ADVANCED PUBLIC FINANCE & TAXATION MAY 2019 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q Evaluate four reasons which, in your assessment, have contributed to the failure of taxation policies to achieve their intended objectives. (8 marks)

A

Solution

Reasons contributing to failures of taxation policies

1. Political interference in the implementation of tax policy - In most developing countries, they face political reluctance from political leaders, which affects the implementation of tax policy.

2. Lack of technical expertise - Implementation requires staff to understand how policies developed are deployed.

3. The lack of proper oversight, monitoring and evaluation of these fiscal policies has led to failure to achieve the desired objectives.

4. High rates of tax evasion due to poverty and unemployment - This is the main reason why tax policy fails in most developing countries

5. The impact of globalization on the income system of developing countries- Globalization has changed the nature of economic activity, which has increased the challenges facing tax authorities

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QUESTION 1b

Q Discuss three roles of the Cabinet Secretary for the National Treasury and Planning or equivalent office in your country, with regard to public debt management. (6 marks)

A

Solution

Responsibilities of the cabinet secretary for national planning and finance in relation to managing the public debt

• A report of all loans given to counties and national government bodies must be provided to the parliament every four months by the CS.

• Tracking and keeping an eye on the management of the public debt.

• The CS reviews the timely reports that the public debt management has given him.

• Providing overall direction to the Public Debt Management Office and ensuring that they adhere to the established rules

• Manage the level and composition of national public debt, national guarantees and other financial obligation of national government.

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QUESTION 1b(ii)

Q Summarise three responsibilities of the State Corporations Advisory Committee (SCAC) or equivalent body in your country. (3 marks)

A

Solution

Responsibilities of state corporation advisor committee

• Review and investigate the affairs of the state corporation and make appropriate recommendations to the president.

• Advice to the president on the establishment, reorganization, and dissolution of state corporations

• Advice on the appointment, removal, and transfer of officers of the state corporations

• Examine any management or consulting agreement to be made by a state corporation and advise accordingly.

• Examine proposals by state corporations to acquire interest in any business or to enter into joint ventures

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QUESTION 1c

Q Describe three ways in which monies paid into the Public Private Partnership Project Facilitation Fund may be applied. (3 marks)

A

Solution

Ways in which monies paid into PPP projects facilitation fund may be applied.

1. Assist the contracting authority during the project's planning phase.

2. Support the activities of the PPP entity under PPP Act.

3. Provide a source of funding to cover any potential project-related liabilities.

4. Settle the transaction advisors retainer fees.

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QUESTION 2a

Q In light of the above statement, outline four categories of tax avoidance schemes that a taxpayer might be investigated for in your country, (4 marks)

A

Solution

Categories of tax avoidance scheme that a tax payer might be investigated

• Shortfall distribution of dividend regulation

• Thin capitalization rule

• Compensating tax

• VAT

• Capital gain tax

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QUESTION 2b

Q (i) Statement of taxable rental income for the year ended 31 December 2018.(10 marks)

(ii) Tax liability, if any, for Dawida Ltd. for the year ended 31 December 2018. (2 marks)

(iii) Highlight any additional information to be sought from the company to help determine the accuracy of the tax computed (4 marks)

A

Solution

Working for capital allowances Industrial deduction ID Sh 000
Item Sewerage system Standby government power house Stone perimeter water tank water pump parking bay	Qualifying cost 1,640 600 280 1,480 540 248 4,670	Rate 100% 100% 100% 100% 100% 100% 100%	Allowance 1,640 600 280 1,480 540 248 4,670 9,458
IBD
Item Shops Offices Show room	Qualifying cost 16,800 17,240 9,460	Rate 25% 25% 25%	Allowance 4,200 4,310 2,365 10,875
Wear & tear
CCTV camera Land cruiser Fire extinguisher	12.5%x720 25%x2,000 12.5%x182		90 500 22.75 612.75

Danolda Itd Computation of taxable income for the year ended 31 dec 2018
Rental income Sale of timber Sale of unused paint Less allowable expenses Electricity expenses Insurance expenses County rate Real estate agent commission Parking metres Capital allowances: ID IBD W&T Loss	Sh 000 492.8 360 94.8 138.4 280 9,458 10,875 612.75	Sh 000 19,400 288.6 92.4 (22,311.75) (2,530.75)

(ii) Tax liability

Tax payable 30% * 0 = 0

(iii)
• Whether the rental income was net or gross

• Detail or the architecture certificate of the commercial building

• Rent per month from the commercial building

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QUESTION 3a(i)

Q Explain four factors to be considered when selecting the most appropriate transfer pricing method. (4 marks)

A

Solution

Factors to consider when selecting appropriate transfer pricing method

➢ Exchange rate fluctuations

➢ Import duties and tariffs

➢ Anti dumping regulations

➢ Taxation aspect

➢ Exchange control

➢ Competition

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QUESTION 3a(ii)

Q Using the resale price method, calculate the arms length price/transfer price of the machine. (4 marks)

A

Solution


Selling price Profit margin 30/100 x 400,000 Total cost Less: incidental cost Arms length transfer price	400,000 (120,000) 280,000 (4,000) 276,000

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QUESTION 3b

Q Suggest four tax planning schemes that could minimise the tax liability of the family. (8 marks)

A

Solution

Tax planning schemes that could minimize the tax liability of the family

• Mr Peter should transfer insurance premium to a registered Kenyan insurance company so as to benefit from insurance relief

• Mr peter should obtain an Education insurance for his children to benefit from insurance relief

• Mr. Peter should go ahead and reduce the shareholding in Lind Ltd. from 18% to 14% to avoid dubbing the salary income of the wife.

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QUESTION 3c

Q Explain four benefits that might accrue from the effective use of information communication technology (ICT) in tax administration (4 marks)

A

Solution

Benefits from effective use of ICT in tax administration

➢ Data accessibility is made simple by the system's storage, organization, and facilitation of access to financial data.

➢ Cost savings - ICT performs several tasks simultaneously, effectively, and efficiently, saving the tax administration a lot of money.

➢ Centralized data that all parties can access

➢ The system offers a more efficient method of monitoring financial transactions, such as income and expenditure.

➢ Enhanced interaction between tax administrators and tax payers

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QUESTION 4a

Q With refèrence to the above statement. evaluate three tax implications of transactions involving mergers or transfers of assets for consideration to another company. (6 marks)

A

Solution

Tax implications of transactions involving merger or transfer of assets for consideration to another company

➢ Shareholders taxation - When transferring an asset or shares, shareholders of the acquired firm may get any type of compensation or payment. These receipts may be taxable or non-taxable, and if taxable, the shareholders must pay tax on the basis of gain .

➢ Tax implication of merger and acquisition - Tax is imposed on both the shareholders and the corporate body depending on how the transaction is organized, and its implications can be examined from both the transferor and transferee perspectives.

➢ Corporate level taxation - The tax implications of mergers and acquisitions at the transferee company level vary on a number of variables. This includes the consideration of key tax aspects and the cost base of the transferred assets.

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QUESTION 4b

Q A statement showing the corrected adjusted taxable income of Solo Traders for the year of income 2018. ( 14 marks)

A

Solution

W1

Credit account
Payment Bal c/d	696,000 139,200 835,200	Bal b/d Returned from supplier Purchaser	278,400 41,760 515,040 835,200

W2

Credit account
Balance b/d Returned to customer Credit sales	174,000 37,120 960,480 1,171,600	Cheque from customer Credit note issued Bal c/d	649,600 34,800 487,200 1,171,600

W3

Electricity 58,000 + 113,680 - 66,120 = 105,560

W4

Salaries and wages 480,000 + 320,000 - 140,000 = 660,000

W5

Rental income 520,000 + 240,000 - 180,000 = 580,000

W6

Depreciation expenses
Fixtures and fittings: [450,000 + 183,000 - 220,000] - 170,000 = 243,000

Motor vehicle 1,400,000 + 500,000 - 1,800,000 = 100,000

W7

Capital gain on sale of fixture 248,000 - 220,000 = 28,000

W8

Wear and tear allowance

Furniture's and fittings 12.5 % ( 170 000) = 21,250

Motor vehicle 25% (1,400,000 + 500,000) = 475,000

Computer 30% x 240,000 = 72,000

Software 20% x 60,000 = 12,000

Solo trader
Computation of taxable income for the year ended 31 Dec 2018

Reported loses
Add back disallowable expenses
Salaries and Wages 660 x 40%
Rent and rates 62 x 40
Electricity expenses 105,560 x 40%
Telephone & Postage 62,640 × 40%
Depreciation:
:- Furniture & fitting (W7)
:- Motor vehicle
Overstated opening stock 20 / 120 x 4320
Under overstated closing stock 225 × 10 / 90
Impact vat tax on purchases 16 / 116 x 515,040
Less Gain on sale of fixtures W7
Output VAT tax on sales 16/116 (4,408 + 960.48)
Wear & tear:
:- Furniture and fitting 21,250 × 60%
:- Motor vehicle 475,000 × 60%
:- Computer 72,000 × 60%
:- Computer software 12,000 × 60%
Taxable income

Sh 000
(186,400)

264,000
24,800
42,224
25,056

243,000
100,000
720,000
25,000
71,040
(28,000)
(740,480)

(12,750)
(285,000)
(43,200)
(7,200)
212,090

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QUESTION 5a

Q Discuss four benefits that could accrue to parties involved in a tax dispute through the use of Alternative Dispute Resolution (ADR) in your country. (8 marks)

A

Solution

Benefit of using alternative tax dispute resolution

➢ It is quicker and less expensive.

➢ People have an opportunity to share their experiences in their own words.

➢ It is more adaptable and sensitive to the needs of the various parties involved.

➢ A greater commitment is devoted by the parties involved, hence the high chances of compliance.

➢ It aids parties in avoiding negative press

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QUESTION 5b(i)

Q (i) A statement of income tax payable by the trustees on the trust income for the year of assessment 2018. (8 marks)

A

Solution

Kalume children settlement trustee Computation of taxable income for the year 2018
Gross rental income Dividend Sundry income Trading income Less allowable expenses Interest on debt Trustee remuneration - fixed 2% x 1,360 000 Administrative and other expense Capital allowances Godown (IBD) 10% × 3500 Staff canteen (IBD) 10% × 750 Parking bay (ID) 100% × 800 Sport pavilion 100% × 1,950 Taxable income	14,000 80,000 27,200 160,000 350 75 800 1,950	Sh"000" 800,000 160,000 90,000 310,000 1,360,000 (284,375) 1,075,625

Tax 30% x 1,075,625 = 322,687.5

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QUESTION 5b(ii)

Q (ii) The amount due to each beneficiary for the year of assessment 2018. (4 marks)

A

Solution


Discretionary payment Annuity Distribution of income 1/5 (107,625-322,687.5)	Baraka Sh"000" 120,000 120,000 150,587.5 390,587.5	Khalifi Sh"000" 100,000 120,000 150,587.5 370,587.5	Mwanga Sh"000" 60,000 120,000 150,587.5 330.587.5

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CPA
Advanced Leval
Advanced Tax May 2019
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Comments on CPA past papers with answers:

Advanced Audit & Assurance

Advanced Financial reporting & analysis

Advanced Financial Management

Advanced Management accounting

Advanced Taxation

Comments on:

CPA
Advanced Leval
Advanced Tax May 2019
Suggested Solutions