Achievements of the EU

Achievements of the EU Mao Julin Hay Jean Leang Pisey Kim Chansreynich Hao Kanhamonisopea Bun Kimsour European Union (EU) is a union formed by mainly European countries, which is established in term of economy and politics. Its origin is European Community that formally created in November 1, 1993 which involves with 6 members-Belgium, Germany, France, Italy, Luxembourg and Netherland. Nowadays, there are 28 members. EU’s headquarter is located in Brussels, Belgium. So far, European Union has reached many achievements such as the promotion and expansion of cooperation with its Member States in economic, trade, social issues, foreign policy, security, defense, and judicial issues. Another major accomplishment of EU is the Economic and Monetary Union (EMU) that makes EU succeed in having a single currency (EURO) along with a common monetary policy. EU is famous for its economy on which many countries around the world are being focused. Economic integration is one of the main goals that EU has considered since its first establishment in 1957, and it has a significantly visible success based on fundamentally by a single currency-the Euro. It is a common currency in the circle of euro area that recently can facilitate the monetary circulation in 18 countries of the member states. Interestingly, its achievement of becoming the second largest currency of the world after dollars has pushed the European community’s economy to flourish further. Euro contributes to maintain the stability and prospect of economic society climate, which attract more investment and international or regional trade through the convenient calculation without involving with the foreign exchange rate. The common monetary policy has been adopted in order to acquire greater achievement, common objective and ensure benefits of all euro area states that use euro as their currency. In addition, cross-border trade and investment are the ultimate goal of Euro zone countries. EU removed trade barriers in order to facilitate the flow of goods and services, which can fill in each other’s gap between the Member States. The common purpose is to increase competition and take away all restriction obstacles of the free movement of goods in the Common Market so that they can accelerate the economic development. The mobility of products, goods and capital facilitate human consumption within the region. Moreover, the free movement of capital is intended to permit movement of investments such as property purchase and buying of shares between countries. All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. Another EU achievement is a so-called Custom Union, which was established in an attempt to adopt the common arrangement for imports from other countries based on common external tariff, provides to all members. This effort is made to develop the world trade and facilitate trade beyond border from all countries around the world. What is more important about its achievements is to establish a society with the same rule for different nationalities; for example, people from each country in the name as membership of EU can possibly travel and move freely to settle down, work, retire, or vote, either permanently or temporarily, without any discrimination. For students who want to experience cross-border education. Thousands of students from EU citizen can get a common standard of education simultaneously experience intercultural understanding and good condition of living and studying in other European member states annually. Due to common passport creation, it has been granted to EU people in order to be indicated as EU citizen and move freely. Along with its accomplishment in term of economy, EU is most recognized because of its fame related to regional stability. It is proved that EU is a confederation organization, which is created on behalf of the promotion of stability and peace within the whole region. As many wars and conflicts have happened across the world year-on-year, EU has been seeking to promote tranquility. Simultaneously, EU has sided human rights, democracy, and law promotion. Crucially, EU has been concentrated on the right of children, women, minorities, and displaced people, and it seeks to abolish death penalty, torture, racism and discrimination in any other cases. In the meantime, EU has struggled to promote justice to be widespread in the whole area by giving all citizens in all 28 members with fair jurisdiction. The European security and Defense was established in order to promote peace, prevent conflict and ensure security externally and internally. It also has the ability to take action in peaceke eping mission to pursue peace in the world scale. It has reinforced its external security by fighting against any terrorism. For instance, in the autumn of 2001, the European Council agreed on a common definition of terrorism, an EU-wide search and arrest warrant, and a common list of suspected terrorist organizations. The European police co-operation agency, Europol, was given a dedicated anti- terrorism unit and there was increased sharing of intelligence by national agencies. Common standard for the retention of communication data will make it harder for terrorists to communicate easily in the EU. EU has been trying to enhance the quality of food rather than expanse the quantity, they simply makes sure that their foods and farming products in European market is what their consumers need- healthy nutritious and affordable price. By doing this, EU has decided to create CAP (Common Agriculture Policy) which was launched in 1960s, and it is being cooperated with all the Member States of European Union. Its purpose is to set the conditions that will allow farmers to fulfill their multiple functions in the society — the first of which is to produce quality food. Additionally, the CPA aims to improve agricultural productivity, help farmers facing climate change, provide them with financial assistance and manage the using of natural resources prudently. For this reason, EU farmers can make a reasonable living and in the same time conserve the environment. Meanwhile, the EU is also working on the environment by choosing the method of recycling â€Å"tri-selectifà ¢Ã¢â€š ¬Ã… ¸Ãƒ ¢Ã¢â€š ¬Ã… ¸ or â€Å"waste sorting† which is really practical among the European states. Waste Sorting is the process which waste is separated into different elements- dry and wet. The 3R that consists in â€Å"waste sorting† are Recycling, Reusing and Repairing. To protect the environment, EU chooses to ratify this regulation everywhere in Europe, so far all the acts, which oppose to the rule of waste sorting, will be counted as penalty. Moreover, the use of plastic bag is prohibited in the large commercial area such as supermarkets or hypermarkets. They’ve been working on the environment for many decades by safeguarding water, air and soil. In brief, we can see that EU has fulfilled many accomplishments. Even though EU has met some futilities such as failure of Kyoto and European Energy Policy, it’s still considered as the first successful integration community in the world. Recently, ASEAN community, which is going to have an economic integration in 2015, is looking at EU as a good model and trying to be as successful as possible.

Hk Tax

Edinburgh Napier University/SCOPE of City U Hong Kong Taxation LECTURE 1: Salaries tax and salaries tax planning, Double taxation arrangement with Mainland China Outline Salaries tax | |- |Scope of charge, format and presentation of salaries tax | |- |Locality of employment | |- |Taxability of fringe benefits | |Salaries tax planning | |- |Remuneration package and fringe benefits | |Double taxation relief | |- |Arrangement between Mainland China and the HKSAR | Textbook – Dora Lee, Advanced Taxation in Hong Kong, 15th edition, 2012, Pearson, Hong Kong, Chapters 2 to 5, 23 & 24 LECTURE 1: Salaries taxUnder s8 of the Inland Revenue Ordinance, salaries tax is charged on every person in respect of his income arising in, or derived from Hong Kong from the following sources: 1) an office 2) employment 3) pension Source of Income from Office The source of income from an office is determined by the location of the office, which is at the place where the central management and contr ol of the company is located. Normally, this means the place where directors hold their meetings. Once it is determined that an office is located in Hong Kong, the whole income from such office is chargeable to salaries tax. No question of apportionment arises. Source of Income from PensionThe source of income from pension is the place where the pension fund is managed. Source of Income from Employment A taxpayer having an employment located in Hong Kong (Hong Kong employment) is chargeable under s8 above. Taxpayers whose employment is not in fact located in Hong Kong (Non-Hong Kong employment) may still be liable to salaries tax if they render services in Hong Kong. The basic charge to salaries tax is specifically extended to include the income of overseas employees working in Hong Kong during visits exceeding 60 days [S8(1A)]. Hong Kong Employment a) No time-apportionment b) All income included despite part of services rendered outside Hong Kong c) Exceptions: i) rendered ALL serv ices outside Hong Kong i) visited Hong Kong for 60 days or less in a year of assessment concerned d) Relief: i) income excluded for income attributable to services rendered in that territory and foreign tax paid ii) tax credit under Double Tax Arrangement with Mainland China and other tax treaty countries According to DIPN10, the IRD accepts that employment is located outside Hong Kong where all the following factors are present: a) the contract of employment was negotiated, and entered into, and is enforceable outside Hong Kong; b) the employer is resident outside Hong Kong; c) the employee’s remuneration is paid to him outside Hong Kong. In appropriate cases, the IRD may need to look further facts.Comparison of Hong Kong employment and non-Hong Kong employment: | |Hong Kong employment |Non-Hong Kong employment | |All services rendered in Hong Kong |Taxable in full |Taxable in full | |Services partly rendered in Hong Kong |Taxable in full |Time apportionment | |All services rendered outside Hong Kong |Exempt |Exempt | |Services rendered in Hong Kong for less than 60 days or less | | | |visits in Hong Kong |Exempt |Exempt | |Services rendered in Hong Kong for more than 60 days visits in | | | |Hong Kong |Taxable in full |Time apportionment | |Services rendered in Hong Kong for 60 days or less but presence in| | | |Hong Kong did not constitute visit to Hong Kong | | | | |Taxable in full |Time apportionment | |Services rendered outside Hong Kong with foreign tax paid |Foreign services income | | | |exempt |Not applicable | If a taxpayer with Hong Kong employment is seconded to work overseas with a new non-Hong Kong employment, clear evidence must be shown such that the old employment has been terminated and that a distinctively new employment has commenced. Format of salaries tax computation – Individual |$ |$ |Section | |Income from principal employment | |A |9 | |Less: Allowable outgoings and expenses |B | |12(1)(a) | | Depreciation allowanc es | C | D |12(1)(b) | | | |E | | |Add: Rental value (10% on E) |F | |9 | | Less: Rent suffered | G | | | |Net rental value | | H | | | | |I | | |Income from other employment | | J | | | | | K | | |Less: Loss brought forward |L | |12(1)(c) | | Self-education expenses | M | N |12(1)(e) | |NET ASSESSABLE INCOME | | O | | |Less: Concessionary deductions | | | | | Approved charitable donations (limited to 35% of K) | P | |26C | | Elderly residential care expenses | Q | |26D | | Home loan interest R | |26E | | Contributions to recognized retirement scheme | S | T |26G | |Net assessable income after concessionary deductions | | U | | |Less: Personal allowances | | V |Part V | |Net chargeable income | | W | | |Salaries tax payable | | | | |Lower of (a) progressive rate on W or | | | | |(b) standard rate on U | | | | | | | | | Format of salaries tax under joint assessment |Husband |Wife |Joint | | |$ |$ |$ | |Net assessable income |X1 |X2 |X | | |== |== | | |Less: Concessionary deductions | | | | | Approved charitable donations (limited to 35% of X) | |P | | | Elderly residential care expenses | |Q | | | Home loan interest | |R | | | Contributions to recognized retirement scheme | |S |T | |Net assessable income after concessionary deductions | | |U | |Less: Personal allowances (married person’s, etc) | | |V | |Net chargeable income | | |W | |Salaries tax payable by the nominated spouse or | |the spouse who would have been liable to pay salaries tax under separate taxation. | | | | | | |100% of salaries tax will be waived, subject to a ceiling of $8,000 (2008/09). | |75% of salaries tax will be waived, subject to a ceiling of $6,000 (2009/10 & 2010/11) and $12,000 for 2011/12. |Case law establishes that income from employment: a) includes income for services rendered or to be rendered; b) excludes voluntary receipts for personal reasons; c) excludes compensation for loss of rights Assessable income includes reward for services rendered, past, pr esent and future. If the employer makes a payment to a third party for which the employer itself was solely and primarily liable, then the benefiting employee is not chargeable to tax on such benefit, unless: a) the benefit can be converted into money; or b) the payment was paid for the education of a child of the employee. c) any amount paid in connection with a holiday journey.Considering whether an income is chargeable to salaries tax: a) whether the payment is derived from an employment or office; b) whether the payment is in recognition of services rendered in the past, present or future. In D19/92, The taxpayer was offered and accepted employment by a Hong Kong company. The company paid him a lump sum at the beginning of his employment as an inducement to join the company. The Board held that this payment was incorporated into his contract of employment with the company. The source of the inducement payment was the employment of the taxpayer with the company. It was not a gift . Compensation for loss of employment Generally speaking, compensation for a loss of employment which does not represent a payment for past, present or future services is not chargeable to salaries tax.This is considered as a sum paid in consideration of the surrender by the employee of his/her rights in respect of the employment. Such payments should be distinguished from the termination gratuities which is usually relate to services previously rendered by the employee and hence taxable. The taxable termination gratuities may be related back for a maximum period of 36 months. A sum specified in the contract of employment may be taxed even though it was described as compensation for termination of employment. In CIR v Yung Tze-kwong, the Court has apportioned 10% of the severance pay as the inducement to enter into employment and 90% of the sum was attributable to restrictive covenants, which was not taxable.In Fuchs, Walter Alfred Heinz v CIR, the Taxpayer was entitled to terminati on payments according to his 3-year contract of employment. The contract of employment was terminated about two years. Under a termination agreement, the Taxpayer received a compensation made up of: †¢ Sum A – equivalent to his salary under the remaining period of his contract (12 months); †¢ Sum B – two annual salaries; and †¢ Sum C – the average of his three previous annual bonuses IRD levied tax on Sum B and C on the basis that they were paid pursuant to his contract of employment and the Taxpayer was contractually entitled to receive them on premature termination.The Court of Appeal held that Sum B and C were assessable because they were not paid in abrogation of the contract of employment but in accordance with the contract of employment. The Court of Final Appeal upheld the decision. Payment in lieu of notice After the decision of Fuchs case, IRD is now of the view that payment made in lieu of notice is an incentive for joining an employment and the payment is made under the terms of employment contract, the amount is chargeable to salaries tax if it accrues to an employee on or after 1 April 2012. EMPLOYEE SHARE-BASED BENEFIT Share Option Benefit Time of assessment At the time of exercise, assignment or release of share option. Taxable Gain Situations |Assessable Amount | |Exercise of option |Market value at the time of taking up the shares over total consideration | |Option assigned/released |Consideration for assignment/release of option less total consideration | Timing of exercise of share option According to the DIPN 38, a taxpayer is generally considered to have exercised an option when he has taken whatever steps are necessary to convert the offer contained in the option agreement into a contract to purchase the relevant shares Locality of share option benefits The gain is chargeable to Salaries Tax if it comes within the scope of s 8(1)(a), ie if it can correctly be described as â€Å"income arising in or de rived from Hong Kong†. If a person had a Hong Kong employment at the time of grant of the right, the income is also regarded as having been derived from Hong Kong.If a right is granted to an employee on an unconditional basis during a year of assessment in which the person renders all services in respect of his employment outside Hong Kong, any gain subsequently realized, even if realized whilst the person is working in Hong Kong will not be charged to Salaries Tax. No liability to salaries tax arises where a right is granted on an unconditional basis prior to a person rendering any services in Hong Kong, notwithstanding that the right may be exercised after the person commences to render such services. Where a person with a non-Hong Kong employment is granted the right subject to a vesting period during which services are rendered both in and outside Hong Kong, the gain should to some extent be chargeable to Salaries Tax based on the following formula: Days spent rendering se rvices Gain calculated in accordanceIn Hong Kong during vesting periodX with s 9(1)(d) and s 9(4) Total number of days in vesting period Definition of ‘vesting period’: ‘Vesting period’ normally means the period from the date of grant of the option to the first available date that an employee is entitled to exercise the option. An option will generally be considered to have vested when all conditions for its exercise have been satisfied. E. g. an employee required to work for a certain period of time. Share Award Benefit Shares obtained through share-based remuneration schemes are taxable perquisites forming part of a taxpayer’s employment income. When does the perquisite accrue to the employee?Referring to section 11D(b), this means â€Å"entitled to ownership of the shares†. Generally, two approaches in assessing such awards, viz: ‘Upfront’ and ‘Back End’. Summary of the two broad approaches: | |‘Upfrontâ€⠄¢ approach |‘Back End’ approach | |Vesting period applies? |No. |Yes. | |Time of assessment |Upfront, ie at the time of the grant. |Back end, ie upon fulfillment of conditions. | |Valuation |Market value at time of grant. |Market value at time of fulfillment of | | | |conditions. | |Discount in valuation? |Yes.The discount is to be determined in the |No | | |light of the facts of each particular case. | | |Distributions |Received during the restriction period: Not |Received during the vesting period: Taxable, | |(eg dividends, bonus shares) |taxable; regarded as investment income since |since employee is entitled to the shares only | | |employee is entitled to the shares at the time|at the end of the vesting period. | | |of award | |Example (Extracted from DIPN 38, eg 11) The taxpayer had a non-Hong Kong employment. On 1 May 2005, he was granted 10,000 shares by his employer subject to a vesting period. Shares would only be vested on condition that he remained an em ployee of his company on the vesting dates. 5,000 shares vested in him on 1 May 2007 and the remaining 5,000 on 1 May 2008. The number of days in Hong Kong and outside Hong Kong was ascertained as follows: | |(A) |(B) |(C) |% | |Year ended |Days in Hong Kong |Days outside Hong Kong |Total days |(A)/(C) | |31. 3. 006 |275 |90 |365 |75 | |31. 3. 2007 |260 |105 |365 |71 | |31. 3. 2008 |250 |116 |366 |68 | |31. 3. 2009 |255 |110 |365 |70 | The assessor and taxpayer agreed that the â€Å"back end† approach is applicable to assess the vested shares. The share-award benefits are assessed as follows: ) the value of the first 5,000 vested shares is to be included with the taxpayer’s other remuneration in the year of assessment 2007/08 and 250/366 of the value is to be subject to tax, while b) the remaining 5,000 vested shares is to be included in the year of assessment 2008/09 and 255/365 of their values is subject to tax. Holiday journey benefits Starting from 1 April 2003, ho liday warrant or allowance to purchase holiday warrant will be subject to salaries tax. Section 9(2A)(c) provides that ‘any amount paid by an employer in connection with a holiday journey’ is taxable. The term â€Å"holiday journey† is defined in section 9(6) as either: a) a journey taken for holiday purposes, or b) where a journey is taken for holiday and other purposes, the part of the journey taken for holiday purposes. The amount to be assessed is based on the actual amount paid by the employer, i. e. the actual costs that an employer pays. DIPN 41 Taxation of Holiday Journey BenefitsThe CIR issued DIPN 41 Taxation of Holiday Journey Benefits in August 2003 to lay down broad statements on the interpretation and practice to be adopted by the Inland Revenue Department in relation to the above amendments. (a) Business trip (including a holiday incidental to such business trip) will not be taxable. (b) If it could be established that a journey is not for holiday, such as for the relocation of an employee and his family – i) in Hong Kong upon assumption of a new post or ii) out of Hong Kong upon termination of an existing post here, the payment made by the employer will not be taxable. For such trips, any stop over visits to another place en route to or from Hong Kong would be disregarded as a concession. c)If an employer was given a certain mileage for a business trip paid by his employer and he redeemed it for a free ticket to a territory for holiday, the value of the free ticket is not assessable as no payment was made by the employer in connection therewith. Rental refund or Cash allowance It is necessary to decide whether a sum is a rental refund and a cash allowance paid by an employer to his employee. A cash allowance is fully taxable as an income from employment. In CIR v Page (2002), to qualify as a refund of rent, there is no requirement for sufficient control, the production of tenancy agreement and/or rental receipt to the employer.However, the taxpayer must prove that the intention of the employer is to refund the rent paid and not to pay an allowance that can be spent in whatever way the employee wishes. For computation of rental value, it is based on a certain percentage on net assessable income (before self-education expense) depending on the nature of accommodation. (Refer to D91/04 regarding the definition of hostel, boarding house & hotel). Allowable outgoings and expenses include all outgoings and expenses (other than domestic, private or capital expenditure), wholly, exclusively and necessarily incurred in the production of the assessable income. There is a distinction between expenses incurred ‘in’ the production of the assessable income and expenses ‘for’ the production of the assessable income.The expression ‘in the production of assessable income’ bore the same meaning as ‘incurred in the performance of the duties of the office or employmentâ €™ and without such expenses the employee may not be able to earn the income. CIR v Humphrey (1970) 1HKTC451 – traveling expenses incurred by a taxpayer in getting to his place of employment were not allowed (when traveling to his place of work, the taxpayer was not on duty). It is the taxpayer’s responsibility to attend to the place of work. CIR v Robert P Burns (1980) 1HKTC1181 – legal expenses incurred by a taxpayer in an appeal against disqualification was not allowed as the expenses were incurred in order to prevent the taxpayer from being precluded from earning income, not incurred in the production of the income. In D91/03, a solicitor was denied a deduction claim on professional indemnity insurance.The Board held that the amount was incurred so as to put the taxpayer in a position to earn her income and so as to qualify the taxpayer to perform the duties of her office as a solicitor. In D35/04, the taxpayer was required to repay part of the commissio n to his employer, being bad debt of his client. The repayment was required because he failed to observe the employer’s credit policy. The Board disallowed the sum as it was not incurred for the performance of duties but for deviation from his duties. Home loan interest deduction 1) mortgage loan to acquire dwelling in Hong Kong 2) interest paid to recognized organization 3) prescribed amount 4) claim for ten years In D5/02, a taxpayer held to be entitled to claim deduction of 50% only of he mortgage loan interest paid in respect of the property held by her and her mother as joint tenant although all mortgage payments were financed by her. In D106/00, it was held that only the portion of interest payment for the second bank loan used to repay the outstanding principal on the first bank loan is allowable. In D2/01, interest paid for the bank loan for the payment of the premium paid to the Housing Authority is not deductible as the premium was not deferred consideration for the acquisition of the dwelling house. In D108/02, it is considered that ‘owner’ does not include beneficial owner. SALARIES TAX PLANNING Common areas of salaries tax planning are source of employment, using statutory exemption and fringe benefit. Territorial source – EmploymentIf the following three factors are present, IRD will normally accept that employment is located outside Hong Kong: 1. the contract of employment was negotiated and entered into, and is enforceable outside Hong Kong; 2. the employer is resident outside Hong Kong; 3. the employee’s remuneration is paid to him outside Hong Kong. a) ensure foreign employment – only income attributable to Hong Kong services is taxable. Ensure all the above three factors are met. b) render all services outside Hong Kong or performed services during visits not exceeding 60 days in the year of assessment. c) dual employment – one covering Hong Kong duties with HK employer and the other covering o verseas services with overseas company.Ensure the nature of the employment duties is clearly differentiated. d) dual capacity as a director and an employee – not taxable if no services rendered in respect of the employment. Benefits-in-kind or Fringe Benefits Arranged to provide the following fringe benefits which are not taxable: 1. discharge of employer’s liability which is not guaranteed by any other person 2. benefits which are not convertible into cash 3. benefits which are not attributable to a particular employee Not convertible into cash The employer should not give an asset to an employee free or at a price below market value. Assets should be lent to the employee for use without transfer of ownership. Utilities of Employee’s HomeThe contracts should be made between the employer and the utilities suppliers for the supply of facilities to the employee’s home. Domestic Servant/driver The servant or driver should be employed by the employer to serve the employee. Low Interest loan or Interest free loan Such a loan provided by the employer is not taxable provided that no other person provides surety to the loan. The benefit must not be convertible into cash by the employee. Club The employer should become a member and allow its employee to enjoy the club’s facilities. Medical and Dental benefits 1. engage a doctor/dentist by the employer 2. join a group medical/dental insurance scheme Quarters 1. reimbursement of rent 2. provision of place of residenceShare option Only gain realized by the exercise of share options is taxable. So do not exercise the right unless you derive very little income from that transaction at that time. Comprehensive Double Taxation Arrangement On 21 August 2006, the Hong Kong Special Administrative Region (â€Å"Hong Kong†) and the Mainland of China (â€Å"Mainland China†) entered into a comprehensive double taxation arrangement known as â€Å"The Arrangement between the Mainland o f China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income† (the â€Å"Arrangement†). Salaries Tax ImplicationsGenerally speaking, income from employment by a Mainland resident shall be taxable only in Mainland China unless the employment is exercised in Hong Kong. If the employment is exercised in Hong Kong, such remuneration as is derived from Hong Kong may be chargeable to salaries tax in Hong Kong. A Mainland resident in respect of an employment exercised in Hong Kong will not be chargeable to salaries tax in Hong Kong if all the following three conditions are satisfied: 9 the recipient is present in Hong Kong for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned; 10 the remuneration is paid by, or on behalf of, an employer who is not a Hong Kong resident; c)the remuneration is no t borne by a permanent establishment which the employer has in Hong Kong. If a Mainland resident renders employment services in Hong Kong but his remuneration is paid by a Hong Kong employer, he will still be exempt from tax under the IRO if his visit to Hong Kong in a year of assessment concerned does not exceed a total of 60 days according to the â€Å"preferential treatment†. Section 50 of the IRO provides the basis for the granting of a tax credit in relation to an item of income stipulated in the Comprehensive Arrangement and in respect of which tax has been paid in the Mainland. Example of calculation in the Arrangement is extracted as follows: |$ | |Total Hong Kong assessable income |200,000 | |Including gross income from the Mainland before tax |120,000 | |Tax paid in the Mainland |10,000 | |Tax rate in the Mainland |8. 33% | |Net income after tax from the Mainland |110,000 | | | |The effective tax rate in HK and the tax credit are computed as follows: | | | | | Total HK assessable income |200,000 | |Less: Deductible items | (12,000) | |Net assessable income |188,000 | |Less: Personal allowance |(100,000) | |Net chargeable income |88,000 | | | | |Tax payable |6,340 | | | | |The effective tax rate in HK: Tax payable x 100% | | Net assessable income | | | = 6,340 x 100% | | | 188,000 | | | = 3. 7% | | | | | |Net income from the Mainland after tax | | | (grossed up at the effective rate in HK)(Note) | | | | | |$110,000 x 100% |113,836 | |(100% – 3. 37%) | | |Less: Net income from the Mainland after tax |(110,000) | |Tax credit limit of tax paid in the Mainland 3,836 | | | | |Under section 50, the actual tax payable in HK is computed as follows: | | | | |Assessable income (Hong Kong) |80,000 | | Assessable income (the Mainland) | | | after deduction of tax 110,000 | | | Add: tax deducted in the Mainland 10,000 | | |Gross income from the Mainland before tax |120,000 | |Total HK assessable income |200,000 | | Less: amount not allowed as a tax credit (10,000-3,836) | (6,164) | | |193,836 | | Less: Deductible items |(12,000) | | |181,836 | | Less: Personal allowance |(100,000) | |Net chargeable income |81,836 | | | | |Tax thereon |5,538 | |Less: tax credit allowed |(3,836) | |Hong Kong tax payable |1,702 | | | | |Note: | | |Under section 50(5), tax paid in the Mainland which is not allowed as a tax credit can be deducted from the income | |Amount not allowed as a ax credit $10,000 – $3,836 = $6,164 | |Net income from the Mainland after tax $120,000 – $6,164 = $113,836 | | | | | | | | | | | | | Lecture 1: Tutorial Questions 1. Mr Lee supplies you the following information in relation to the year ended 31 March 2012: ) He was recruited five years ago in Singapore by Multinet Ltd, a company incorporated and carried on business in Hong Kong, as the company’s regional manager. He was paid an annual salary of $800,000. During the year he only spent six months in Hong Kong as he was required to travel around Asia to carrying out his duties. By arrangement with his employer, his salary was paid directly into his bank account in Singapore from which he had money remitted periodically to Hong Kong. b) Multinet Ltd operates a medical insurance scheme for all its employees through an insurance company based in Hong Kong. Under this scheme Multinet, as insurer, arranges with the insurance company to insure each employee against illness and related hospital costs.It pays an annual premium to the insurance company of $6,000 for each employee. Mr Lee paid visits to his own doctors and paid the doctor’s bill first, which was later reimbursed by the insurance company. The insurance company reimbursed him the total cost of $7,500. c) He considered that it would be productive to have a personal laptop computer for use while traveling on business trips. He therefore purchased a computer for $12,000. He used it solely for his employment. d) Before he was employe d by Multinet, he was working with an international company incorporated in Singapore. All his services were rendered in Singapore. In March 2005, he was granted an option to subscribe for 100,000 hares at a cost of $2 per share. At the time of the grant, the market price was $5 per share. In January 2012, he exercised the option and the market price was $4 per share. In March 2012, he sold the shares for $6. e) Mrs Lee is a housewife and is living in Hong Kong. f) Multinet paid school fees amounting to $60,000 for the education of his younger son in Hong Kong. Under an arrangement entered between the school and Multinet, Mr Lee was not liable for the payment of the school fees. g) Mr Lee paid residential care expense of $60,000 to the residential care home situated in Kowloon Tong in respect of his father who is aged 64. He also paid $12,000 to his father. ) He has two children, aged 16 and 22. The younger son is the child as described in (f) above and the elder son is receiving fu ll time education in Singapore. He has a part-time job for his daily expenses. i) Mr Lee lives in a flat owned by himself and his wife as joint tenants. During the year they paid mortgage loan interest to the bank of $130,000. Required: a) Explain whether Mr Lee is liable to Hong Kong salaries tax. b) Assuming Mr Lee’s income is liable to Hong Kong tax, comment your tax treatment for items (b) to (i) above; and c) Compute Mr Lee’s salaries tax liability for the year of assessment 2011/12. Ignore provisional salaries tax. Note to students: distinguish between the HK employment and non-HK employment and apply the three factors to the case) 2. Mr Brown was employed by B Ltd as a sales manager for many years. B Ltd was incorporated and carrying on business in Singapore. Mr Brown used to live and perform duties in Singapore. In order to expand its market in China and South East Asia, he was assigned by B Ltd to work for two years from 1 April 2009 to 31 March 2011 to in cha rge of the sales activities of the company in that area, including Hong Kong, at an annual salary of $1,095,000. In consideration of his taking up the two years’ assignment, B Ltd would grant him a share option (Option 1) to purchase 100,000 shares in B Ltd at a price of $3 each upon completion of the assignment.On completion of the contract on 31 March 2011, B Ltd granted him the share option and he exercised the option on 30 June 2011. The share price per share of B Ltd was $5 and $8 as at 31 March 2011 and 30 June 2011 respectively. On 1 April 2011, Mr Brown signed another contract with B Ltd for another two years with annual salary of $1,171,200. In consideration of the taking up of a new contract, B Ltd unconditionally granted Mr Brown another option (Option 2) to purchase 150,000 shares in B Ltd at a price of $3. 50 each when the price per share was $5. 50. Mr Brown paid $10,000 for purchasing the option. On 1 October 2011, Mr Brown assigned the share option (Option 2) to his colleague for $330,000 when the price per share was $6.Starting from 1 April 2011, B Ltd rented a flat in Hong Kong at a monthly rent of $35,000 for Mr Brown’s residence and Mr Brown was required to pay monthly nominal rent of $1,500 to B Ltd. In the year of assessment 2011/12, Mr Brown took a 5-day business trip to Thailand to be followed by 5 days’ vacation there. Mr Brown’s wife accompanied him to take the 10-day trip to Thailand. B Ltd paid $50,000 for each of them to a travel company for the entire trip including air ticket, accommodation, meals, transportation expenses, etc. The cost of the air ticket was estimated to be $5,000 each. During the following years of assessment, Mr Brown’s stay in Hong Kong is as follows: Year of assessment No. of days in Hong Kong 2009/1055 2010/11280 011/12200 Required: a) Explain to Mr Brown whether his income is subject to salaries tax for the year of assessment 2009/10. b) Compute the assessable income of Mr Brown for the years of assessment 2010/11 and 2011/12. 3(a)Mr Fong is a financial manager of A Ltd, a company incorporated in Hong Kong, since December 2006. In April 2011, he was posted to Macau to set up the financial system of a subsidiary of A Ltd. His salary is directly deposited in his bank account in Hong Kong. He returns to Hong Kong regularly and stays with his friends, as he does not have a home in Hong Kong. In the year of assessment 2011/12, he spent 58 days in Hong Kong.During the period, he carried some of the work with him from Macau and worked in the office of A Ltd for a total of 50 days. Required: Comment on the salaries tax liability of Mr Fong for the year of assessment 2011/12. 3(b)Mr Kam was having a non-Hong Kong employment before 31 March 2010. On 10 April 2009, he was granted an option (Option A) unconditionally to purchase 80,000 shares of his employer’s holding company at a price of $2. 00 each when the price per share was $3. 50. During the year e nded 31 March 2010, he visited Hong Kong for 160 days for performing his employment duties. Starting from 1 April 2010, he was employed by C Ltd, a company incorporated and carrying on business in Hong Kong.He supplied you the following information for the year ended 31 March 2011: (a)Salary: $1,500,000 b) On 1 December 2010, he was granted an option to purchase 120,000 shares in C Ltd at a price of $1. 50 each when the price per share was $4. 25. He exercised the option on 20 March 2011 when the price per share was $5. 50. On 31 March 2011, he received dividend of $12,000 for the shares. c) Starting from 1 April 2010, he leased a flat at a monthly rent of $40,000 and C Ltd refunded monthly rent of $35,000 to him. d) Starting from 1 April 2010, C Ltd leased a motor car for the free use of Mr Kam. C Ltd paid monthly rental of $8,000 to the car leasing company. ) On 20 March 2011, he exercised Option A when the price per share was $3. 30. He sold the shares on 31 March 2011 when the p rice per share was $4. 80. f) He made cash donations to the Hong Kong Red Cross of $100,000. Mr Kam is married and his spouse is a housewife. They have a son aged 20 and is studying in a university in Singapore. Required: i) Explain your tax treatment of items (c) and (d) above. ii) Compute Mr Kam’s salaries tax liability for the year of assessment 2010/11. Ignore provisional salaries tax. 4. Mr Pang is a senior management of a company in Hong Kong. Due to the Board of Director’s decision, Mr Pang’s employment was terminated immediately on 29 June 2012.When Mr Pang left the company, he received a total sum of $3,960,000 consisting of the following: a) final month’s salary of $120,000; b) bonus of $100,000; c) payment in lieu of notice of $120,000; d) compensation for leave not taken of $60,000 e) lump sum payment of $1,000,000 agreeing for not participate with the company’s business for two years; f) a further sum of $2,560,000 being final settleme nt between the company and Mr Pang. According to the employment contract, the company is responsible for the traveling expenses for returning to Mr Pang’s home country. In this regard, the company had incurred cost of air tickets of $80,000 for Mr Pang’s return to his home country with his spouse.Required: Advise the tax treatment of the above items. (Note to students: you have to consider what additional information you may require to determine if the income is taxable or not) 5(a). Mr Chan owns Property A and Ms Lee owns Property B. Mr Chan married Ms Lee on 1 September 2010. Before their marriage, Mr Chan and Ms Lee lived at their own property. After marriage, Ms Lee moved into Mr Chan’s property. Ms Lee’s property was still used by her parents as their residence. Mr Chan and Ms Lee paid the following home loan interest during the year ended 31 March 2011: 1. 4. 2010 – 31. 8. 20101. 9. 2010 – 31. 3. 2011 Mr Chan$60,000$84,000Ms Lee$65,000 $30,000 5(b). Mr and Mrs Ko lived together in their jointly owned residence up to 31 December 2010. On 1 January 2011, they separated and Mr Ko moved out to a rental accommodation. Under the Deed of Separation, Mr Ko would assign the property to Mrs Ko at the date of divorce. The date of divorce was 1 July 2011 and the legal ownership of the property was assigned to Mrs Ko on that day. They paid the following home loan interest during the year ended 31 March 2011: 1. 4. 2010 – 31. 12. 2010$90,000 1. 1. 2011 – 31. 3. 2011$30,000 Mrs Ko was responsible for the payment of loan interest during the period from 1. 1. 2011 – 31. 3. 2011. 5(c).On 1 March 2010, Mr Ma purchased Property D at cost of $4,000,000 with downpayment of $1,200,000 and the balance was paid with the finance of mortgage loan obtained from a local bank and secured by Property D. The downpayment was financed by a bank’s overdraft, which was secured by his personal guarantee. He used Property D as his residence starting from 1 April 2010. During the year ended 31 March 2011, he paid the following interest to the bank: Bank overdraft interest: $60,000 Mortgage loan interest:$56,000 Required: Compute the amount of home loan interest that each of the above person was entitled to claim for the year of assessment 2010/11.You are required to state the principles/reasons to support your calculation. [Note to students: refers to DIPN No. 35(Revised)] 6. Mr Chung is going to renew a contract of employment with his employer. The company’s director has provided him with the following proposed changes: | |Current benefits |Proposed benefits | |(a) |13 months salary per annum |12 months salary per annum plus discretionary bonus, | | | |depending on the company’s profitability and the | | | |employee’s erformance | |(b) |Company car (the car is owned by the company) |A monthly sum of $12,000 will be paid to him for his | | | |transportation | |(c) |Meal coupons from canteen |Cancelled, business meals to be reimbursed upon | | | |approval | |(d) |Medical insurance (the company participated with a |Cancelled, medical bills to be reimbursed upon | | |scheme for the employees) |approval, up to a maximum of 80% of the bill amount | |(e) |Monthly housing allowance of $20,000 |Cancelled, rental reimbursement of $15,000 upon | | | |production of rental receipts and tenancy agreement | |(f) | – |Share option for employees to acquire shares in the | | | |employer’s listed holding company | |(g) |Children’s education cash allowance, paid by the |Cancelled, a one-off lump sum compensation payment to| | |company directly to the school |be made at the commencement of the new contract | Required: Advise Mr Chung on the Hong Kong salaries tax implications arising from the proposed changes to the respective benefit items. (Note to students: comments on whether such changes will affect the tax liability)

What Everybody Dislikes About Science Essay Topics Example and Why

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Business Valuation Example For Free - Free Essay Example

Sample details Pages: 10 Words: 2868 Downloads: 7 Date added: 2017/06/26 Category Business Essay Type Argumentative essay Did you like this example? Formerly called Trinity Labs, Torrent pharmaceuticals is one of Indias leading pharmaceutical companies with an annual turnover of about 930 crores worldwide. It is now a fast-growing company after shaking off the sluggishness of past few years. It has recently established a new manufacturing facility in Baddi, Himachal Pradesh both as a means of expanding production and to take advantage of its low-cost production environment by shifting existing production capacity. Don’t waste time! Our writers will create an original "Business Valuation Example For Free" essay for you Create order Torrent Pharmaceuticals Ltd. is one of the most renowned companies in the Indian pharmaceutical market. It is considered to be one of the foremost companies in the pharmaceutical company. The Companys major sources of revenue are mainly from manufacturing services and sale of branded-generic drugs in India and unbranded-generics pharmaceutical products abroad. A further classification of these pharmaceutical sales can also be done as, Domestic formulations which basically comprises of branded pharmaceutical formulations sold in the domestic or the local market, Contract manufacturing which is generally comprised of sourcing, producing and supplying insulin formulations to Novo Nordisk (India) Ltd. under their brand name and International operations which encompasses sales outside the country of branded as well as unbranded-generic pharmaceutical formulations to foreign subsidiary companies and third parties. Torrent Pharma has also made significant inroads into the internati onal generic drugs market. Over the last few years, the Company has built up a strategy and infrastructure along with the capabilities focused on tapping this productive opportunity. The production facilities are improved to meet stringent and strict quality assurance standards of the highly regulated and developed countries (like fulfilling or satisfying the USFDA norms); and along with it maintaining the competitive cost advantage. Torrent Research Center (TRC), the research development facility, is upgraded to develop international generic versions of selected molecules in the required time frame and prepare the necessary regulatory dossiers for obtaining timely marketing approval in regulated markets. Company has sought to establish a strong RD outlook in this field by investing over 12% of its net sales in RD. As per the mentioned or discussed strategy, their current international operations are focused on five key or major areas: Brazil Latin America, Russia CIS countrie s, Europe, North America and Rest of the World comprising less regulated countries of Africa and Asia. DIRECTORS REPORT: SIGNIFICANT EVENTS ISSUE OF BONUS SHARES: During the year, equity shares of the Company of face value Rs.10 each were sub-divided into two new equity shares of Rs.5 each and bonus shares were issued on post-split basis in the ratio of one bonus share for every existing share held. Dividend recommendation of Rs.2.50 per equity share on the expanded capital post issuance of bonus shares (50 % on fully paid up face value of Rs.5) (previous year Rs.8 per equity share, 80% on fully paid up face value of Rs.10), amounting to Rs.21.15 crores (previous year Rs. 16.92 crores). The stock-split allowed the Company to unlock the value for shareholders. CAPITAL AND BORROWINGS: During the year, the Company split the face value of its equity shares from Rs. 10 to Rs. 5 and also issued bonus equity shares in the ratio of 1 bonus share for every share on a post-split basis by way of capitalization from Capital Redemption Reserve.The paid up share capital of the Company increased from Rs.21.15 crores to Rs. 42.31 crores as at 31-Mar-06 on account of the same. It allowed company to retain cash to fund the capital expenditure program mainly comprising of formulation manufacturing facility at Baddi, API upgradation and expansion project at Indrad, (both completed during the year), expansion of research development (under execution) and other maintenance capital expenditure were funded mainly from the term loans and internal accruals. NEW PRODUCTS A pharma company has to continuously search for new products to survive in a market that makes old products obsolete very fast. Torrent launched a number of products that protected its market-share by replacing the obsolete products. UPGRADATION OF RESEARCH CENTER Torrent Research Center (TRC), the research development facility, has seen increasing investments mainly to develop generic formulations of drugs going off-patent. Since Torrent doesnt have the scales to fund original molecule research, this is a prudent approach. In a market where a number of blockbuster drugs will go off-patent in near future, it is possible to create value with this strategy. However, decline in capital funding for research as a percentage of sales is a matter of concern. ACQUISITIONS Torrent acquired the German firm Heumann Pharma that has boosted its balance-sheet for overseas operations. It has allowed them to gain foothold in German market. Torrent India Analysis Asset Efficiency The overall efficiency of Torrent India has decreased from 1.27 to 1.14 in 2005-06. This could be attributed to the significant decrease in Working Capital efficiency from 5.20 in 2005 to 3.11 in 2006. This decrease in working capital efficiency is due to an increase in cash and bank balance by 634.3% and sundry debtors by 85.78%, which is indicative of slackening in collection from market. Working Capital Cycle Efficiency of inventory has increased substantially in the year. However company seems to have lost some of its bargaining power with both its suppliers and customers as evident in decreased credit facility available from suppliers and increased credit facility being given to its customers. The change to VAT regime may have led to thinning of pipeline in the first quarter leading to loss of market power but there is no reason for this phenomenon to make impact for the entire year. Cash flow analysis The net short-term debt taken by the company in 2004-2005 was Rs. 2966.81 lakhs, which was completely repaid in 2005-2006. In 2005-2006, however, they have taken a lot of long-term loans. The company took a net long-term debt of Rs. 6283.50 lakhs, which put its total net long-term debt on 31 March 2006 at 24408.50 lakhs. During this period, Torrent Limited has purchased fixed assets that have a long gestations period worth Rs. 11440.64 lakhs. Last annum they had purchased fixed assets worth Rs. 9563.21 lakhs. Their long-term investment in subsidiaries was Rs. 3555.13 in 2005-2006, compared to Rs. 530.10 lakhs last year. This can be explained by their huge investment in their German subsidiary, Torrent Pharma GmBh, for acquisition of Huemann Pharma GmBh, and to meet the working capital requirement of Huemann, post acquisition. The cash and cash equivalents of Torrent have decreased substantially, by Rs. 9429.39 lakhs, compared to a corresponding increase of Rs. 12429.59 lak hs last year. It seems that the entire capacity expansion has been funded by internal accruals and the long term debt has been utilized to retire short-term debt as well as to pay for the acquisition in Germany. Yet, Torrent enjoys a comfortable cash position. Long term solvency The interest coverage ratio has declined sharply to 4.97 from the corresponding figure of 9.76 last year. However, the firm is stable to meet its interest payment needs and this change is due to the increase in long-term loans. The company is in comfortable position in terms of Debt Equity ratio and Debt service coverage ratio. Torrent remains an eminently lend-able company. Profitability Ratios Net profit margin has declined from 11.21% in the previous year to 9.71% in the current year because of the impact of writing off losses on account of closing of a subsidiary, and decline in non-operating income since surplus funds were withdrawn from market instruments for capital expenditure. The summary of reported operating profit margin movement for the year is as under: Operating profit margin for FY 2004-05 15.6% (Loss) / Gain in margin on account of: Raw and packing materials consumed 1.9% Manufacturing cost 1.5% Staff cost 1.0% Increase in stock-in-trade (4.7%) Selling cost 2.4% RD cost 2.1% General and administration cost (2.6%) Operating profit margin for FY 2005-06 17.1% The operating profit margin before tax of the company has increased from 15.55% to 17.11%, but at the same time, ROTA and ROCE of the company has decreased from 14.48% to 12.27% and 19.77% to 19.47% respectively. Though ROTA and ROCE has dec lined, RONW has shown an increase from 15.53 to 17.21. The Du Pont analysis indicates a decrease in assets turnover and leverage impact. The decrease in ROTA, ROCE and Assets turnover ratio could be attributed to the fact that company has been spending heavily in capacity building and acquiring new subsidiaries. Since the returns expected from such expansions is yet to be realized in substantial measure, decline is understandable. Cash/bank balance They wanted to go for capacity expansion. So they sold all their relatively risky investments aggregating 14695.34 lakhs and put them into relatively safer instruments like fixed deposits. This led to an increase in the cash and bank balance by 634.3% and complete knocking-off of outside investments other than those in subsidiaries. Torrent Consolidated Analysis Profitability Operating profit margin before tax has decreased from 13.47 in 2005, to 11.13 in 2006. Similarly, the net profit margin has also decreased from 8.90 in 2005 to 5.25 in 2006. Though net profit margin for Torrent (India) also declined during this period, the operating profit margin has increased from 15.55 to 17.11. The decrease in operating profit margin of Torrent (consolidated) indicates that subsidiaries are making losses. Long term solvency The debt service coverage ratio has significantly decreased from 4.13 to 1.93 during the period 2005-06. For Torrent (India), these figures were 5.3 and 3.15 respectively. This decrease in debt service coverage ratio of Torrent (consolidated) can be attributed to the fact that during 2005-06 the cash flow from operating activities for Torrent (consolidated) increased by 36.38%, whereas its interest paid increased by 190.8%.The high interest paid also has an effect on interest coverage ratio which declined from 8.99 to 2.37. Though the figures are still in the acceptable region, a further decline in cash flow from operating activities and an increase in interest paid will have an adverse effect on the long term solvency position of torrent consolidated. Market Position Since consolidated figures show decline in reserves lying with the Company as compared to figures for India operations, book value declines marginally. The majority shareholding in Torrent is by its promoters, thus there is no significant threat of a takeover. Asset Efficiency (consolidated) One significant difference that can be seen between Torrent India and Torrent Consolidated is that overall efficiency ratio decreased fro Torrent India in 2005-06 whereas it increased for Torrent Consolidated. A possible reason is that sales for torrent consolidated increased by 76.5% whereas its capital employed increased by 63.3%. On the other hand increase in sales for Torrent India was 39.1% and increase in Capital employed was 55.5%. The huge increase in capital employed of torrent India was because of the loans given by torrent India to its foreign subsidiaries. Comparison between Domestic and International operations International operations of Torrent still have a pull down effect on the consolidated performance of the company because they have not yet started generating returns. Most of the subsidiaries are still in the investing phase and have a very low turnover denying efficiency scales to the company currently. However their continued improvement indicates that company should be able to build scales in its international operations too in the near future. Torrents stock performance: Bonus Issue: The bonus issue decision taken by the board of directors was well accepted by the shareholders. The share price jumped from a mere 168 to 192 in a single day. The bonus issue was finally approved on Jan 25th by the company shareholders. Performance vis-Ã  -vis Market Torrent share price has largely mirrored the movement of BSE index, but has shown a sharp jump between November and February on account positive market response to share split. However, in the period after Mar 2006 Torrents performance has declined vis-Ã  -vis the stock exchange. While the BSE index has given returns of close to 50%, the stock has gone up by round about 39%. The beta value of the stock lies close to 0.7657. It indicates a declining enthusiasm for the scrip in the stock market. Shareholding Pattern The company is a very closely held company with close to 74.9% under the promoters. Foreign institutional investors have also shown significant interest in the stock with holding s of nearly 11%. Other financial institutions carry another significant chunk of the shares. This means that very little is in the hands of the retail investors. In comparison, the industry leader, Dr Reddys has only 24% under promoter holding. The FII is slightly higher at 15%. COMPARISON WITH SIMILAR COMPANIES Torrent pharmaceuticals performance with respect to the industry and a few similar companies of the pharmaceuticals sector is presented in the table below. The comparison of Torrent with the some of the pharma is done keeping in mind that the other three companies share almost same business model and are somewhat similar in terms of sales. The sales figure for Glenmark, Alembic and Torrent are 562.94Cr, 525.35 Cr, 691.96Cr respectively in FY2006. Aggregate Alembic Torrent Pharma Cadila Health Glenmark Pharma 2006 2006 2006 2006 Key Ratios Debt-Equity Ratio 0.81 0.64 0.63 0.6 1.06 Long Term Debt-Equity Ratio 0.56 0.31 0.59 0.43 0.88 Current Ratio 1.5 1.2 1.48 1.14 2.74 Turnover Ratios Fixed Assets 1.78 1.31 1.79 1.33 2.49 Inventory Turnover 4.87 5.12 1.92 6.43 5.55 Debtors Turnover 4.45 5.07 8.1 8.9 3.43 Interest Coverage Ratio 4 8.33 4.97 7.94 6.19 PBIDTM (%) 15.31 16.98 15.67 21.22 22.11 PBITM (%) 11.98 12.63 12.46 16.51 19.32 PBDTM (%) 12.32 15.46 14.48 19.14 18.99 ROCE (%) 11.64 17.02 19.47 20.11 19.31 RONW (%) 13.2 23.27 17.11 24.42 25.53 Â Ratios of other companies are sourced from https://www.capitaline.com Torrent seems to be servicing its debt pretty efficiently when seen in light of industry aggregate. The debt-equity and long-term debt-equity ratios for torrent are below the industry average. Torrent, Cadila and Alembic have around 60% debt with respect to their equity whereas Glenmark is above 100%. When seen this in the light of debt servicing (interest coverage ratio) capacity of the firm Torrent and other companies are doing a good job. They are above the industry aggregate of 4. The interest component for Torrent, Cadila, Alembic and Glenmark are approximately 25%, 14.4%, 13.6% and 19.2% respectively of their PAT. The short-term solvency of the Torrent and others is also above the industry average. Torrent is using its fixed assets more efficiently than Alembic and Cadila Health. Torrent, in most of the aspects, matches and at times is well above the industry aggregates of the key performance indicato rs. Torrent has one of the good sales credits to cash conversion among the others in the industry. One key area where Torrent needs to improve upon is Inventory Turnover. When it comes to efficiency in Inventory Torrent is not doing a good job with respect to Industry aggregates. Torrent has been managing its inventory very inefficiently (larger holding periods) even though it has improved on this count in the current year and hence in this aspect it is rated as one among the low in the industry. Du-pont Analysis Du-pont chart for Torrent India operations 2006/2005 RONW=17.21/15.53 Operating margin Asset Turnover Leverage Ratio Equity Ratio 14.7/13.99 1.14/1.27 1.54/1.315 0.63/0.87 There has been an upward swing in the RONW of torrent over the past year assisted mainly due to the improvement in the operating margin and the equity ratio. The operating margin has moved upwards mainly due to the sales push. Even though the costs have increased sales has cushioned the blow. The revival in sales is mainly due to the general growth in the pharma industry after the recovery from the slack caused by the implementation of VAT. Increase in the brand portfolio as well as an increase in the field force also assisted in the growth. The change in the equity ratio has been mainly due to strong performance that has increased shareholder wealth in the Company and pushed debt ratio down even when substantial amounts have been raised as debt from financial institutions. The fixed assets have grown because of the addition of the 2 new plants that have been commissioned which are still to make full impact on sales thus pulling down the overall asset efficiency. The cash in bank balance has seen a major increase due to the conservative investment strategy of torrent. However this hardly is a cause of concern because non-operating are not a major source of income in any case and withdrawing finds from the market have enabled funding for capacity expansion. Future Growth Prospects Torrent Pharmaceuticals is a company with conservative growth outlook because its scales donot allow it to play high-risk high-reward game of original research. In a market dominated by innovative companies, this can be a handicap. However, Indian companies barring the top 2-3 have hardly got the necessary resources for such business model. The old story of growth through branded and unbranded generics that catapulted some Indian companies into big league is likely to continue for a few more years. So, betting on this strategy is not such a bad idea. In recent times, pharmaceutical sector has faced uncertain regulatory environment and increasing pressures on margins. The recent move by the government towards a more comprehensive price control regime is likely to tighten the margins further. Under these circumstances, a brave investor would bet on a conservative strategy that Torrent follows. Torrent will have to find ways of tapping into the research pipeline to make its business m odel reflect current churning in the market. Since its balance sheet is not big enough to allow such strategy, one way out could be to open new revenue streams by hitching itself to research pipeline like contract research for a part of research supply chain. Torrents international strategy is also focused on generics which may have a better future given the thin penetration of healthcare in under-developed markets where Indias low-cost producers have a natural advantage. However, India has already moved to a regime that will lead to continuous thinning of generic pipeline. Its full impact is still a few years away so Torrent still has time to re-orient its business model to reflect market realities.