Guaranteed

95.5% Pass Rate

CPA
Advanced Leval
Advanced Tax May 2019
Suggested Solutions

Advanced Public Finance & Taxation
Revision Kit

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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