ADVANCED PUBLIC FINANCE & TAXATION MAY 2018 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1(a)

Q Discuss three strategies that county governments could put in place to manage long outstanding debts. (6 marks)

A

Solution

Strategies by county government to manage long debts

1. Debt rescheduling - This entails using procedures to reschedule loan payments over a longer period of time.
It may also entail negotiating lower interest rates.

2. Establishing risk management framework - This will aid in the analysis of the county's debt.

3. Enhancing revenue allocation - This will improve the availability of funds for debt repayment.

4. Verification of all pending bill - Some counties have formed pending bills committees to confirm and validate all outstanding payments. Debts that have not been authenticated should be cancelled.

5. Improvements to the open approach for developing and reporting debt management policies

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QUESTION 1(b)

Q (i) Describe the broad objective of establishing the Project Facilitation Fund (PFF) (2 marks)
(ii) Summarise four areas in which the PFF could be applied (4 marks)

A

Solution

(i) Objective of establishing PFF

The primary goal of the PFF is to offer financial assistance for the implementation of PPP projects under the act, which may take the form of grants, loans, equity, or other financial instruments.

(ii) Areas in which PFF could be applied

➫ Provision of a source of finance to cover project-related contingent liabilities
➫ Provision of viability gap financing for projects to support the unit's activities
➫ Providing assistance to the contracting authority.

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QUESTION 1(c)

Q Identify two projects or activities in which the PIC is specifically excluded from overseeing (2 marks)

A

Solution

Activities in which the PIC is specifically excluded from overseeing

(i) Matters of day-to-day administration .

(ii) Matters for the consideration of which machinery is established by any special statute under which a particular public investment is established.

(iii) Matters of major Government policy as distinct from business or commercial functions of the public investments.

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QUESTION 1(d)

Q Summarise six ethical principles that are specifically applicable to a tax practitioner acting on behalf'ol'a client.
(Note: You are not required to discuss the general principles of ethics), (6 marks)

A

Solution

Ethical principles specifically applicable to a tax practitioner acting on behalf of a client

• Integrity
• Confidentiality
• Professional competence
• Professional due care
• Technical standards
• Independence
• Avoiding conflict of interest

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QUESTION 2(a)

Q Tax liability (or refund) for Mafuta International Ltd. for the year ended 31 December 2017. (12 marks)

A

Solution

Mafuta international ltd Computation of taxable profit or loss for the year 2017
Crude Oil Export 1,400 × 12 × 105 Crude oil Sold locally 750 x 35 Incidental Less: Allowable Expenses Exploration cost Management and administration expenses Bad debt (Specific) Non Productive rent Capital allowances: Plant& machinery 20% × 6,000 Fixtures & fittings 20% × 2,000 Pipeline & storage tank 20% × 4,000 Building 20% x 4,000 Adjusted taxable	16,000 14,000 1,250 1,156 1,200 400 800 800	Sh"000" 1,764,000 26,250 1,250 (35,606) 1,755,894

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QUESTION 2(b)

Q Discuss four other tax incentives provided to oil and gas exploration companies in your country. (8 marks)

A

Solution

Tax incentives provided to oil and gas exploration companies in your country

• Exploration costs, including capital expenditure incurred in carrying out exploring operations, are fully deductible for tax purposes in the year in which they are expended.

• Development investment, including plant and machinery and social infrastructure, is depreciated at a rate of 20% per annum (straight line) beginning in the year after the asset is brought into use and in the year production begins.

• Operating cost (including geological and geophysical and intangible drilling cost) are fully deductible in the year incurred

• Losses - Losses incurred in other operations can be carried forward indefinitely by oil and gas businesses.

• Customs duty exemptions - Except for motor vehicles, all commodities imported by oil and natural gas businesses for direct use in oil and gas exploration and production are duty-free.

• VAT exemption - Kenya's VAT regime allows for both remission and exemption of VAT on services and goods purchased by oil and gas corporations for exploratory activities in Kenya.

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QUESTION 3a(i)

Q (i) With supporting computations, advise the partners on the accuracy of the estimated assessment issued for the year of income 2017. (9 marks)

(ii) Prepare a schedule of total taxable income for each partner for the year of income 2017. (5 marks)
lint: Start with the adjusted net loss.

A

Solution

W1

Debtors account
Bal b/d Credit sales	240 1,820 2,060	Receipt Bal c/d	1,700 360 2,060

Total sales = credit sales + cash sales
1,820 + 1,000 + 440 = 3,260

W2

Creditors account
Payment Bal c/d	880 280 1,160	Bal b/d Purchases	400 760 1,160

Total Purchase = 760 + 200 - 150 = 810

W3

Rent account
Bank Bal c/d	394 44 438	Bal b/d Income statement	78 360 438

W4

Electricity expenses Account
Bal b/d Bank	472 78 550	Income statement Bal c/d	520 30 550

Disposal of furniture
Sales proceeds
Net book value (160 - 14)
Profit on disposal

Depreciation of PPE
Furnitures 20% × 200
Motor vehicle 20% × 600
Partition 20% × 180

Interest on capital
Jua 10% × 600
Kali 10% × 900

170
(146)
24

40
120
36
196

60
90
150

Jua kali enterprise
Computation of taxable profit or loss for the year ended 31/12/2017

Reported loss
Ac ball disallowable expenses
Partners salary 100 + 80
Rent (private) 20% × 360 (W3)
Electricity (private) (W4) 30% × 520
Depreciation (W6)
Undercast sales (W1) 20 / 80 × 3,260
Overcast purchases 20 / 120 x 810 (W2)
Interest on capital (W7)
School fee (private)
Tax appeal expenses
Insurance policy
Computer software
Loss: gain on sale of furniture (W5)
Rental income
Wear & tear: furnitures 12% x 200
Motor vehicle 25% × 600
Partition 12.5% × 180
Software 20% - 50
Taxable profit

Sh 000
(424.5)

180
72
156
196
815
135
150
80
40
70
50
(24)
(580)
(25)
(150)
(22.5)
(10)
708

(ii) Prepare a schedule of total taxable income for each partner for the year of income 2017.

Allocation Schedule
Salaries Interest on capital Profit share Total(Profit) Add: rental income Total taxable income	Jua 100.0 60.0 151.2 311.2 232.0 543.2	Kali 80.0 90.0 226.8 396.8 348.0 744.8	Total 180 150 378 708

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QUESTION 3(b)

Q In light of the above statement, evaluate three factors to be considered in the selection of an appropriate transfer pricing method. (6 marks)

A

Solution

Factors to consider when selecting appropriate transfer pricing method

(i). Anti-dumping regulations

(ii). Import duties and tariffs

(iii). Exchange rate fluctuations

(iv). Taxation

(V). Competition

(vi). Exchange controls

(vii). Minority interest/shareholders

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QUESTION 4(a)

Q (i) A statement of total taxable profit of Jakes Air Safraris Ltd. for the year ended 30 September 2017. (8 marks)

(ii) Tax liability, if any, for the airline for the vear ended 30 September 2017. (2 marks)

A

Solution

Jakes air Safaris ltd
Competition of taxable profit or loss for the year ended 31/9/2017

Income
Income from cargo freight (Kenya /China)
Income from passenger & freight Kenya / Middle East
Income from loaded into aircraft
Income from passenger & freight Korea /Kenya
Expenses
Salaries & other expenses (balancing figure)
Use & other expenses (balancing figure)
Hotel bills for first class passengers
Accommodation for airline crew
Gifts
Wear and Tear = Aircraft = 25% × 360,000
Plane engine 12.5% × 117,000
Taxable profit

Sh 000
1,567,720
1,765,000
630,000
1,001,880

(1,341,000)
(32,400)
(37,800)
(9,000)
(10,800)
(90,000)
(14,625)
3,428,975

(ii) Tax liability
37.5% x 3,428,975 = 1,285,865,625

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QUESTION 4(b)

Q Discuss five objectives of the MTO. ( 10 marks)

A

Solution

Objectives of medium taxpayer Office(MTO)

• Relationship management that caters to the needs of tax payers on a personal level.

• Increase voluntary tax compliance

• Improve service delivery by segmenting taxpayers.

• Performing a quality-focused audit based on an objective risk-profiling framework

• Improve taxpayer convenience by focusing on the taxpayer and responding to individual taxpayer needs.

• Maintain a close working relationship with taxpayers.

• Maintain tax administration professionalism and integrity.

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QUESTION 5(a)

Q (i) A statement of adjusted taxable profit or loss for the year ended 31 December 2017. (12 marks)
(ii) Tax liability, if any. for the year ended 31 December 2017. (2 marks)
(iii) Comment on payment of tax for the year ended 31 December 2017, assuming that tax had been paid during the year 2017 based on previous year's tax or (2 marks)

A

Solution

Savanna Itd
Computation of taxable profit or loss for the year ended 31 Dec 2017

Net profit
Add back disposable Expenses
Factory building cost Management fee of subsidiary
Interest on loan - head office
Depreciation
Office furnitures
Computer software
Donations
Legal expenses:- Disposal cost
:- Negotiating loan
:- Processing legal document
:- Defending company (director)
:- Patent document registration
Dividend paid
Corporation tax
Less:
Dividend from subsidiary company
Dividend from cooperative
Overstated
gross profit 20 / 20 x (11,520)
Undercast Purchases 15 / 85 × 340
Wear and tear:
Office furnitures 12.5% x 360
Computer software 20% × 90
Packaging machine 12.5% x 420
Computer 30% × 240
Weighing scale machine
IBD
Staff canteen
Godown
Adjusted taxable profit

Sh 000
2,957.5

4,800
495
96
250
360
90
25.5
27
36
19.8
94
52.8
120
375

(244)
(68)
(1,920)
(60)

(45)
(18)
(52.5)
(72)
(6)

(19.5)
(15)
7,278.6

(ii) Tax liability 30% x 7,278,600 = 2,183,580

(iii)


Tax for the period Tax paid = 2,400,000 × 110% Tax returnable	2,183,580 (2,640,000) 456,420

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QUESTION 5(b)

Q Discuss two roles of the Directorate of Portfolio Management under the National Treasury or equivalent ministry in your country. (4 marks)

A

Solution

Function/roles of directorate of portfolio management under the national treasury

• Conduct portfolio management research to help guide policy development.
• Keep track of the financial performance of state cooperation.
• Monitor the national government's and its entities' financial management of public enterprises and investments.
• Divestiture of public enterprises and coordination of PPPs
• Assist county governments in developing their financial management capacity to be efficient, effective, and transparent.
• Develop policies and regulations on asset management
• Be in charge of a national government asset inventory.
• Manage the public investment policy

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CPA
Advanced Leval
Advanced Public finance May 2018
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Advanced Financial reporting & analysis

Advanced Financial Management

Advanced Management accounting

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Advanced Audit & Assurance

Advanced Financial reporting & analysis

Advanced Financial Management

Advanced Management accounting

Advanced Taxation

Comments on:

CPA
Advanced Leval
Advanced Public finance May 2018
Suggested Solutions