In Ireland the system of taxation is governed by various legislations that includes Income Tax Act 1967, Value added Tax Consolidation Act 2010 and many other laws. The capital gain tax payable by an individual is calculated by the application of tax Consolidation Act 1997. The determination of the residential status of the taxpayer is important for ascertaining the rate at which the capital gain tax is calculated. The law states that if the taxpayer is an ordinary resident of Republic of Ireland then capital gain tax is calculated for the gain made anywhere in the world during the year. The law further states that if the taxpayer is nonresident then the capital gain will be taxable for the gains that are arising from Ireland. The capital gain tax is chargeable for gain made on the disposal of capital assets as per section 287 of the tax consolidation Act. The act in section 532 of the Tax consolidation Act 1997 provides the meaning of capital assets for the purpose of tax. It states that both the tangible and intangible assets are included within the definition of capital assets for determining the capital gain tax payable. The meaning of disposal is sale of capital assets as per the section 525 of the Tax consolidation Act 1997. The capital gain tax is calculated by deducting allowable deduction from the gains made and applying the tax rate on that amount (Dukelow 2016).
In this case, it is stated that Ashe holding is the majority shareholder of three companies. These three companies are Oak Limited, Beech limited and Palm limited. In case of Beech limited, the company is planning to sell the shares to a French company. The Rosemary and Michael are the equal owner of the Ashe holding. The issue here is to determine the tax implication on the decision of sale of shares of Beech Limited by the Ashe Holding limited (Kelly et al. 2014).
The disposal of shares will attract the capital gain tax that the company will have to pay on selling of its shares. At the very outset in order to calculate the capital gain, the company will have to determine the chargeable gain. The chargeable gain is calculated by reducing the cost of shares from the amount of consideration that is received on sales of shares. There is a requirement that the cost of shares should be adjusted for inflation for the calculation of the capital gain. The system of indexation is applicable on the shares that is purchased before 2004. In the given case, the Ashe Holding purchased the shares of all the companies during the year 2004 (Fuestet al. 2013). Therefore, it can be said that the indexation system will not be applied for determining the cost of shares for calculating the capital gain. The current rate that is applied for calculating the capital gain tax on sale of shares is 33%. In the given case, the Ashe Holding has decided to sell 85% of its stake in Beech Limited to a French company. This transaction of disposal of shares has resulted in capital gain of €486,000.00. The capital gain tax rate of 33% is applied on the capital profit of €486,000.00. In this case the capital gain tax that is, payable by the Ashe holding on selling of shares comes to €160,380.00.The calculation is provided below:
Calculation of Capital Gain Tax
Amount received on sale of Shares
Cost of acquisition
Profit on sale of Shares
Capital gain tax Payable
Table 1: Capital gain Tax
(Source: Created by Author)
Therefore, based on the above discussion it can be concluded that the tax implication for the company is that the company will have to pay a capital gain tax of €160,380.00.
In the given case, it is provided that a property was acquired by Palm limited in 2010. The company has acquired this property directly from a supplier. The company paid an amount of €1589000 inclusive of vat for purchasing the property. The property was a storage unit and it is an excess capacity available. The Oak limited was in need of a storage unit. Therefore, it was planned that the excess capacity of Palm limited will used by Oak limited (Doherty et al. 2017). It was stated that there was two options that is being considered. The first option is that the palm limited will transfer the property to Oak limited free of charge. The second option is that the palm will lease the property to Oak limited. The tax implications for the various options are discussed in details.
The Value Added Tax Consolidation Act 2010 governs the rules and regulations relating to the value added tax. The act provides that an accountable person supplying or providing of goods or services within Republic of Ireland is required to pay the value added tax. The VAT is applied in importing and supplying of goods and services for intercommunity acquisition or outside European Union (Kielty et al. 2015). The taxable person is a person that is engaged in the business of supplying goods and services in the country or elsewhere. Therefore, it is clear from the above discussion that the taxable person is required to pay VAT. It should be noted that the taxable person also includes the person that are exempted from paying VAT or the farmers to whom the flat rate of tax is applied. The person responsible for charging VAT is known as the accountable person as per the section 5 of the Value Added Tax Consolidation Act 2010. The accountable person includes individual, company, partnership etc. and they are the taxable person. The requirement provides that the accountable person should be registered for Value added tax. The accountable person engaged in the supply of goods or services should be registered for VAT if the threshold limit is exceeded as per the section 65 of the Value Added Tax Consolidation Act 2010 (Kelly et al. 2015).
The VAT is applicable on supply or receiving of goods or services as per section 37 of the Value Added Tax consolidation Act 2010. The value added tax is applied to the total amount that is paid or payable. The total amount on which the VAT is added includes the charges, commission etc. that have been paid. The value of supply that have been made between the connected person is determined by the revenue officer as provided in section 38 of the Value added Tax consolidation Act 2010 (Lyng et al. 2015). In this case, the VAT payable is calculated by charging the Vat rate on the amount determined by the revenue officer. The tax is charged on the value that is determined based on the open market value. The open market value is ascertained based on the amount that is expected to be realized from the sale of goods and services. The cost is used for calculating the VAT if in the open market there is no comparable supplies. The Vat is generally charged at the time of supply of goods or services. The law provides that at the time of issuing the invoice the VAT becomes payable. If the invoice is not issued then the VAT becomes payable at the time when the invoice should have been issued. In case the payment is received in part or full before the date vat is normally payable then in such case the vat becomes payable at the time the payment is received (Malone et al. 2015).
The regulations relating to the immovable property are separately stated in the act. The VAT is applied on the immovable property that is used in the economic activity during the course of business. The sale of property is divided into two categories that is old property and new property. The completion of the development is the important criteria for making the classification of property as the old and new property (Stewart 2013). The law provides that in case of transfer of new property the Value added tax is applied. The five-year rule provides that property that are sold within the five year of completion are subjected to value added tax. The two-year rule states subsequent sale of property are subject to value added tax provided the transfer of property has been made before completion of two years from the date of occupation. In addition to this requirement, states that there should have been prior vat sale of the property and the transaction should be between the parties that are connected (O'Donnell et al. 2016).
The act provides that in general value added tax is not applied for letting of the property. In ascertaining the application of value added tax the act have made no distinction based on the term of lease. However, in certain cases long leases is regarded as supply of property then in such cases, the vat is applied. The law provides an option to the landlord for applying the value added tax in letting the property. This option is of applying vat is not applied in case the property leased is a residential property or the property is leased between the connected parties. However, it should be remembered that tax-letting option is available for connected party tenant if at least 90% of the value added tax is recovered (Bozio et al. 2015).
In the given case, it can be seen that the Ashe holding limited is the owner of 75% stake in the Palm limited. In the case, it can be seem that the Ashe holding limited owns the 100% stake of Oak limited. Therefore as in both the companies the Ashe holding is the majority shareholder so it can be said that Oak limited and Palm limited are connected parties. It is stated in the act that for the transaction between the connected parties the revenue officer will ascertain the amount on which the value added tax will be charged for ascertain the VAT payable. As discussed earlier the VAT is chargeable in case of property that are new so it can be said that for the property that are old the value added tax is not charged. In this case, as the property transferred between the Palm Limited and Oak limited is an old property so it can be concluded that in this case value added tax is not chargeable (Smyth et al. 2016).
There is another option of leasing the property that is also considered. It is planned that the Palm limited will lease the property to Oak limited. The tax implication in this case is that in general value added tax is not applied in case of leasing but the tenant has the option to choose for applying the VAT. In this case, it can be seen that the Palm limited and Oak Limited are the connected parties. In the given case, it is also stated that the Palm limited during the acquisition made recovery of 100% Vat. The discussion above shows that the Palm is a connected party and has recovered VAT. In such circumstances, if the company decides to let the property to Oak limited then the company has the option for applying Value added tax on the lease payment (Haugh et al. 2016).
The tax implication of two types of transactions have been discussed above. Based on the above discussion the conclusion that can be drawn for the two type of transactions are different. If the company decides to sell the property then in such case, the vat is not applied and if the company decides to let the property then there is an option available for charging vat on the lease amount.
The Oak limited has been selected for Revenue Audit but on analyzing the financial account there are many issues that are identified. There are four issues that have been identified this are:
The first issue that have been identified is the failure to deduct taxes on the amount of bonus. The law states that at the time of making payment of wages and salary the company should deduct taxes. This system of making payment of wages and salary after deducting the taxes is known as the system of Pay As You Earn (PAYE) (Píchová and Vaní?ková 2014). The revenue commissioner can ask the employer to deduct the tax from the future payment if the person has failed to make the payment of taxes as per section 484 of the Income Tax Act 1967. In this case, the bonus have been paid to senior management that falls in the bracket of top rated taxpayer. The Pay As You Earn tax compliance code provides that an individual having main source of income that is taxed under PAYE system is referred to as the PAYE taxpayer. There is an option of correcting the error that has been in payment of tax by the PAYE taxpayer. The tax affair can be corrected by contacting the revenue officer and providing the details of mistake that have been made in reporting and payment of taxes. The taxpayer has three options for correcting the default that have been made in payment of taxes (Law 2014). The first option that is available to the taxpayer is the innocent declaration of mistake that has been made in calculating the tax. The second option that is available to the taxpayer is making necessary rectification of the error. The third option that the taxpayer have is to make qualifying disclosure. The actions and behavior that have caused the resulted default of tax should be considered at the time of determining the option that is available to the taxpayer. The section 12 states that irrespective of the cause of default the taxpayer should make the payment that has not been made. Based on the above discussion it can be suggested that the company should immediately deduct the amount of tax that is payable on bonus amount and the amount should be deposited with the revenue department. This strategy will ensure that the penalty is minimized.
The second issue is that VAT rate of 13% is applied irrespective of the amount of material and labor. There are four types of VAT rates that are applied depending on the type and nature of goods and services. The VAT rate of 0% is applied on the certain goods known zero rated VAT items. In case of agricultural items mainly 4.8% rate of VAT is applied. The Value Added Tax rate of 23% is known as the standard rate it is mainly applied for supply of goods. The VAT rate of 13.5% is known as the rate and it is applied on the services provided. In this case, the company is engaged in the business of supplying and installation of storage unit. Therefore, in this case the two third rule should be applied for making the decision for payment of tax. The two third rule states that if the value of goods is more than the two third of the total cost then in such case the VAT rate of 23% should be applied instead of 13.5%. Therefore it is advised that the company should determine the proportion of material and labor so that the correct arte of VAT can be applied (Barbone et al. 2015).
In the third issue, an employee of the company worked in Germany for four months. The company has deducted foreign earning deduction from the salary of the employee. The foreign earning deduction can claim by an employee for the quantity of income that have been made in the relevant states. The list of relevant states includes Brazil, Russia, India and South Africa. Many other countries have been added in the list in the subsequent years. In this case, the employee went to Germany but it is not included in the list of relevant states. Therefore, it can be said that the foreign exchange deduction that have been allowed to the employee is incorrect. The company should immediately disallow the foreign exchange deduction and recalculate the amount of salary for the purpose of PAYE. The company should make the payment of the short fall so that penalty could be avoided (O'Neill and Yadav 2016).
In the fourth issue, the company purchased a software from Spain. As there was, no Vat in the invoice the accountant of the company ignored the value added tax. The law provides that in case of intercommunity transaction the goods can be supplied free of VAT. However, on receiving the goods it can be said that is the responsibility of the company to record the VAT on acquisition. In this case, it is advised that the company should account for VAT on acquisition.
The above discussion have shown that the company has made underpayment of taxes. The instances for underpayment of taxes are discussed. The company has applied 13.5% on all invoices. However if the two third rule applies then the company will have to pay taxes based on 23%. Then there will be underpayment of tax. The company has not deducted payroll taxes from bonus of senior management. In this case, there is an under payment of taxes. The company has wrongly deducted foreign earning deduction from the salary of an employee. This will resulted in shortfall in payment of taxes (Schwarz et al. 2014).
The Value Added Tax Consolidation Act provides that if vat becomes the accountable person does not pay payable but then an interest of 0.0274% is charged per day until the payment is made. There are various other penalties are applied. The penalty amount in most cases is €4,000.
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