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95.5% Pass Rate

CPA
Advanced Leval
Advanced Tax November 2016
Suggested Solutions

Advanced Public Finance & Taxation
Revision Kit

QUESTION 1a

Q Tax havens have increasingly been used as avenues for tax avoidance. The Organisation for Economic Co-operation and Development (OECD) specifies three key factors in considering whether a jurisdiction is a tax haven.

Required:

(i) Citing two examples of countries constired as tax havens, evaluate the three factors referred to in the above statement.
(ii) Explain the terms "tax arbitrage" and "transfer pricing" in the context of international taxation systems.
A

Solution


(i) Two Examples of Tax Havens and Evaluation of the Three Factors:

Cayman Islands:

Factor 1: Low or Zero Tax Rates: The Cayman Islands is known for its zero-tax regime on corporate income, capital gains, and personal income tax. This attracts multinational corporations and wealthy individuals looking to minimize their tax liabilities.

Factor 2: Lack of Effective Exchange of Tax Information: The Cayman Islands had faced criticisms in the past for its lack of transparency and limited cooperation with international tax authorities in terms of sharing financial information. However, it has taken steps to improve transparency and comply with international standards.

Factor 3: Financial Secrecy and Lack of Transparency: Historically, the Cayman Islands had strict banking secrecy laws, making it an attractive location for individuals and companies seeking to keep their financial activities private. However, it has made efforts to enhance transparency and adhere to international anti-money laundering regulations.

Switzerland:

Factor 1: Favorable Tax Regime for Certain Activities: Switzerland offers preferential tax treatment for certain activities, such as holding companies and foreign income earned by Swiss companies. This has led to the perception of Switzerland as a tax haven for some business structures.

Factor 2: Banking Secrecy (Previously): Switzerland was renowned for its strong banking secrecy laws, which attracted individuals and entities seeking to protect their wealth and financial transactions from prying eyes. However, due to international pressure and changing regulations, Switzerland has taken steps to increase financial transparency and cooperation with foreign tax authorities.

Factor 3: Stable Economy and Strong Financial Sector: Switzerland's political stability, robust financial sector, and well-established infrastructure have also contributed to its appeal as a financial and tax planning hub. It's essential to note that the classification of countries as tax havens can change over time as regulations and practices evolve. Many countries have made efforts to improve transparency and comply with international tax standards to shed the tax haven label.

Bermuda:

Factor 1: Zero Corporate Income Tax: Bermuda is known for its zero corporate income tax rate, making it an attractive destination for multinational corporations seeking to minimize their tax burden.

Factor 2: Limited Tax Information Exchange: In the past, Bermuda had faced criticism for its lack of tax information exchange agreements with other countries. However, it has since made efforts to sign bilateral agreements to improve transparency and cooperate with international tax authorities.

Factor 3: Stringent Banking Secrecy: Bermuda had strict banking secrecy laws, which made it appealing for those seeking confidentiality. Nevertheless, there has been increased international pressure for transparency, and Bermuda has taken steps to comply with global transparency standards.

Luxembourg:

Factor 1: Favorable Tax Regime for Holding Companies: Luxembourg offers a beneficial tax regime for holding companies, including exemptions on certain types of income and capital gains. This has made it an attractive location for multinational corporations looking to set up their regional or global headquarters.

Factor 2: Extensive Network of Tax Treaties: Luxembourg has an extensive network of tax treaties with other countries, which can be used to reduce withholding tax rates on cross-border payments and facilitate tax planning strategies.

Factor 3: Financial Secrecy and Banking Confidentiality: Luxembourg has had a reputation for banking secrecy and discretion in the past. However, it has faced increasing international pressure to enhance transparency and information exchange.

Jersey:

Factor 1: Low Tax Rates for Companies: Jersey offers a relatively low corporate income tax rate for companies, making it appealing to businesses seeking to reduce their tax liabilities.

Factor 2: History of Limited Tax Information Exchange: Jersey, like other offshore financial centers, had limited tax information exchange arrangements in the past. However, it has made efforts to improve cooperation and comply with international tax standards.

Factor 3: Banking and Financial Secrecy: Historically, Jersey had strong banking secrecy laws, making it attractive for private wealth management. Nevertheless, it has moved towards increased transparency and compliance with international regulations.

(ii) Explain the terms "tax arbitrage" and "transfer pricing" in the context of international taxation systems.

Tax Arbitrage:

Tax arbitrage refers to the practice of exploiting the differences in tax rules and rates between two or more countries to gain a tax advantage. This involves legally structuring financial transactions or business operations in a way that allows taxpayers to minimize their overall tax liability. Tax arbitrage can be achieved through various methods, such as moving profits to low-tax jurisdictions, utilizing preferential tax treatments, and taking advantage of different tax rules related to specific types of income.

Transfer Pricing:

Transfer pricing is the practice of determining the prices charged for goods, services, or intangible assets transferred between related parties within a multinational corporation. The goal of transfer pricing is to allocate profits and costs among the different entities within the group in a way that reflects arm's length transactions, as if the transactions were conducted between unrelated parties. This is important for international taxation because it helps prevent tax avoidance by ensuring that profits are appropriately distributed among the countries where the multinational corporation operates.

However, some companies may use transfer pricing to shift profits to low-tax jurisdictions deliberately, even if the prices charged do not reflect fair market values. This allows them to reduce their tax liabilities in higher-tax jurisdictions and increase profits in tax-favored locations. As a result, transfer pricing has been a subject of scrutiny and regulation to prevent abusive tax practices and ensure a fair distribution of tax revenues among countries.

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QUESTION 1b

Q (i) A statement of adjusted taxable profit or loss of the partnership for the year ended 31 December 2015.
(ii) Total taxable income (loss) for each partner.
A

Solution


(i) A statement of adjusted taxable profit or loss of the partnership for the year ended 31 December 2015.

Electricity
Bal b/d
Bank

170,000
60,000
230,000		 I/S
Bal c/d

30,000
200,000
230,000


Debtors account
Bal b/d
Credit sales

1,800,000
1,360,000
3,160,000		 Receipt from debtors
Bal c/d

2,200,000
960,000
3,160,000


Payables account
Payment to suppliers
Bal c/d

840,000
1,200,000
2,040,000		 Bal b/d
Purchases

1,500,000
540,000
2,040,000




Alibaba traders
Computation of taxable income for the year of income 2015
Sales
Opening stock
Purchases
Closing stock
Gross profit
Allowable expenses
Salaries & wages (1,700+1,600-840)-190
Electricity W1 = 30,000-15,000
Catering fees
Legal fees (160-48)
Wear and tear:
:- Saloon car 25% (2,000,000)
:- Furnitures 12.5% (200,000)
:- Computer 30% (600,000)
Computer software 20% × 120,000
Taxable loss
360,000
540,000
(500,000)


1,270,000
15,000
90,000
112,000

500,000
25,000
180,000
24,000

 1,360,000


(400,000)
960,000









2,216,000
(1,256,000)


(ii) Total taxable income (loss) for each partner.

Partner allocation schedule

Salarie's
Interest on capital
Less: Loss share
Loss
Less: Mortgage interest 10% x 200,000

 Ali
70,000
30,000
(598,400)
(498,400)
(20,000)
(518,400)		 Baba
120,000
20,000
(897,600)
(757,600)
(20,000)
(777,600)		 Total
190,000
50,000
(1,496,000)
(1,256,000)


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QUESTION 2a

Q (i) A capital statement for each of the years ended 31 December 2012, 2013, 2014 and 2015.
(ii) Revised taxable income and tax payable by Mr. Bora from tax arrears arising from undeclared income.
Note: Use year 2015 tax rates.
(iii) Advise Mr. Bora on the intended appeal.
A

Solution


(i) A statement of adjusted taxable profit or loss for the year ended 3 1 December 2016.

Capital Statement for the year ended 31 December


Assets
Liabilities
Net worth
Growth in net worth
Add: Donation
Living expenses
School fees
(Capitalise): Legal expense Less:
Capital allowance
Business expenses
Mortgage interest
Inheritance
Capital gain
Adjusted taxable income		 2011
Sh "000"
2,654
(1,330)
1,324
-
-
-
-
-
-
-
-
-
-

2012
Sh "000"
2,936
(1,676)
1,260
(64)
-
80
84
48
(56)
(24)
(80)
(80)
-
(92)		 2013
Sh "000"
2,790
(1,260)
1,530
270
-
88
84
-
(56)
(24)
(80)
-
(20)
262		 2014
Sh "000"
3,073
(1,284)
1,789
259
160
96.8
84
-
(56)
(24)
(80)
-
-
439.8		 2015
Sh "000"
3,058
(1,396)
1,662
(127)
92
106.48
84
-
(56)
(24)
(80)
-
-
(4.52)


(ii) Revised Taxable income and tax payable by Mr. Bora from tax arrears arising from undeclared income

Total taxable income 2013 - 2015
-92 + 262 + 439.8 - 4.52 = 605,280

First

Excess

147,580 x 10% = 14,758.0
139,043 x 60% = 83,425.8
(605,280 - 564,709)30% = 12,171.3
110,355.1


(iii) Advise to Mr. Bora on the intended appeal

MrS Bora should not make any appeal, he should remit the expected tax due of 110,354 to the revenue authority


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QUESTION 2b

Q (i) Advise the club's manager on the circumstances under which members clubs are taxed in your country.
(ii) Assess whether Michezo Sporting Members Club is subject to taxation for the year ended 31 December 2015 and the applicable tax liability (if any).
A

Solution


(i) Circumstances under which members club taxed

Member clubs are subject to taxation on less than 75% of their gross receipts, excluding gross investment receipts, only if the majority of the gross receipts are received from non-members. If the gross receipts received from members exceed 75%, they will not be subject to taxation.

(ii) Assessment on whether Michezo sporting members club is subject to taxation for the year ended 31 December 2015

Direct income from members
Entrance fee
Members subscription
Interest on late subscription

4,770
15,900
795
21,465


(21,465 / 35,000) x 100% = 61.33%

This means the members club shall be taxed since the proportion of members income is less than 75%

Michezo Sporting club
Computation of taxable income for the year 2015
Entrance fee
Members subscription
Interest on late subscription
Interest income
Royalties
Rent income

Operating expenses
Adjusted taxable income		 4,770,000
15,900,000
795,000
2,544,000
1,908,000
6,360,000
32,277,000
(6,360,000)
25,917,000


Tax payable = 30% x 25,917,000 = 7,775,100

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QUESTION 3a

Q (i) Total taxable profit for the Sacco for the year ended 31 December 2015.
(ii) Tax payable by the Sacco for the year ended 31 December 2015.
A

Solution


(i) Total taxable profit for the Sacco for the year ended 31 December 2015.

Jaumboree Sacco Society ltd
Computation of taxable income for the year 2015
Rental income
Interest on saving account.
Interest on fixed account
Interest on treasury bills
Taxable profit
Less: Dividend and bonuses
Declared
Maximum 80% × 1,132,500
Adjusted taxable profit		 (840 - 156 - 72)
160 × 50%
560 × 50%
(435 - 114) x 50%


980,000
906,000

612,000
80,000
280,000
160,500
1,132,500


(906,000)
226,500


(ii) Tax payable

30% x 226,500 = 67,950


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QUESTION 3b

Q The capital gain and tax payable (if any) by Ms Chemu from the sale of the house.
A

Solution


Mr Avril Chemu
Computation of taxable income for the year 2015
Transfer value (selling price)
Less: Incidental cost
Agent commission
Advertising expenses
Valuation fees
Repainting cost
Legal fees

Adjusted cost
Cost of plot
Conveyance fee
Valuation fee
Material (4,600 - 600)
Labour on workers
Painting
Stamp duty
Mortgage entered
Less: Capital allowance
Capital gain








8,000,000
200,000
360,000
4,000,000
560,000
300,000
320,000
1,458,000
(420,000)

20,000,000

(400,000)
(48,000)
(240,000)
(80,000)
(160,000)
19,072,000









(14,778,000)
4,294,000


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QUESTION 4a

Q Some scholars have raised concern over the apparent mismatch between taxation policy and the economic agenda of certain countries, where increased tax revenue did not necessarily translate into higher standards of living for the citizenry,

Required:

Explain factors that could have contributed to the above scenario.
A

Solution


➧ Inefficient Government Spending: One of the primary reasons for the disconnect between tax revenue and improved living standards is inefficient government spending. When tax revenue is not used effectively and is subject to mismanagement, corruption, or wasteful spending, it fails to translate into the necessary public goods and services that could improve citizens' lives. In such cases, even if tax revenue increases, the impact on the quality of healthcare, education, infrastructure, and other essential services may be limited.

➧ Income Inequality and Distribution: High levels of income inequality can hinder the effective redistribution of tax revenue to benefit the broader population. If wealth and income are concentrated in the hands of a few, tax policies may not be sufficient to address the disparities, and the majority of citizens may not experience significant improvements in their living standards.

➧ Economic Structure and Productivity: The economic structure and productivity levels of a country play a crucial role in determining how tax revenue can positively impact living standards. If the economy is heavily reliant on low-productivity sectors or suffers from structural inefficiencies, increased tax revenue might not be enough to drive substantial economic growth and improve living conditions.

➧ Corruption and Mismanagement: Corruption and mismanagement within the government can hinder the effective use of tax revenue. When funds are diverted for personal gain or non-productive purposes, the intended benefits of increased tax collection do not reach the citizens, resulting in a lack of improvement in their living standards.

➧ Dependence on External Factors: Some countries may heavily depend on external factors such as commodity prices, foreign aid, or remittances, which can have a significant influence on their overall economic well-being. If these external factors fluctuate or decline, the impact of increased tax revenue may be overshadowed by other economic challenges.

➧ Policy Priorities: Governments may have different policy priorities, and tax revenue might be allocated towards areas that do not directly address the living standards of citizens. For example, increased military spending or investment in non-productive projects could limit the positive impact of taxation on public welfare.

➧ Demographic and Social Challenges: Demographic factors, such as population growth, aging populations, and changing social needs, can influence the effectiveness of tax revenue in improving living standards. If a significant portion of the population is dependent on government support, increased tax revenue might be directed towards social safety nets rather than investments that lead to substantial economic growth.

➧ Tax Evasion Scenarios: Rampant tax evasion by individuals and businesses can significantly reduce the overall tax revenue collected by the government. When taxpayers engage in tax evasion practices, they contribute less to the tax pool, resulting in reduced funds available for public goods and services, leading to limited improvements in living standards for the citizens.

➧ Long-Term Nature of Some Projects: The implementation of long-term projects, such as large-scale infrastructure or social programs, may require sustained investment over an extended period before yielding tangible benefits. As a result, the positive impact of increased tax revenue on living standards might not be immediately evident, especially if the projects are still in progress.

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QUESTION 4b

Q (i) Double taxation relief (if any) due to Mr. Sylvanus Jirani for the year of income 2015.

(ii) Tax payable (or refundable) by Mr. Jirani for the year of income 2015.
A

Solution


(i) Double taxation relief (if any) due to Mr. Sylvanus Jirani for the year of income 2015.

Double taxation relief due to Mr. Sirenused for the year of income 2015
Earning in Uk = 43,500 × 100
Kenyan income
Employment income
Consultancy fee (190÷95%)
Rental income
Add: Cost of furniture
Estate agent fee
Less: Wear and Tear furniture (12.5% × 36,000)
Patent royalty (9,500-95%)
Less: Operating expenses
Total income for the year



400,000
36,000
48,000
(4,500)
100,000
(18,000)



950,000
200,000



479,500

82,000

4,350,000








1,711,500
6,061,500


Determining gross tax on total income

147,580 x 10% + 139,043 x 60% + 30% (6,061,500 - 564,709) = 1,747,221.1

Determining gross tax on Kenyan income

147,580 x 10% + 139,043 x 60% + 30%(1,711,500 - 564,709) = (442,221.1)

Foreign UK tax 1,305,000
PAYE paid in Uk 8,700 x 100 = 870,000

Double tax relief = 870,000 (lower of the two)

(ii) Tax payable (or refundable) by Mr. Jirani for the year of income 2015.

Tax payable by Mr. Jirani for the year 2015
Total tax liability
Less: PAYE
DTR
Personal relief
Withholding tax : Consultancy fee
:- Royalty
Tax payable		 1,747,221
(184,800)
(870,000)
(16,896)
(10,000)
(5,000)
660,525

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QUESTION 4c

Q Summarise uses of funds deposited in the public private partnership (PPP) project facilitation fund.
A

Solution


➧ Project Feasibility Studies: The fund may be used to finance feasibility studies for potential PPP projects. These studies assess the viability and economic, technical, and financial feasibility of proposed projects before their implementation.

➧ Transaction Advisory Services: Funds can be utilized to hire transaction advisors who provide expert advice and support throughout the PPP project's lifecycle. These advisors assist in structuring the project, conducting due diligence, and managing the tendering process.

➧ Capacity Building and Training: The PPP Project Facilitation Fund may allocate resources to enhance the capacity of public sector entities involved in PPP projects. This includes providing training and workshops to improve skills and knowledge related to PPP management.

➧ Project Preparation Costs: The fund can cover various project preparation costs, including legal, technical, and financial advisory expenses incurred during the pre-construction phase of the PPP project.

➧ Risk Mitigation Measures: Funds deposited in the PPP Project Facilitation Fund may be used to implement risk mitigation measures, such as setting up contingency funds or providing guarantees to reduce risks associated with the project.

➧ Public Awareness Campaigns: Some funds may be allocated to public awareness campaigns, informing citizens and stakeholders about the benefits and implications of specific PPP projects.

➧ Research and Development: The fund might support research initiatives related to PPPs, exploring innovative approaches and best practices to improve the efficiency and effectiveness of PPP project implementation.

➧ Project Implementation Support: The PPP Project Facilitation Fund can provide financial support during the construction and implementation phases of the PPP project to ensure smooth execution and timely completion.

➧ Monitoring and Evaluation: Part of the funds might be allocated for monitoring and evaluating the performance of PPP projects, ensuring adherence to contractual obligations and assessing their socio-economic impact.

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QUESTION 5a

Q The Council of the Institute of Certified Public Accountants of Country X is developing a Code of Ethics to manage the conduct of its Council members.

Required:

Propose provisions for inclusion in the above referenced Code of Ethics to prevent cases of conflict of interest among Council members.
A

Solution


➧ Disclosure of Conflicts of Interest: Require all Council members to disclose any financial interests, affiliations, relationships, or other circumstances that could potentially lead to a conflict of interest. This disclosure should be made annually and updated promptly if any new conflicts arise during their term as a Council member.

➧ Recusal from Decision-Making: Establish a policy that mandates Council members to recuse themselves from discussions, deliberations, and voting on matters in which they have a conflict of interest. They should abstain from any involvement in decision-making processes related to such matters.

➧ Definition of Conflict of Interest: Provide a clear and comprehensive definition of what constitutes a conflict of interest within the context of the Council's operations. This definition should cover direct, indirect, and potential conflicts to ensure a thorough understanding by all Council members.

➧ Prohibition on Self-Dealing: Explicitly prohibit Council members from using their positions for personal gain or to benefit their family members, close associates, or businesses. This includes avoiding any transactions or engagements with the Council that could create a conflict of interest.

➧ Transparency and Record-Keeping: Establish a requirement for maintaining accurate and up-to-date records of all disclosed conflicts of interest, recusals, and related actions taken to address conflicts. This promotes transparency and accountability within the Council.

➧ Independent Review of Conflicts: Designate an independent committee or an ethics officer to review and assess potential conflicts of interest among Council members. This committee or officer should be responsible for guiding members on handling conflicts appropriately and reporting any concerns to relevant authorities.

➧ Education and Training: Provide regular education and training sessions to Council members on identifying, managing, and disclosing conflicts of interest. This training should emphasize the importance of maintaining the highest ethical standards.

➧ Annual Certification: Require Council members to certify annually that they have reviewed the Code of Ethics, disclosed any conflicts of interest, and complied with all relevant provisions.

➧ Consequences of Violation: Clearly outline the consequences for Council members who fail to disclose conflicts of interest or act in violation of the Code of Ethics. This could include disciplinary actions, sanctions, or removal from the Council, depending on the severity of the breach.

➧ Annual Code Review: Mandate a periodic review of the Code of Ethics to ensure its effectiveness and relevance. This review should consider feedback from Council members, stakeholders, and ethical experts.

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QUESTION 5b

Q With reference to the operations of the Public Investments Committee (PIC) in your country

(i) Describe functions of the PIC.
(ii) Explain matters which the PIC is specifically excluded from dealing with
A

Solution


(i) Functions of the Public Investments Committee (PIC):

The functions of a Public Investments Committee (PIC) can vary depending on the country and its governance structure. Generally, the PIC is responsible for overseeing the management and decision-making related to public investments and expenditure. Some common functions of a PIC may include:

➧ Reviewing Investment Proposals: The PIC reviews and evaluates investment proposals from various government agencies and departments. These proposals can include projects, programs, and initiatives that require public funding.

➧ Assessing Financial Viability: The PIC examines the financial viability and economic benefits of investment projects. This evaluation ensures that proposed investments align with the country's fiscal objectives and contribute positively to the economy.

➧ Evaluating Project Risks: The PIC assesses the risks associated with investment projects and provides recommendations on risk management strategies to safeguard public funds.

➧ Prioritizing Investments: The PIC helps prioritize investment projects based on their potential impact, urgency, and alignment with the government's development priorities.

➧ Budget Allocation: The PIC plays a role in the budgetary process by recommending the allocation of funds to specific projects and programs.

➧ Monitoring and Oversight: After approving investments, the PIC monitors the progress and performance of the projects to ensure they are executed as planned and within budget.

➧ Accountability and Transparency: The PIC ensures transparency and accountability in the allocation and use of public funds, promoting responsible financial management.

(ii) Matters Excluded from PIC's Scope:

While the specific exclusions can vary based on the country's legal framework and governance practices, there are some common matters that PICs are often excluded from dealing with:

➧ Monetary Policy: PICs are typically not involved in formulating or implementing monetary policy, which is the domain of central banks and monetary authorities.

➧ Micro-Level Decisions: The PIC focuses on macro-level investment decisions and does not usually get involved in micro-level administrative decisions within individual departments or agencies.

➧ Private Sector Investments: The primary role of the PIC is to oversee public investments. As such, it is generally not responsible for private sector investments or business decisions.

➧ Day-to-Day Operations: The PIC does not engage in the day-to-day operations of projects and agencies. Its role is to provide oversight and strategic guidance.

➧ Political Matters: The PIC's functions are typically non-political and aim to ensure prudent financial management rather than getting involved in political matters.

➧ Judicial Matters: Legal and judicial matters are typically handled by the judiciary and legal authorities and are not within the purview of the PIC.

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QUESTION 5c

Q The taxable income or loss for Msanifu Insurance Company Ltd. for the year ended 31 December 2015.
A

Solution


Taxable income or loss for Msanifu Insurance Company Ltd.
for the year ended 31 December 2015 Sh000

Premium received
Premium returned
Premium paid to reinsurance
Recoveries on reinsurance
Commission received
Income from exercise of subrogation rights

Expenses
Claims paid
Add: claims bal c/d
Less: claims bal b/d
Management fee
Agency expenses
Travelling expense
Advertising
General expense (8,490 - 800 - 1,260)
Bad debt
Increase in reserves (6,200 - 3,240)
Wear & tear:- Computers 30% × 800
:- Fittings 12.5% × 1260
Taxable Loss
Other incomes
Fixed deposit account
Rental income
Adjusted taxable income		 Sh 000
15,450
(374)
(4,680)
150




7,600
6,000
(5,640)














Sh000



10,546
1,360
1,250
13,156



(7,960)
(1,934)
(1,350)
(1,800)
(364)
(6,430)
(368)
(2,960)
(240)
(157.5)
(10,407.5)

780
10,000
10,780


Msanifu life assurance
Amount distributed to shareholders 25% × 300,000
30% Excess command management fee 30% (25,000 - 5,312.5)

75,000.00
5,906.25
80,906.25


W1

Management fee is restricted as follows:
1st
Next
Next
Next
Over

5M
7.5M
7.5M
10M
30M

@25.0%
@22.5%
@20.0%
@17.5%
@15.0%

25.0% x 5,000
22.5% x 7,500
20.0% x 7,500
17.5% x 5,000
-

 1,250.0
1,687.5
1,500.0
875.0
-
5,312.5


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