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ADIT 2009 Examiners' Reports

Paper I

125 candidates sat this examination (as compared with 109 candidates last year). The
examination paper was divided into two parts. Parts A and B comprised five essay questions and
two problem questions respectively. Candidates were required to answer four questions
composed of either two questions from each part or three questions from part A and one question
from part B.

Most candidates used the time available (3 hours) effectively and answered four questions in
accordance with the examination rubric, and a fair number opted to answer each of the problem
questions. In relation to the problem questions, the performance was generally disappointing and
a significant weakness of many of the answers was an inability to identify key issues and to apply
relevant law/principles to the facts. A perusal of the marks awarded for these questions (6 & 7)
shows that question 6 was relatively poorly answered and the pattern of marks awarded for
question 7 was not impressive. Overall, the general performance with regard to the essay
questions was much better. Questions 2, 3 and 4 proved to be particularly popular and were
usually well answered whilst, by comparison, question 1 was attempted by far fewer students
whose knowledge of the relevant subject matter tended to be limited and who often took a rather
narrow view of its ambit.

Overall, the standard of the scripts was mixed. It was pleasing that 4 candidates were awarded
marks of 70 or above. The performance of the other candidates was relatively evenly balanced
between those within the 50 pus range and those achieving marks of 49 or below. Also, the
number of candidates within the 39 or below band (27%) was encouragingly lower than the
number of candidates falling within that band last year (40%).

Paper IIA United Kingdom

Question 1

Question spotters should have been well prepared for this question as, if one was looking for a
subject which had been topical over the last twelve months, one would quickly have alighted upon
the changes to the tax of foreign domiciliaries in the United Kingdom. It was no surprise,
therefore, to find that the majority of candidates chose to answer this question and that the
answers were generally quite satisfactory without ever verging on the brilliant.

The examiner thought that he was being clear with the instructions that the concept of domicile
should be explained briefly (ie not taking up 50% or more of the answer) and that the discussion
of its importance for UK tax should give emphasis to the Finance Act 2008 changes but not at the
expense of everything else. Some candidates did fall into the trap of devoting far too much of
their answer to explaining what domicile meant rather than explaining the tax effects and many
candidates chose to ignore taxes other than income tax.

In general, candidates showed reasonable knowledge of the 2008 changes although the details
of the 30,000 charge and, in particular, the treatment of remittances and their relationship with
the charge were the subject of some uncertainty and confusion. It is suspected that most of the
candidates had not had any experience of dealing with these issues in practice.

Question 2

This was an extremely popular question covering a broad range of issues relating to businesses
looking to expand their operations outside the United Kingdom. This is the sort of question which
comes up regularly in practice and it was pleasing to see that most candidates were able to

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identify the major corporate tax issues including the controlled foreign company and transfer
pricing matters as well as the distinctions between branches and subsidiaries.
Perhaps reflecting a greater emphasis on corporate tax expertise and experience among the
candidates, the answers on the employment and VAT issues were generally weaker although
most candidates were able to identify the flaw in the finance directors VAT saving scheme.

Question 3

This was not a popular question and it appeared that some of those who attempted it did so out of
desperation as they did not discuss four cases. Most of the candidates omitted the Willoughby
and GCA International Ltd cases (actually nobody answered on the latter, which was a surprise
as it is probably one of the easiest to explain). Knowledge of Gaines-Cooper and Cadbury
Schweppes was significantly greater than that of the other cases offered.

Question 4

The application of UK specific knowledge and general OECD treaty principles was generally very
good. However, knowledge of the UK-US treaty and in particular the limitation on benefits and
conduit arrangement provisions was generally poor, with very few candidates demonstrating
much knowledge in this area. Whilst the UK-US treaty is a narrow area of the syllabus, the treaty
is widely used in practice and candidates were expected to have some knowledge of the anti-
avoidance principles in the treaty.

Question 5

This was a very topical question based on a number of corporate inversions to non-UK
ownership which have generated significant press and media coverage over the last 18 months.
Whilst it was not answered by as many candidates as expected, those who did answer generally
produced good responses, and picked up relatively easy marks in a range of different areas such
as corporate residence (UK and OECD definitions), transfer pricing and treaty withholding taxes.

Question 6

This question was not widely answered. Those that did had a good grasp of the basic knowledge
of interest payments, withholding tax and thin capitalization. However, only a few candidates
scored well on the arbitrage rules, the treaty position of the partnership claiming treaty benefits,
and the UK reorganization rules on transferring a business and loss carry over.

Question 7

A generally well answered question, with most candidates having a good understanding of the
DTR and EUFT rules in part (b). The only part of (a) that was not well answered was the
difference in CFC treatment between the recently acquired position (motive test period of grace)
and the future position if activities are changed (prejudicial to motive test period of grace).

Paper IIC Hong Kong

Candidates performance is good overall.

Two candidates got over 60. They demonstrated their good understanding of all relevant
knowledge and were able to handle the questions in a logical way. They achieved a standard of
good performance in the examination with good understanding of the tax law and practices,
proper referencing, necessary analysis and application.

One candidate had marginally passed. She/he barely addressed the questions and just
demonstrated a minimum understanding of the concepts involved. She/he demonstrated a

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standard of marginally acceptable performance in the examination with some errors of
understanding and application of the tax law and practices.

Two candidates failed because they were unable to meet a minimum standard of passing the
examinations with major errors of understanding or omission of explanation of the tax law and
practices. Specifically, performance on Q1 (anti-avoidance question) was poor. Candidates were
unable to quote the relevant provisions of the Hong Kong Inland Revenue Ordinance and discuss
how the provisions can be applied to the case. Incidentally, similar situation was observed in last
year.

Performance on Q3 (stamp duty) and Q5 (salaries tax) was better than other questions.

Paper IID Singapore

All candidates attempted questions 1 and 3. Despite being relatively straightforward questions,
the candidates failed to provide a more comprehensive analysis of the nature and true
characterisation of some of the sums in question, especially in relation to termination payment
and the foreign-source income. Most were content to assume that the payment was either taxable
or otherwise without any attempt to provide the basis for the assertions. With the exception of 1
candidate, the rest showed a competent grasp of the legislative provisions involved. Most of the
candidates show awareness of applicable judicial decisions but failed to provide the actual case
citations. Most candidates were able to identify and ascertain the eligibility for tax credits.

The candidates who answered the other questions provided reasonably good responses. Most of
the answers displayed a fairly good grasp of the concepts and issues being addressed. Where
tax computations were required, the candidates were able to show a good understanding of the
technical computational rules although there were several instances of mistakes that were clearly
committed out of carelessness. Overall, the answers reveal a certain degree of unevenness in the
mastery of diverse concepts and issues being tested in the questions.

Paper IIE Malta option

The examination paper consisted of seven questions. Candidates were expected to answer four
out of seven questions. Each question was sub-divided into 3 sub-questions. Each question
contemplated an element of theory and a practical application of such theory.

Most of the candidates used the time available (3 1/4 hrs) effectively and answered all their
questions. A perusal of the marks awarded shows that the absolute majority of the students
warranted the award of a mark over 50%. There was an isolated case when a student failed to
answer significant sections of some questions. The standard of the candidates was rather high
with several candidates scoring high marks in the theoretical questions.
On the other hand, most students appeared to struggle with the practical questions. The
application of theory to practice was a challenge in which only a small percentage of the
candidates succeeded. The same applies to the application of principles of UK tax law to Maltese
tax law. Question 5 proved to be particularly popular with students. Most candidates appear to
have been very well prepared in relation to this topical subject and its seemingly infinite
permutations. The candidates who achieved the higher marks were the candidates who took the
initiative to fragment their answers step by step. The latter approach evidenced the level of
analytical skills which was expected. However, more attention to case law should have been
given in relation to the analysis of domestic tax rules. The understanding of the taxability of fringe
benefits tended to be satisfactory but computational skill in relation to fringe benefits was at
marginal level.

Understanding of interest expenditure rules (Question 7) was rather poor with most students
missing some of the fine points completely. However, most students showed a good grasp of the
basic subjects (tax accounting, participation exemption, interest/royalty exemption).

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Overall, the standard of the scripts was good.

Paper IIF Australia option

Question 1

The answers to this question were generally well handled but with insufficient focus being given
to the relevance of source in applying Australias double tax agreements.

Most students handled the broad issue of source well, looking both to the limited statutory source
rules and the more detailed common law source rules.

However, in the context of Australias double tax agreements little attention was given to, for
example, Article 22 of the Australia/Malta agreement which deems Australian source in a broad
range of circumstances and no one really examined how that deemed sourcing is likely to be
interpreted by courts if pushed for an answer.

Question 2

This question was not well handled by those students who attempted it with very little attention
being given to the basic issues as to, for example, whether RDS would be treated as a trust or a
company in Australia, or possibly neither, and whether the Vauru Approved Membership Rights
(VAMs) would be treated as shares or interests in a trust for Australian tax purposes. If RDS is
not a company or a trust, or if the VAMs do not constitute shareholding or trust interests, it may
well be the outcome that none of Australias attribution rules would apply. This requires careful
analysis before attempting broader answers to the question posed.

Very little attention was given to these issues by those students who attempted this question.

On the other hand, the question of the nature of the income earned by RDS and its relevance to
any attribution to Australian taxpayers was well and generally comprehensively considered.

Question 3

Again this question was not well handled by those who attempted it with little attention being
given to:-

1. The CFC/FIF issues which clearly arise in the context of the attribution rules;
2. Division 15 which clearly has application in relation to insurance premiums;
3. The decision in WD & HO Wills v FCT which clearly has application in relation to the
possibility of Part IVA of the Act applying in the circumstances that have been presented.

On the other hand, the general application of Part IVA was handled well as were general
discussions regarding deductibility and transfer pricing.

Question 4

Overall this question was quite well handled with people addressing each of the four matters
referred to in some detail.

Little attention was however given to the concept of beneficial ownership in the dividend interest
and royalty articles which has attracted much discussion judicially in various international fora.
The application of Article 16 of the Australia/US double tax agreement was generally well
considered.


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Question 5

Surprisingly few students attempted this question but those that did did a fairly good job in
describing the facts, the arguments put and the conclusion reached by the court. The question as
to how the case would be decided today was handled less well with insufficient detail being given
to developments that have occurred since the two cases were decided. In particular, in relation to
McDermotts case, DTA developments should be considered and in relation to Lamesa, changes
to the International Agreements Act should be specifically referred to and the consequences of
that amendment should be discussed in detail.

Question 6

This was one of the most popular questions and the answers were of the highest standard in
response to any of the questions asked.

Generally the four propositions were well considered and well-crafted answers were provided. In
some poorer responses in considering in particular proposition 4, the answers were somewhat
superficial and failed to highlight, for example, the limited scope of section 23 AJ. For example, it
does not apply to non-corporates or portfolio dividends and further it does not apply where there
has been prior attribution of income under the CFC or FIF measures. In those cases, section 23
AI or 23 AK would apply to prevent double taxation and section 23 AJ would be excluded.

Question 7

This question regarding the application of Australias fringe benefits tax was generally well
handled with good attention being given to who pays the tax, the FBT exemptions and the FBT
concessions that may apply. Simplification issues were not well considered and there are some
obvious measures that might be appropriate. For example, aligning the FBT tax year with the
income tax year would considerably ease the compliance and administration expenses
associated with FBT. Levying the tax on employees would make it conceptually more consistent
but would probably add to complexity in administration. None of these matters were really
considered in any detail by candidates.


Paper IIIB EC option

General remarks

Generally, standards continue to rise but many candidates failed to achieve a pass on this
examination. A number of candidates endeavoured to answer the examination questions by using
scripted answers prepared in advance. Obviously, a script on a certain topic like exit taxes can
help, but the answers have got to be related to the questions asked and not the question the
candidate has prepared and would like to have been asked. Consequently, many candidates
struggled to achieve pass marks in many questions.

A second comment worth noting is that a number of candidates failed to discuss the Courts
jurisprudence beyond naming cases. Others chose to write detailed paragraphs out of the Van
Raad book without making any comment as to why the cases supported their answers. Still
others chose to give a two sentence discussion of the main cases losing easy marks in the
process.

As with any examination, showing knowledge is the key to success. With access to the Van Raad
book, there should be no reason for well-prepared candidates to have feared any of the questions
on this years examination; there was a good spread of topics, including state aid and VAT, yet
many candidates failed to show the necessary preparation for an examination of this magnitude.
Candidates should not forget that the ADIT is a professional qualification. From reading many of

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the answers, it is apparent that many candidates are simply unready to advise clients on EC tax
matters and to be paid for that advice.

The Examination Questions some comments

Q1. This was answered by the majority of candidates. There was a poor discussion of the
role of the Court beyond that mentioned in the EC Treaty. For instance, few candidates
discussed the role played by the Advocates General and their Opinions. The question asked
candidates to describe and examine the role of the Court in matters of taxation. Taxation is not
simply direct taxation. Easy marks were lost by candidates who failed to relate their answers to
the question asked or who simply cited cases without making a link to the question.

Q2. This question was about a single justification. It did not require a discussion of the
internal market and a listing of the four freedoms and all the other justifications and lists of cases
showing when the Court used the justifications. Not a single candidate referred to the origin of
this justification in the Opinion of AG Maduro in Marks and Spencer. Generally speaking, this
question was very poorly answered. Asked to analyse the statement, one candidate wrote a
prepared script on the fundamental freedoms. Another discussed the facts of the N case at length
and another simply re-wrote the question wasting valuable time and scoring zero or almost zero
marks in the process. Interestingly, no candidate made reference to Cassis de Dijon.

Q3. This question was rarely answered and those candidates that attempted it were totally
unprepared. The question asked for a Memorandum on the Communitys recent activities in its
fight against VAT fraud. The answer was available on the Commissions taxation website for any
candidate interested in this aspect of VAT and on the Courts website in relation to Missing Trader
case law. Only one candidate referred to the Courts jurisprudence and few candidates discussed
the activities of the Commission and Council, indicating a complete lack of knowledge of this
topic. Instead, a number of candidates listed provisions of the VAT Directive from the Van Raad
book. Another produced a scripted answer which produced no discussion of the question asked
in the examination.

Q4. This question concerned capital gains tax cases. This was translated by a number of
candidates into exit taxes and companies moving to other jurisdictions (like discussions on Daily
Mail and Cartesio). Few candidates explained the link between companies moving and capital
gains taxes and few candidates discussed the capital gains tax case law of the ECJ beyond the
exit tax cases. One candidate chose to discuss the Courts dividend taxation cases only.

Q5. This was very poorly answered by most candidates. A number failed to discuss either of
the cases mentioned in the question. Others chose to write out chunks of material from the Van
Raad book scoring virtually no marks and wasting valuable time. Few candidates discussed the
cases at any level despite the question clearly asking for a Memorandum on the two cases,
highlighting the key taxation issues. A well prepared candidate should have been able to
discuss the two cases and weave the basic state aid material into a coherent answer. This
question warranted 25% of the examination marks and given that the question asked for a
discussion of two designated cases only, it should have been a relatively straightforward task to
construct a reasonable answer.

Q6. Only a handful of candidates spotted the Dutch Ship Registration case and Halliburton as
being highly relevant. Those that did scored high marks. Good lay-out of the letter scored easy
marks. Failure to spot the relevance (or existence of) the aforementioned cases was crucial to the
level of advice offered. That said, clever (wrong) arguments scored marks. Many candidates went
off in a tangent and focused on the EU rights of the USA directors and the USA parent company
getting entirely lost in the process.

Q7. Finally, this question which was attempted by nearly all candidates with many having a
scripted answer prepared on the EC/International topic. The answers, however, of many

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candidates failed to answer the question which required an analysis of a simple statement. Easy
marks were lost by candidates who spent pages writing about tax treaties and the OECD Model
and who failed to answer the simple question asked despite having sufficient knowledge
(apparent from their scripts) to make a decent shot at it. Too many candidates trotted out the D
case and Bouanich without really explaining their relevance to the question asked. Still more
candidates failed to discuss the D case or Bouanich in enough detail to collect the marks on offer.

As this is my last ADIT Examination let me take the opportunity to thank Roz Baxter for her
dedicated work behind the scenes. When we started this project some five years ago, eight
students took the EC tax option, this year there were 41/42 scripts.

Paper IIIC UK option

This was the fourth sitting of the Paper III UK Option with only one candidate sitting the paper.
The level of overall knowledge shown by the candidate was below the required level expected
and lacked detail other than on one of the four questions attempted.

The intention with this paper is for a general knowledge of UK taxation as a secondary jurisdiction
but from an international perspective.

It is intended that the format, required level of knowledge and mix of UK and International aspects
for future sittings will continue to be in line with this and previous papers.

Future candidates should again review each of the questions set as a guide for future
examinations both in terms of format and technical content.

The seven questions set can be summarised as: -

Q1. A question requiring an understanding of the definition and factors affecting a companys
residence and the term permanent establishment and the determination of profits for UK tax
purposes.

The answer to this question lacked detail. Whilst reference to central management and control
was made, only minimal mention was made of how this term should be incorporated.

Again whilst the basic detail of the expression permanent establishment was made the candidate
failed to expand on the term and made little comment on how the profits are to be determined.

Much greater content and detail was needed for this question.

Q2. A question on how a persons domicile is determined for UK tax purposes and the effect of
non-UK domicile status both before and after the changes introduced by the Finance Act

This question was not attempted.

Q3. A question on the tax differences arising between property asset sales by a company
compared with a share sale both at the individual and corporate level. Including details on de-
grouping charges. Requiring understanding of the taxation of corporate chargeable gains and
individual capital gains.

Again while the answer was marginally better than for question one it still lacked sufficient detail
or expansion of basic comments and understanding thereof. Minimal comments made regarding
the extraction of profits from a company post sale. Reference made to Entrepreneurs relief
despite the group being an investment (as opposed to a trading) group.

Again the answer lacked sufficient detail or content.

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Q4. A general question requiring detail and understanding of the transfer pricing regime in the UK
and any available exemptions and documentation.

This question was not attempted.

Q5. A question on set up of new business ventures in both the UK and abroad. Requiring
discussion of possible structures in view of potential losses and R&D relief.

A reasonable attempt at this question with good coverage of difference between corporate, group
or stand alone, and non-corporate loss relief. Reasonable knowledge shown of R&D and
substantial shareholding exemption.

Q6. A question on the method of relief for UK tax purposes for capital expenditure and the
difference that can arise on timing of relief for capital and revenue expenditure.

Whilst reasonable comments were made regarding the reliefs available for capital expenditure no
comments were made regarding revenue expenditure, for example that may have been
capitalised or had been accrued, nor mention of GAAP or the accruals concept etc. In a two
parted question of this type it is important to attempt both parts as no matter how well one part is
answered it will still only be allocated a proportionate part of the available marks.

Q7. A question on the sources of UK tax legislation and the interpretation thereof by HMRC and
the Courts. Also on the impact of European Law and the Human Rights Act on UK legislation.

This question was not attempted.

As with all examinations marks were allocated for lay out and presentation

Paper IIID China

There were eight papers written. Other than the one paper scoring 50%, others scored between
68% to 75%. As such, the overall result is satisfactory.

There were 6 questions in the exam and candidates were required to answer four questions:
question 1 or 2, question 3 or 4, question 5 and question 6. Most candidates answered questions
2, 4, 5 and 6. Only one candidate did question 1 as opposed to question 2. The answers to
question 4 and 5 were generally better, perhaps because the issues were already more or less
identified in the questions. The issues in Question 2 and 6 were more general, requiring
candidates to identify the issues before answering the questions. Answers to question 4 were the
best across the board and the answers to question 6 were the poorest.


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Paper IIIE Australia

The candidate demonstrated a sound knowledge of most core concepts. However, there was a
notable lack of awareness of particular international tax concepts especially controlled foreign
companies and accruals. The question where these were important was poorly done. Knowledge
of residence and source concepts was also limited to basic areas. Knowledge of principles of
income and deduction was sound.