final income tax = 320 x 16% = 51 lei 1
The final income tax of 51 lei shall be settled against prepayments made during the year of 40 lei and the
difference of 11 lei shall be paid to the state. ½
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WORKINGS
(1) Gift vouchers
Although Mr Melon has a child and he could have received non-taxable gifts from his employer up to
150 lei on the occasion of Easter, the law states that the gift vouchers are fully taxable. No limit of
non-taxation applies.
(2) Voluntary pension contributions
Contribution paid by Water Ltd
The contribution paid by Water Ltd for Mr Melon’s voluntary pension plan is a non-taxable benefit up
to €400 per year.
Non-taxable contribution = €400 x 4·20 lei/euro = 1,680 lei
Contribution paid by Water Ltd for Mr Melon = 2,480 lei
Taxable contribution = 800 lei

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Contribution paid by Mr Melon
The contribution paid by Mr Melon for his voluntary pension plan may be deducted when computing
the taxable employment income up to €400 per year.
The maximum deductible contribution = €400 x 4·20 lei/euro = 1,680 lei
Contribution paid by Mr Melon = 2,000 lei
Deductible contribution = 1,680 lei
Non-deductible contribution = 320 lei
(3) Social contributions base
Social contributions do not apply to gift vouchers. Thus the base for computing social contributions shall
be 2,700 – 300 = 2,400 lei.
(4) Personal deduction
Mr Melon has one person in his care, his child. His wife may not be considered as being in Mr Melon’s
care as she has revenues higher than 250 lei per month.
Personal deduction = 350 x (1 – (2,700 – 1,000)/2,000)) = 52,5 ≈ 60 lei

3 Mr Strawberry

(a) Explanation of concepts

Taxable person: Any person who, independently, carries out in any place any economic activity, whatever the
purpose or results of that activity. 1
Examples: a self-employed architect, a trading company ½
Non-taxable person: Any person who is not a taxable person according to the above definition. 1
Examples: an employee, a non-profit organisation which does not carry on any economic activity ½
Taxable transactions: The supply of goods, supply of services, intra-community acquisitions and imports. 1½
Examples: supply of books, supply of consultancy services ½
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(b) Registration for value added tax (VAT) and tax period
Registration for VAT
Mr Strawberry started his business on 1 October 2010, thus he operated for only three months during 2010.
The threshold for VAT registration applicable to Mr Strawberry in 2010 is therefore €35,000 x 3/12 x
3·3817 lei/euro = 29,589·88 lei ≈ 30,000 lei. 1
Mr Strawberry’s estimated sales for the period of 110,000 lei is higher than the threshold.
Thus, based on his estimated sales figure Mr Strawberry did have an obligation to register for VAT purposes
in 2010. 1
Tax period
The threshold for the tax period applicable to Mr Strawberry = €100,000 x 4,2296 lei/euro x 3/12 =
105,740 lei. 1
Mr Strawberry’s estimated sales of 110,000 lei are higher than this threshold.
Thus, based on his estimated sales figure, Mr Strawberry has the obligation to use the month as his tax
period during 2010. 1
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(c) General rules for determining the place of supply for architectural services
(1) If the services are linked to an immovable property the place of supply is where that immovable property
is situated. 1
(2) If the services are not linked to a specific location then the general rules apply:
– if the services are provided to a non-taxable person the place of supply is where the supplier is
established, except when the beneficiary is established outside the EU, in which case the place of
supply is where the beneficiary is established; 1

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– if the services are provided to a taxable person the place of supply is where the beneficiary is
established. 1
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(d) Place of supply for invoices issued by Mr Strawberry

The services performed by Mr Strawberry are not linked to a specific location, therefore they will not be
considered services linked to immovable property.
Invoice issued to Client X based in Romania
For this invoice the place of supply will be in Romania, i.e. where the beneficiary is established, as both the
supplier and the beneficiary are based in Romania. ½
VAT = 10,000 lei x 24% = 2,400 lei. ½
Invoice issued to Client Y based in Bulgaria
As Y is a taxable person, which can be proven with his VAT registration number in Bulgaria, the place of
supply will be in Bulgaria, where Y is established. ½
No VAT is chargeable on the invoice by Mr Strawberry, as the reverse charge mechanism is applicable. ½
Invoice issued to Client Z based in the United States of America
The place of supply of this invoice will be in the United States of America irrespective of the status (taxable
or non-taxable) of the beneficiary. ½
No VAT shall be charged on this invoice. ½
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4 Pineapple Ltd

(a) Corporate income tax

(i) Expenditure deductibility
(1) Contractual penalties due to a supplier for not paying invoices in due time are entirely deductible
as they are due according to the contract. 1
(2) Provisions for performance warranties (garanţ ie de bună execuţ ie) granted to clients are
deductible only within the limits established in the contracts for such performance warranties. 1
(3) Meal vouchers for 20 employees may be deducted only within the limits of one meal
voucher/employee/working day in which the employee has worked within the premises of the
company. 1
(4) Expenditure for repairing the company’s cars may be deducted within the limit of one company
car used by each employee who has management responsibilities. 1
(5) The impairment (depreciation) of an asset due to a revaluation that decreased its value under the
acquisition cost is entirely non-deductible. 1
(6) Tax consultancy services, performed on a monthly basis may be deducted only if these services
prove to be necessary and only if the company has a contract and other supporting documents for
it. 1
(7) Stolen raw materials may be deducted if either they are charged to a responsible person or the
materials were insured. 1
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(ii) Measures to increase deductibility
In order to obtain the maximum deductibility for its expenses Pineapple Ltd should:
– make sure that any penalties paid to a supplier are mentioned in the contract;
– set up provisions for performance warranties only within the limits established by the contracts for
these warranties;
– give meal vouchers only for the working days on which employees worked on the premises of the
company;
– use only one company car for each manager;

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– have contracts and supporting documents for any consultancy services to prove that they were
necessary; and
– insure its raw materials stock.
Two items only required, for 1 mark each, maximum 2
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(b) Value added tax (VAT)

1. Decision to change the designation of the building from a building to be sold to an office building.
This decision does not have any VAT implications. 1
The selling of new buildings is a taxable transaction. As Pineapple does not have any other exempt or
out of the scope of VAT activities, all the VAT deducted when the building was constructed is still
deductible no matter whether the building is sold or it is used for Pineapples Ltd’s office activities. 1½
2. Decision to use the building 50% for trading activities and 50% to renting it to a bank.
The allocation of 50% to trading activities does not have any VAT implications, whereas the allocation
of 50% to renting activities will generate a VAT adjustment effect, as renting is an exempt activity
(general rule). 1
Input VAT deducted on the construction of the building (initially) = 245,100 lei
Adjustment period is 20 years, i.e. 1 January 2010 to 31 December 2029
Year when the adjustment event occurred = 2011
VAT adjustment = 245,100 x 50% x 19/20 = 116,423 lei 1½
Thus, 116,423 lei must be recorded as non-deductible VAT in the VAT return in January 2011. 1
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5 Mrs Almond

(a) Income tax liability

(1) For income earned as an employee income tax is due on a monthly basis. The income tax is withheld
monthly by the employer and paid to the state budget; the income tax is due by the 25th of the following
month. 1
Lei
Gross salary 3,120
Basic salary 2,800 ½
Company car (20,000 x 1,7% x 50%) 170 1
Company phone (300 x 50%) 150 ½
Social contributions (516)
Social security contribution (10·5%) (328) ½
Health care insurance contribution (5·5%) (172) ½
Unemployment contribution (0·5%) (16) ½
Net employment income 2,604
Taxable base 2,604
Income tax at 16% 417 ½
Total income tax due for 2011 = 417 x 12 = 5,004 lei ½
(2) For income earned as a self-employed individual annual income tax is due. During the year Mrs Almond
will make quarterly pre-payments by the 15th of the last month of each quarter. After the year end her
final income tax liability must be settled against the pre-payments made by 25 May of the following
year, i.e. by 25 May 2012. 1
Lei
Gross revenue (5 x 700 x 12) 42,000 ½
Deductible expenses (13,446)
Office rent (400 x 12) (4,800) ½
Office stationery (100 x 12) (1,200) ½
Compulsory subscription (W1) (2,100) 1
Social contributions (5,346) ½
Taxable income 28,554
Income tax due for the year at 16% 4,569 ½

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(3) In the case of dividend income, tax is withheld by the company and paid to the state budget by the
25th of the month following the month in which the dividend was paid. If the dividends are not paid
until the end of the year in which they are distributed, the dividend income tax must be paid by the
company by 25 January of the following year. 1
In 2011 Mrs Almond may not receive any dividend as the company was only started on 1 January
2011 and dividends may be received only after the approval of the financial statements and the net
income distributable as dividends determined. 1
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WORKING
Deductibility of compulsory subscription
The compulsory subscription to the Organisation of Chartered Accountants may be deducted up to 5% of the
gross revenue.
5% x gross revenue = 5% x 42,000 lei = 2,100 lei
The subscription to the Organisation of Chartered Accountants = 2,200 lei
Thus, only 2,100 lei of the subscription paid is tax deductible.

(b) Comparative analysis for decision-making purposes

Tax and social contribution burden in 2011
Employee Self-employed
Gross revenue 3,120 x 12 = 37,440 42,000
Tax liability 5,004 4,569
Tax burden 13·37% 10·88% 1
Social contributions 516 x 12 = 6,192 5,346
Social contribution burden 16·54% 12·73% 1
Other factors that should be considered:
– Accounting (bookkeeping) requirements
– Tax declaration obligations
– Personal risk
Two factors only required, for a ½ mark each, maximum 1
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