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95.5% Pass Rate

CPA
Advanced Leval
Advanced Tax May 2017
Suggested Solutions

Advanced Public Finance & Taxation
Revision Kit

QUESTION 1a

Q A government's debt portfolio is usually the largest financial portfolio in a country. It often contains complex and risky financial structures and can generate substantial risk to the government's balance sheet.

Required:

In the context of the above statement:

(i) Explain the term "public debt management".
(ii) Discuss five guidelines for effective public debt management.
A

Solution


(i) Explanation of "Public Debt Management":

Public debt management refers to the process of planning, organizing, and controlling the government's borrowing and debt issuance activities to achieve specific financial and economic objectives. It involves making strategic decisions on how much debt to raise, the types of debt instruments to issue, the timing of debt issuance, and how to service and retire the debt over time. The primary goal of public debt management is to ensure that the government's debt remains sustainable and that debt-related risks are managed effectively. By optimizing the government's debt portfolio, public debt management aims to strike a balance between meeting financing needs and minimizing potential risks to the country's financial stability.

(ii) Five Guidelines for Effective Public Debt Management:

➧ Clear Debt Management Strategy: Formulate a well-defined debt management strategy that outlines the government's objectives, risk tolerance, and target debt structure. This strategy should be aligned with the overall economic and fiscal policy objectives of the country.

➧ Risk Assessment and Mitigation: Conduct thorough risk assessments of the government's debt portfolio to identify potential risks, such as interest rate risk, currency risk, and refinancing risk. Implement risk mitigation measures, such as diversification of debt instruments and maintaining an appropriate balance between fixed-rate and floating-rate debt.

➧ Transparency and Accountability: Ensure transparency in debt-related decisions and operations. Provide timely and comprehensive information on the government's debt and borrowing activities to the public and relevant stakeholders. Transparency fosters public confidence and accountability in debt management practices.

➧ Cost-Effectiveness: Strive for cost-effective debt management by minimizing borrowing costs and transaction expenses. Explore opportunities to tap into international capital markets for more favorable borrowing terms, but also be cautious of foreign exchange risks and potential exposure to global financial market volatilities.

➧ Debt Sustainability Analysis: Conduct regular debt sustainability analyses to assess the government's ability to service and manage its debt over the long term. Ensure that debt levels remain within sustainable limits, considering the country's economic growth prospects, revenue generation capacity, and debt service capabilities.

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QUESTION 1b

Q Assess factors that might hinder the optimal growth of the East African Community (EAC) or the equivalent trading block In your region.
A

Solution


➧ Mistrust among Member States: Lack of trust and cooperation among member states can lead to difficulties in making joint decisions and implementing regional policies effectively.

➧ Fear of Loss of Political and Economic Sovereignty: Some member states may fear that deeper regional integration could result in a loss of control over their political and economic decision-making processes.

➧ External Heavy Debt Burden of Member States: High levels of external debt among member states can constrain their ability to invest in regional integration projects and hinder economic growth and development.

➧ Lack of Skilled Personnel: Shortages of skilled labor and expertise within the region can limit the capacity to implement complex regional projects and initiatives.

➧ Corruption and Greed by Political Leaders: Corruption and mismanagement of resources by political leaders can undermine public trust in regional institutions and hinder the effective implementation of regional integration efforts.

➧ Divergent Economic Policies: If member countries within the trading block have differing economic policies and priorities, it can create challenges in coordinating trade and economic activities. Harmonizing policies, regulations, and standards is essential for effective regional integration.

➧ Non-Tariff Barriers: The persistence of non-tariff barriers, such as complex customs procedures, excessive bureaucratic red tape, and differing technical standards, can hinder the smooth movement of goods and services within the trading block.

➧ Infrastructure Deficits: Inadequate infrastructure, including roads, railways, ports, and energy supply, can constrain intra-regional trade and increase the cost of doing business within the bloc.

➧ Limited Market Integration: Insufficient integration of markets can restrict the flow of goods, services, and investments among member countries, leading to missed opportunities for economies of scale and increased competition.

➧ Political Instability and Conflicts: Political instability, regional conflicts, and security issues can disrupt trade flows and investment within the trading block, affecting investor confidence and economic cooperation.

➧ Inadequate Financial Integration: Weak financial integration, including limited access to cross-border banking and financial services, can hinder investment and capital flows within the region.

➧ Disparities in Development: Significant disparities in economic development levels among member countries can lead to uneven benefits from regional integration, potentially creating tensions and resistance to further cooperation.

➧ Protectionism and National Interests: Protectionist policies and national interests that prioritize domestic markets over regional integration may impede progress toward deeper economic cooperation and shared benefits.

➧ Lack of Policy Coordination: Insufficient coordination and communication among member countries' governments can lead to conflicting policies and hinder the efficient implementation of regional integration initiatives.

➧ Institutional Weaknesses: Weak institutions or inadequate capacity to implement and enforce regional agreements and policies may limit the trading block's effectiveness and hinder its ability to address challenges effectively.

➧ External Influences: The influence of external factors, such as global economic conditions, international trade policies, and geopolitical dynamics, can impact the growth and stability of the trading block.

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QUESTION 2a

Q The privatisation of state corporations continues to be witnessed in a number of countries, particularly in the developing world.

Required:

Discuss benefits likely to be realised from the above trend.
A

Solution


➧ Increased Efficiency and Productivity: Privatization often introduces competition and market discipline into formerly state-run entities. As private companies strive to be efficient and profitable, they are incentivized to improve productivity and streamline operations, leading to better performance.

➧ Access to Capital and Investment: Private companies generally have better access to capital markets and can attract more significant investments, enabling them to modernize infrastructure, expand operations, and implement new technologies that were often challenging for state corporations due to budget constraints.

➧ Enhanced Service Quality: With competition driving performance, privatized entities tend to focus on customer satisfaction and service quality to attract and retain customers. This can lead to improved service delivery and responsiveness to customer needs.

➧ Reduced Fiscal Burden: Governments can alleviate the financial burden of supporting and subsidizing state corporations by selling them to private investors. This can free up public funds for other critical priorities, such as education, healthcare, and infrastructure development.

➧ Promotion of Entrepreneurship and Innovation: Privatization encourages entrepreneurship and innovation as new private owners seek to differentiate themselves and introduce novel business approaches to succeed in the market.

➧ Job Creation and Skills Development: Privatization can create job opportunities in the private sector, potentially absorbing the workforce from previously bloated state corporations. Additionally, private companies often invest in training and skills development, enhancing the employability of the workforce.

➧ Foreign Direct Investment (FDI): Privatization can attract foreign investors, leading to increased FDI inflows into the country. Foreign investors bring not only capital but also expertise and global market access, contributing to economic growth.

➧ Reduced Corruption and Political Interference: Privatization can reduce opportunities for corruption and political interference in business operations, as private companies operate based on market principles and are subject to independent oversight and regulations.

➧ Encouragement of Economic Liberalization: Privatization is often accompanied by other economic reforms and liberalization measures, fostering a more open and competitive market environment that can stimulate economic growth.

➧ Asset Utilization and Optimization: Privatization allows for better asset utilization, as private companies are incentivized to maximize the efficiency and profitability of their assets.

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QUESTION 2b

Q (i) A statement showing the taxable profit or loss fhr Mali Commercial Bank Ltd. for the year ended 31 December 2016
(ii) Tax payable by (or refundable to) the bank.
A

Solution


(i) A statement showing the taxable profit or loss fhr Mali Commercial Bank Ltd. for the year ended 31 December 2016

Computation of taxable profit or loss for the year ended 31 Dec 2016
Incomes
Interest On Advance
Interest On Government Securities
Interest On Placement & Bank Balances
Gain On Foreign Exchange Dealing
Discount On Bill Purchases (329-39)
General Charge Recovered
Conclusion On Exchange And Broak Average

Expenses
Contribution to Report (98,000 - 648)
Operating Lease Rentals
Interest Paid On Deposit
Loss on disposal of collaterals
Fees And Commission Expenses
Losses on stock brokerage dealings
Losses From Investment In Securities
Exchange And Commission Paid
Interest And Discount Paid
Auditors Renumeration
Bad Debt (140 - 68)
Interest Accrued And Paid
Debate On Bill Discounted
Wear and Tear: Equipment 12.5% × 1,200
Adjusted Taxabe Profit		 Sh000









97,352
6,480
4,740
840
1,420
348
790
48
39
786
72
1,974
292
150

 Sh 000
464,800
14,600
2,660
1,470
290
250
784
484,854














(115,331)
369,523


(ii) Tax payable

30% x 369,523 = 110,857,000


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QUESTION 3a

Q Your country has been experiencing growth in the number of projects initiated through public-private partnerships (PPPs). However, this growth appears to be declining in the last few years.

Required:

Evaluate possible factors that could have contributed to the above trend.
A

Solution


➧ Regulatory and Legal Challenges: Complicated and lengthy regulatory processes, unclear legal frameworks, and inconsistent policies can create uncertainty for private investors and deter them from participating in PPP projects.

➧ Political Instability: Political instability and changes in government leadership may lead to delays in decision-making and the implementation of PPP projects. Uncertainty in government commitment to ongoing projects can discourage private investors.

➧ Economic Conditions: Economic downturns or financial crises can affect investor confidence and lead to a reduced appetite for risky long-term investments, such as PPP projects.

➧ Lack of Bankable Projects: The availability of bankable projects that meet the criteria of private investors, such as revenue potential, risk allocation, and clear contractual arrangements, is crucial for attracting private sector participation in PPPs.

➧ Fiscal Constraints: Governments may face fiscal constraints, making it challenging to allocate funds or provide viability gap funding required for some PPP projects.

➧ Perceived Risk and Uncertainty: Private investors may perceive PPP projects as high-risk ventures due to concerns about regulatory changes, project execution risks, or revenue uncertainties.

➧ Project Delays and Cost Overruns: Delays and cost overruns in ongoing PPP projects can discourage investors and may lead to a loss of confidence in future projects.

➧ Capacity and Expertise: Governments may lack the capacity and expertise to structure and manage PPP projects effectively, leading to delays and inefficiencies.

➧ Public Perception and Opposition: Opposition from the public or civil society groups to specific PPP projects, especially if there are concerns about social and environmental impacts, can create obstacles to project implementation.

➧ Private Sector Preferences: Shifting priorities and preferences of the private sector may lead them to focus on other types of investments rather than PPPs.

➧ Failure and Lessons Learned: Past failures or suboptimal outcomes in certain PPP projects can lead to caution among investors and governments in pursuing similar initiatives.

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QUESTION 3b

Q (i) Separate statements of adjusted taxable profit or loss for Wenda Enterprises and Dawadu Ltd. for the year ended 31 December 2016. (Hint: Start with the net profit),
(ii) Tax payable by (or refundable to) Dawadu Ltd, for the year ended 31 December 2016.
A

Solution


(i) Separate statements of adjusted taxable profit or loss for Wenda Enterprises and Dawadu Ltd. for the year ended 31 December 2016.

Computation of taxable income for the year ended 31 Dec 2016


Net Profit
Add Back Disallowable Expenses
Purchase Of CCTV Camera
Impairment
Website Development
Loss On Rented Property
Purchase Of Foreign Currency
Advertising of exp(Neon sign)
Purchase of computers
Purchase & installation of computer programme
Director allowance (Menda)
Salaries and wages (partners)
Legal expenses: Acquisition of title deed
Negotiating debenture
Drafting MOA
Overcast opening stock (20 / 120 × 576)
Purchases input vat tax 16 / 116 x 2,146.
Undercast closing stock 10 / 90 × 675
Less: Specified incomes
Rental income
Interest on fixed deposit
Wear and tear allowances:
:- CCTV 12.5% (96 + 54)
:- Neon sign = 12.5% × 92
:- Computer 30% × 180
:- Website 20% x 130
:- Computer programmed (20% x 120)
:- Taxable profit
Add: Specified sources of income
Rental income
Interest on fixed deposit
Adjusted taxable profit		 Wenda enterprise
9 month
829,125

72,000
93,450
97,500
27,150
258,675
69,000
135,000
90,000
60,000
120,000



72,000
222,000
56,250

(111,600)
(60,000)

(14,062.5)
(8,625)
(40,500)
(19,500)
(18,000)
1,929,862.5




 Dawada ltd
3 months
276,375

24,000
31,150
32,500
9,050
86,225
23,000
45,000
30,000
-
-
50,000
100,000
60,000
24,000
74,000
18,750

(37,200)
(20,000)

(4,687.5)
(2,875)
(13,500)
(6,500)
(6,000)
793,287.5

37,200
20,000
850,487.5


(ii) Tax payable by Dawadu Itd

30 x 850,487.5 = 255,146.25


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QUESTION 4a

Q Describe tax planning opportunities that could be derived from the financial management decisions in a company
A

Solution


➧ Capital Structure Optimization: By balancing debt and equity in their capital structure, companies can influence their interest expenses and leverage ratios. Interest expenses are typically tax-deductible, so having an optimal debt-to-equity ratio can result in higher interest deductions and lower taxable income.

➧ Timing of Income and Expenses: Companies can time the recognition of income and expenses to their advantage. For example, accelerating expenses into the current tax year can reduce taxable income, while deferring the recognition of income can postpone tax liabilities.

➧ Investment in Tax-Advantaged Assets: Investing in tax-advantaged assets, such as government-approved bonds or infrastructure projects with tax benefits, can provide companies with tax credits or deductions, reducing their overall tax burden.

➧ Research and Development (R&D) Tax Credits: Companies engaged in R&D activities may be eligible for tax credits or deductions to encourage innovation and technological advancement.

➧ Location of Business Operations: Companies can strategically establish their business operations in regions or countries with favorable tax regimes, including lower corporate tax rates or tax holidays for specific industries.

➧ Utilizing Tax Incentives and Exemptions: Taking advantage of available tax incentives and exemptions, such as those for investments in designated industries or economic zones, can result in reduced tax liabilities.

➧ Transfer Pricing: For multinational companies, implementing transfer pricing strategies can allocate profits among affiliated entities in a tax-efficient manner, considering varying tax rates in different jurisdictions.

➧ Dividend Policy: Decisions regarding dividend distribution can impact the tax liabilities of both the company and its shareholders. Optimal dividend policies can minimize tax implications for both parties.

➧ Employee Compensation and Benefits: Structuring employee compensation and benefits packages to include tax-efficient components, such as stock options or fringe benefits, can provide tax advantages for the company and its employees.

➧ Use of Tax Losses: Companies can carry forward or carry back tax losses to offset taxable income in other years, reducing overall tax liabilities during profitable years.

➧ Tax-Deferred Savings and Retirement Plans: Implementing tax-deferred savings and retirement plans for employees can provide tax advantages for both the company and its employees.

➧ Paying Taxes on Time and Filing Correct Returns: By paying taxes on time and ensuring accurate tax return filings, companies can avoid tax penalties and interest charges. Timely compliance with tax obligations is crucial for maintaining a good reputation with tax authorities and avoiding unnecessary financial burdens.

➧ Choosing VAT Registered Suppliers for Input Tax Claims: If a business is registered for Value Added Tax (VAT), selecting suppliers who are also registered for VAT allows the company to claim input tax credits. Input tax credits are deductions claimed on the VAT paid on purchases and expenses, reducing the net VAT liability of the business

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QUESTION 4b

Q Determine the VAT payable by (or refundable to) Sawela Ltd. for the month of April 2017.
A

Solution


Computation of vat for the month of April 2017
Input tax
Purchases At Standard Rate
Audit Fees
Purchase Of Fuel And oil For Van
Telephone Bills
Purchase Of Stationery
Credit Note Received
Imported goods

Output tax
Export of goods to south Africa
Sales of standard rate
Exported good to Zambia
Debit note issued
Credit Note issued
626,400 × 16 / 116
37,120 × 16 / 116
29,000 × 16 / 116
17,400 × 16 / 116
20,880 × 16 / 116
29,000 × 16 / 116
320,000 × 120% × 16%


380,000 × 0%
1,113,600 × 16 / 116
220,000 × 0%
24,360 × 16 / 116
34,800 × 16 / 116


86,400
5,120
4,000
2,400
2,880
(4,000)
61,440
158,240

0
153,600
0
3,360
(4,800)
152,160


Deductable input tax
=
Taxable supply
Total supply
x input tax


Supplies
Standard rate supplies
Zero rate supplies
Exempt supplies


1,113,600 - 153,600
(380 + 220)



960,000
600,000
400,000
1,960,000


Deductable input tax
=
960,000 + 600,000
1,960,000
x 158,240 = 125,946


Vat Payable = Output Tax - Input Tax
= 152,160 - 125,946 = 26,214


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QUESTION 5a

Q The development of an effective tax policy for a country requires critical consideration of certain factors at macro- economic level.

Required:

Discuss such factors
A

Solution


➧ Economic Growth and Stability: Tax policies should support and promote economic growth and stability. The tax system should be designed in a way that it does not hinder investment, business activities, or consumer spending, which are vital for overall economic development.

➧ Fiscal Sustainability: The tax policy must align with the government's fiscal objectives, ensuring that revenue collection is sufficient to cover public expenditures while maintaining fiscal sustainability and avoiding excessive deficits or debt accumulation.

➧ Income Distribution and Equity: A well-designed tax policy should take into account income distribution and equity considerations. Progressive tax structures, where higher-income individuals pay a proportionally higher share of taxes, can help reduce income inequality and promote social cohesion.

➧ Tax Efficiency and Competitiveness: The tax system should be efficient, minimizing administrative burdens and compliance costs for taxpayers. A competitive tax environment can attract investment and foster economic competitiveness on a global scale.

➧ External Trade and Investment: Tax policies should be carefully designed to avoid adverse effects on international trade and investment. They should consider how taxes may impact imports, exports, and foreign direct investment (FDI) flows.

➧ Inflation and Price Stability: The tax policy should take into account the impact of taxation on inflation and price stability. Excessive or poorly targeted taxes can lead to higher prices and affect overall price stability in the economy.

➧ Monetary Policy Coordination: Coordination between fiscal and monetary policy is essential to ensure macroeconomic stability. Tax policies should be in sync with the broader economic objectives pursued by the central bank's monetary policy.

➧ Labor Market Dynamics: Tax policies can influence labor market participation, employment, and wages. Consideration should be given to how taxes affect labor supply and demand, as well as their potential impact on unemployment and workforce participation.

➧ Investment and Savings: Tax policies can influence investment decisions and household savings rates. Favorable tax treatment of savings and investment can encourage capital formation and long-term economic growth.

➧ Sectoral Impact: Different industries and sectors may be affected differently by tax policies. Policymakers should consider the impact of taxes on various sectors and assess potential implications for economic diversification and development.

➧ Environmental Considerations: Tax policies can also be used to promote environmental sustainability and address externalities, such as carbon taxes to incentivize low-carbon practices and reduce environmental pollution.
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QUESTION 5b

Q As a tax assessor, compute the net profit fòr tax purposes fòr the year ended 31 December 2016 indicating the taxable income for each partner,
A

Solution


W1

Debtors Account
Bal b/d
Bank


9,300
25,160

34,460		 Receipt from debtors (26,400 - 440)
Credit note issued
Bal c/d

25,960
1,000
7,500
34,460


Rent Account
Bal b/d
Bank
Bal c/d

 800
240
950
1,990		 Receipt from debtors
I/S
Bal c/d

0
1,990
0
1,990


W3= Salaries - 9 months = 2,400 x 9 / 12 = 1,800
W4 = 3 months 2,400 × 3 / 12 = 600
W5 = 101,705 - 2,400 = 99,305 x 9 / 12 = 74,479
W6 = 101,705 - 2,400 = 99,305 x 3 / 12 = 24,826



AB Enterprise
Computation of taxable income for the year ended 31 Dec 2016

Sales - cash sales (72,400 - 30 - 1,450)
Credit sales
Credit note issued
Net sales
Cost of sales
Opening stock
Purchases (19,250 - 300 )
Closing stock
Drawings
Gross profit
Discount received
Allowable expenses
Loan interest (400 + 200)
Electricity 750 - 50
Salaries and wages 6,100 - 2,400
Bad debts
Insurance
W&T Machinery 12.5% × 97,000
Taxable profit		 Sh000





6,100
18,950
(4,200)
(300)



600
700
3,700
400
1,450
12,125

Sh 000
70,920
25,160
(1,200)
94,880




(20,550)
74,330
350






(18,975)
55,705


Allocation schedule for partners

9 month Salaries (1,800 ÷ 2)
3 Months Salaries
9 month profit share (74,479 ÷ 2)
3 months prefer share
Taxable income		 A
900.0
240.0
37,239.5
9,930.0
48,309.5		 B
900.0
240.0
37,239.5
9,930.0
48,309.5		 C
-
120
-
4,965
5,085		 D
1,800
600
74,479
24,825
101,704


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