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CPA
Advanced Leval
Advanced Tax November 2017
Suggested Solutions

Advanced Public Finance & Taxation
Revision Kit

QUESTION 1a

Q Citing areas, discuss the moral and ethical issues against tax avoidance with specific reference to operations of multinational corporations (MNCs).
A

Solution


➧ Fairness and Social Justice: One of the primary moral concerns against tax avoidance by MNCs is the perceived lack of fairness and social justice. MNCs often utilize complex tax structures and loopholes to shift profits to low-tax jurisdictions, which can lead to reduced tax revenue for the countries where they operate. This can result in a disproportionate burden on individual taxpayers and small businesses, leading to an unequal distribution of the tax burden in society.

➧ Public Services and Infrastructure: When MNCs engage in aggressive tax avoidance, it can lead to reduced funds available for public services and infrastructure. Governments rely on tax revenues to fund essential services such as education, healthcare, and public safety. By avoiding taxes, MNCs may indirectly contribute to the degradation of public services, affecting the well-being of citizens in the countries where they operate.

➧ Tax Havens and Developing Nations: MNCs often utilize tax havens, which are countries with low or no taxes and financial secrecy, to minimize their tax liabilities. This practice can have a detrimental impact on developing nations, as it hinders their ability to generate revenue from foreign companies operating within their borders. Consequently, these countries may struggle to invest in critical infrastructure and social welfare programs.

➧ Corporate Social Responsibility (CSR): Many MNCs claim to be socially responsible and committed to sustainability and ethical practices. However, aggressive tax avoidance practices can be seen as contradictory to their CSR claims. Such actions can damage a company's reputation and erode public trust in their stated commitment to social and environmental responsibilities.

➧ Global Economic Inequality: Tax avoidance by MNCs can exacerbate global economic inequality. Large corporations with the means to exploit tax loopholes benefit disproportionately from the lower tax rates, while smaller businesses and individuals often lack the resources or international presence to do the same. This disparity can contribute to a widening gap between rich and poor, both within and between nations.

➧ Legal vs. Ethical: Some MNCs defend their tax avoidance strategies by arguing that they are acting within the confines of the law. However, the ethical concerns arise from the fact that while these practices may be technically legal, they can be viewed as morally wrong, especially when they exploit legal loopholes that were not intended to be used for aggressive tax planning.

➧ Impact on Developing Economies: Developing countries often rely heavily on foreign investments from MNCs to stimulate their economies. However, when MNCs engage in aggressive tax avoidance, it can diminish the potential benefits that these countries could receive in terms of job creation, technology transfer, and overall economic development.

➧ Weakening of Tax Systems: The prevalence of tax avoidance schemes can undermine the effectiveness of tax systems worldwide. Governments may find it challenging to enforce tax laws and close loopholes, leading to a loss of public trust in the fairness and integrity of the tax system.

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QUESTION 1b

Q The following statement was made by the Commissioner General of your country's revenue authority during an international conference to discuss the challenges of taxation in the era of electronic commerce (e-commerce) and mobile commerce (m-commerce).

"The rapid growth of electronic commerce and mobile commerce fuelled by the developments in digital technology has shaped a revolution in global retail trade that is opening up markets across borders and continents. The growth in e-commerce and m-commerce has imposed a number of challenges to the government in relation to the tax system

With reference to the above statement. analyse challenges of taxing businesses and transactions arising from the adoption of e-commerce and m-commerce.
A

Solution


The rapid growth of e-commerce and m-commerce has indeed presented several challenges for governments worldwide in terms of taxing businesses and transactions. These challenges arise due to the unique characteristics and complexities associated with digital transactions and the borderless nature of online commerce. Here are some key challenges in taxing businesses and transactions arising from the adoption of e-commerce and m-commerce:

➧ Jurisdictional Challenges: E-commerce and m-commerce transactions often occur across borders, making it difficult for tax authorities to determine the appropriate jurisdiction for taxation. Companies may have a physical presence in one country but conduct significant online sales in another, leading to disputes over which country has the right to tax the income generated from those transactions.

➧ Permanent Establishment (PE) Definition: The concept of a "permanent establishment" is crucial for determining the tax jurisdiction of a multinational company. However, e-commerce businesses can operate without a physical presence in a country, which raises questions about how to define and apply the PE concept in the digital context.

➧ Digital Products and Services Taxation: The sale of digital products and services (e.g., software, e-books, music, streaming services) across borders can be challenging to tax adequately. Different countries may have varying rules for classifying and taxing these transactions, leading to potential double taxation or tax gaps.

➧ Taxation of Data and User Information: Some businesses operating in the digital space derive value from user data and information. Taxation of such intangible assets is complex, and determining their value for tax purposes can be challenging.

➧ Tax Avoidance and Base Erosion: E-commerce and m-commerce companies can use sophisticated tax planning strategies to shift profits to low-tax jurisdictions, leading to base erosion and reducing the overall tax revenue for countries where actual economic activities occur.

➧ Inconsistent VAT/GST Rules: Value-added tax (VAT) or goods and services tax (GST) rules can differ significantly between countries. This lack of harmonization makes it difficult for businesses to comply with multiple tax regimes, especially for smaller businesses that lack resources for compliance.

➧ Digital Economy Taxation Framework: Traditional tax systems may not adequately capture the unique features of the digital economy. Developing a fair and effective taxation framework that accounts for the digital nature of transactions is a challenge for governments.

➧ Technological and Administrative Capacity: Tax authorities may face challenges in adapting to rapidly evolving digital technologies and may lack the technological capacity to monitor and enforce compliance in the digital realm effectively.

➧ Cross-Border Data Sharing and Privacy Concerns: International cooperation in tax enforcement requires cross-border data sharing, which raises privacy and data protection concerns. Harmonizing data-sharing practices while respecting privacy rights is a complex issue for tax authorities.

➧ Digital Currency Taxation: The emergence of cryptocurrencies and blockchain technologies presents novel challenges for tax authorities to determine how to tax transactions and assets in the digital currency realm.

➧ Insufficient Documentation for Taxation: E-commerce and m-commerce transactions are often conducted electronically, leading to a lack of comprehensive paper records. As a result, tax authorities may struggle to establish the necessary documentation to determine the taxability of a transaction.

➧ Limited Accessibility to Transaction Records: Privacy concerns surrounding mobile phones and computers can hinder tax authorities' access to critical transaction records. This lack of accessibility makes it challenging to identify the ultimate customer involved in the transaction.

➧ Difficulty in Determining Transaction Location: The online nature of transactions conducted through the internet makes it challenging to pinpoint the exact location of a transaction for tax jurisdiction purposes. This ambiguity complicates the process of determining which tax regulations apply.

➧ Identity Verification Issues: Establishing the identity of the parties involved in the transaction becomes problematic due to the absence of face-to-face interactions in e-commerce and m-commerce transactions. This makes it challenging for tax authorities to identify the parties responsible for tax obligations.

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QUESTION 1c

Q (i) Summarise specific objectives of COMESA.
(ii) Some experts have argued that COMESA has been overtaken by globalisation and should be dissolved.

Required:

Citing reasons, support the above view.
A

Solution


(i) Objectives of COMESA.

➧ Facilitate seamless movement of goods and services within the region: COMESA aims to remove trade barriers, eliminate tariffs, and streamline customs procedures to promote the smooth flow of goods and services among member countries.

➧ Promote regional development: The organization seeks to foster economic development and growth in the region by creating a conducive environment for investment and trade.

➧ Enhance intra-regional trade opportunities: COMESA provides a larger export market for member countries, encouraging increased trade among them.

➧ Stimulate economic cooperation and growth: By promoting economic cooperation and collaboration, COMESA aims to boost overall economic growth and prosperity in the region.

➧ Combat economic smuggling across borders: One of COMESA's objectives is to prevent illegal trade activities and economic smuggling between member countries.

➧ Encourage labor mobility and investment: COMESA strives to facilitate the movement of labor and encourage cross-border investment among its member states.

➧ Promoting Free Trade: COMESA aims to establish a Free Trade Area (FTA) among its member states, eliminating tariffs and non-tariff barriers to enhance intra-regional trade.

➧ Customs Cooperation: The organization seeks to harmonize customs procedures and policies to facilitate the movement of goods across member states' borders.

➧ Enhancing Investment: COMESA aims to attract foreign direct investment (FDI) and promote investment opportunities within the region to foster economic growth and development.

➧ Infrastructure Development: The organization works towards the development of regional infrastructure, such as transportation, energy, and communication networks, to improve connectivity and facilitate trade and investment.

➧ Industrial Development: COMESA aims to promote industrialization in the region, supporting the growth of manufacturing and value-added industries.

➧ Economic Cooperation and Policy Harmonization: COMESA aims to harmonize economic and monetary policies,prevent tax evasion and fraudulent practices among member states and create a conducive environment for regional economic integration.

(ii) Reasons supporting the view that COMESA has been overtaken by globalization and should be dissolved:

➧ Limited Impact on Intra-regional Trade: Despite its objectives of promoting free trade and eliminating barriers, COMESA has not been as successful in boosting intra-regional trade as expected. The growth of global trade and globalization has led member states to focus more on international trade with countries outside the region, reducing the emphasis on intra-regional trade within COMESA.

➧ Competition from Larger Trade Blocs: With the rise of larger trade blocs like the African Continental Free Trade Area (AfCFTA), which encompasses a broader range of African countries, COMESA's significance in promoting regional integration has diminished. The AfCFTA offers a more comprehensive platform for trade and economic cooperation, making COMESA appear redundant in the face of this larger initiative.

➧ Limited Progress in Harmonization: COMESA's progress in harmonizing economic policies and customs procedures among member states has been slow, leading to inconsistencies and challenges for businesses operating in the region. In contrast, globalization has pushed countries to align their policies with global standards, making COMESA's efforts seem less impactful.

➧ Complex Regional Integration Landscape: Africa has multiple regional economic communities, each with its own set of objectives and rules. This complex landscape of regional integration efforts can lead to overlaps and inefficiencies, raising questions about the need for multiple overlapping organizations like COMESA.

➧ Inadequate Resources and Coordination: COMESA has faced challenges in securing sufficient resources and effective coordination among member states to implement its objectives fully. Globalization has brought about stiffer competition for resources and investment, potentially diverting attention and resources away from COMESA's initiatives.

➧ Focus on Global Trade Partners: Member states may prioritize trade and economic relationships with global players outside the region, focusing on major economies and international trade agreements, which could reduce the commitment and relevance of COMESA.

➧ Heavy Debt Burden and Reliance on Developed Countries: Many COMESA member countries face substantial debt burdens from developed nations, which results in financial constraints and ties them to debt covenants. This heavy debt burden increases their reliance on financial assistance and support from Western countries. Such reliance can limit their economic independence and decision-making, potentially impacting their ability to pursue their development priorities effectively.

➧ Trade Barriers and Globalization Concerns: The establishment of the COMESA economic union has led to the implementation of trade barriers against non-COMESA member countries. This approach contradicts the principles of globalization, which emphasize open and unrestricted trade among nations. By imposing trade barriers, there is a risk of isolating non-COMESA countries and limiting their access to markets within the region. This may hinder economic growth and potential partnerships with external trading partners, affecting the overall spirit of globalization and international economic cooperation.

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QUESTION 2a

Q (i) A statement of adjusted taxable profit or loss for the year ended 3 1 December 2016.
(ii) State three areas or items that you might require further clarification on from Masai Traders for accurate computation of any tax due.
A

Solution


(i) A statement of adjusted taxable profit or loss for the year ended 3 1 December 2016.
Wear & tear Allowance "000"


Saloon car
Weighing machine
Furniture
Computer
Forklift
Lorry (2 tonne)
Other asset (28000-14-240-324-400-460)
Total cost
Allowance 2015
WDV
Allowance 2016		 Clas I
37.5%




400


400
(150)
250
93.75		 Class II
30%



324



324
(97.2)
226.8
68.04		 Class III
25%
860




960

1,820
(455)
1,365
341.25		 Class IV
12.5%

14
240



26,062
26,316
(3,289.5)
23,026.5
2878


Business Premises IBD
Item
Warehouse
Staff canteen

Qualifying cost
540
600

Rate
10%
10%

Allowance
54
60
114


Creditors account
Payment
Bal c/d

2,488
4,572
7,060		 Bal b/d
Purchases

3,120
3,940
7,060




Masai traders
Computation of taxable income for the year ended 31 Dec 2016

Net profit
Add back Disallowable expenses
Impairment loss of business premises
Depreciation
Conveyance fee of hand title deed
Salary to wife
Mortgage interest (personal residence)
Defending business against illegal trade
Revenue stamp
Undercast sales 824,600 × 20/80
Overcast purchases. 3,940 × 60/160
less:
IBD-warehouse
staff canteen
W&T
class I
class II
class III
class IV
Bad debt VAT = 16/116 x 85.84
Adjusted taxable profit 		Sh 000
30,428

4,800
1,600
128
260
184
160
16
20,650
1,477.5

(54)
(60)

(93.75)
(68.04)
(341.25)
(2,878)
(11.84)
56,196.62


(ii) State three areas or items that you might require further clarification on from Masai Traders for accurate computation of any tax due.

➢ Determining the valuation method for non-current assets, whether stated at historical cost or net book value (NBV).
➢ Verification of the accuracy of transactions through cash sale receipts.
➢ Court proceeding about the debtor declared bankrupt


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QUESTION 2b

Q Various governments have established agencies to broadly enhance efficiency and effectiveness of state corporations. In some countries, this agency is called the State Corporations Advisory Committee (SCAC)

Required:

Summarise specific responsibilities of SCAC or its equivalent body in your country.
A

Solution


➧ Renew and Investigate State Corporation Offices: Conduct periodic reviews and audits of state corporations' offices to ensure efficiency and effectiveness.

➧ Advise on Establishment and Dissolution: Provide recommendations to the president regarding the establishment or dissolution of state corporations based on thorough assessments.

➧ Examine State Corporation Proposals: Evaluate proposals put forward by state corporations and offer expert advice on their viability and potential impact.

➧ Appointment, Removal, and Transfer: Advise on matters related to the appointment, removal, and transfer of officers and staff within state corporations to ensure competent and capable personnel are in place.

➧ Governance Oversight: Providing oversight and guidance to state-owned corporations to ensure they operate in accordance with established regulations and best practices.

➧ Strategic Planning: Assisting state corporations in developing long-term strategies and plans to achieve their objectives and contribute to national development goals.

➧ Performance Monitoring: Evaluating the performance of state corporations to ensure accountability and efficiency in their operations.

➧ Financial Management: Reviewing financial reports and budgets of state-owned corporations to ensure prudent financial management and use of resources.

➧ Risk Management: Assessing and managing risks associated with state corporations' operations to safeguard public interests.

➧ Stakeholder Engagement: Facilitating communication and cooperation between state corporations and relevant stakeholders, including government agencies, shareholders, and the public.

➧ Policy Formulation: Assisting in the formulation of policies related to state-owned enterprises to support their efficient functioning and alignment with national objectives.

➧ Compliance and Legal Matters: Ensuring state corporations comply with relevant laws, regulations, and corporate governance principles.

➧ Performance Improvement: Identifying areas for performance improvement and offering recommendations to enhance operational efficiency and effectiveness.

➧ Reporting to the Government: Presenting periodic reports and recommendations to the government on the performance and activities of state-owned corporations.

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QUESTION 3a

Q Describe ways through which the government might redeem public debt.
A

Solution


➧ Surplus Budget: The government can use budgetary surpluses to repay existing debt. A budget surplus occurs when government revenues (taxes and other income) exceed government expenditures. The excess funds can then be used to retire or decrease outstanding debt.

➧ Bond Redemption: If the government issued bonds to finance its debt, it can redeem the bonds upon their maturity. When a bond matures, the government repays the principal amount to the bondholders along with any accrued interest.

➧ Open Market Operations: The government can engage in open market operations to reduce public debt. In this approach, the government sells its own bonds in the open market to private investors. The proceeds from these sales can be used to retire existing debt.

➧ Asset Sales: The government can sell off certain assets, such as state-owned enterprises or properties, to raise funds that can be used to pay down public debt.

➧ Debt Conversion or Restructuring: The government can negotiate with its creditors to convert existing debt into new securities with more favorable terms, such as lower interest rates or longer repayment periods. This debt restructuring can help ease the burden of debt repayments.

➧ Privatization: Selling state-owned assets or enterprises to the private sector can generate revenue that can be used to retire public debt.

➧ Foreign Exchange Reserves: In the case of foreign-denominated debt, a government can use its foreign exchange reserves to pay off foreign creditors and reduce external debt.

➧ Economic Growth and Increased Tax Revenue: A growing economy with increased tax revenues can help the government service its debt more effectively. A higher GDP and tax collection can contribute to debt reduction over time.

➧ Additional taxation: An effective measure of debt redemption involves implementing additional taxation. This entails imposing new taxes to generate the necessary revenue to repay both the loan principal and the accrued interest.

➧ Refunding: The government can issue new bonds and securities to pay off matured debt, effectively refinancing the debt with new obligations.

➧ Terminate Annuities: Debt redemption can involve the issuance of terminable annuities to bondholders, enabling the fiscal authorities to gradually pay off a portion of the public debt annually.

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QUESTION 3b

Q Andrew Mole is an employee of Sombea Lid. He has presented the following information:

1. His salary per month is Sh.80,000 which includes house allowance of Sh.20,000 per month.

2. His wife is employed at a salary of Sh.20.000 per month with Faza Ltd, where Andrew Mole holds 15% of share capital.

3. The house in which the family lives in is owned by his wife. The house was constructed in the year ended 31 December 2016 through an 18% mortgage loan of Sh.5,000,000 repayable over a period of 10 years.

4. Their children attend a nearby primary school. Mole has been saving Sh.12,000 per month for his children's secondary school education and Sh.20,000 per month with his Sacco to be withdrawn upon retirement.

5. His wife has insured the house and pays insurance premiums of Sh.5.000 per month and county govemment rates of Sh 24,000 per annum

Evaluate possible schemes of tax planning that Andrew Mole and family could use to minimise their tax liability for the year of income 2016.
A

Solution


➧ Optimize Tax Benefits through Registered Pension Scheme:

Mr. Mohe can consider transferring his savings from the Sacco to a registered pension scheme. By doing so, his contributions can be utilized to reduce his chargeable tax liability, potentially providing tax advantages for retirement planning.

➧ Utilize Education Insurance Policy for Secondary Education:

To benefit from insurance relief, Mr. Mohe should acquire an education insurance policy for his children's secondary education. Such a policy could offer tax benefits and help mitigate the financial burden of educational expenses.

➧ Adjust Shareholding with Faza Ltd:

To avoid potential salary income complications, Mr. Mole may consider reducing his shareholding in Faza Ltd from 15% to less than 5%. This adjustment would allow the wife to be assessed separately and claim personal relief and be taxed at a lower tax rate.

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QUESTION 3c

Q (i) The amount of tax payable, if any, by the company plus any interest and penalties arising from the above transactions for the four months to April 2016.
(ii) Comment on the information you might require from the company to determine the accuracy of the VAT payable, if any.
A

Solution


(i) The amount of tax payable, if any, by the company plus any interest and penalties arising from the above transactions for the four months to April 2016.

VAT account
Input tax
Purchases 754,000 x 16 / 116
Credit note received 29,000 × 16 / 116
Debit note received 69,600 x 16 / 116


104,000
(4,000)
9,600
109,600		 Output tax
Sales 788,800 x 16 / 116




108,800


108,800


January

Output tax - input tax

108,800 - 109,600 = (800) VAT Refundable

February

Output tax = 522,000 × 16 / 116 = 72,000

Input tax on purchases

Sales net of VAT 522,000 - 72,000 = 450,000

Cost of purchase before margin

450,000 × 100 / 120 = 375,000

Input tax vat = 375,000 x 16% = 60,000

Vat payable = 72,000 - 60,000 = 12,000

March

Output tax = 417,600 × 16 / 100 = 66,816

April 30, 2020 fraudulent returns -- this will attract max penalty of Ksh, 400,000

VAT Payable
January
February (Tax + Penalty 2 months) (12,000 + 20,000)
March (tax + penalty) 66,816 + 10,000
April
VAT Payable		 (800)
32,000
72,816
400,000
508,016


(ii) Comment on the information you might require from the company to determine the accuracy of the VAT payable, if any.

➧ VAT Records and Invoices: Detailed records of all transactions subject to VAT, including invoices issued by the company and those received from suppliers, would be essential to verify the accuracy of reported VAT amounts.

➧ Tax Returns and Supporting Documentation: Access to the VAT returns filed for each respective month (January, February, March, and April) is crucial, along with any supporting documentation submitted with these returns.

➧ Transaction Details and Descriptions: A breakdown of the specific transactions and activities that led to the VAT amounts recorded in each month would help to understand the nature of the VAT liabilities and penalties.

➧ Penalty Calculations: Documentation explaining the calculation of penalties for February (12,000 + 20,000) and March (10,000) is necessary to validate their accuracy and ensure they are appropriately applied.

➧ Details of Fraudulent Return and Max Penalty: For April's fraudulent return with a maximum penalty of 400,000, comprehensive information about the fraudulent activities detected and the basis for imposing the maximum penalty is crucial.

➧ Reconciliation and Audit Trail: A complete reconciliation and audit trail of all VAT transactions from the beginning of the tax period to the end would be necessary to ensure the accuracy and consistency of the reported VAT figures.

➧ Compliance with VAT Regulations: Verification of the company's compliance with VAT regulations, including proper VAT registration, timely filing of returns, and adherence to any specific VAT requirements applicable to the industry or nature of their business.

➧ Communication with Tax Authorities: Any correspondence or communication with the tax authorities related to VAT matters, including any queries, assessments, or adjustments made by the tax authorities.

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QUESTION 4a

Q Discuss measures that the central government could put in place to enhance financial accountability and transparency at the county level.
A

Solution


Enhancing financial accountability and transparency at the county level is crucial for promoting good governance and efficient use of public funds. Here are some measures that the central government could put in place to achieve this:

➧ Strengthening Auditing and Oversight: The central government can establish an independent and robust auditing body to conduct regular financial audits of county governments. This auditing body should have the authority to investigate financial transactions, monitor compliance, and assess the effectiveness of financial management systems.

➧ Public Financial Reporting: Mandate county governments to publish comprehensive and timely financial reports accessible to the public. These reports should detail budget allocations, revenue sources, expenditures, and any deviations from the approved budget.

➧ Transparent Procurement Processes: Implement transparent procurement systems at the county level, ensuring that procurement decisions are made through competitive and open bidding processes. Regularly publish procurement information to promote accountability and prevent corruption.

➧ Whistleblower Protection: Establish mechanisms to protect and encourage whistleblowers to report any financial misconduct or irregularities within county governments. This can include anonymous reporting channels to safeguard individuals who come forward with information.

➧ Financial Training and Capacity Building: Provide training and capacity-building programs for county government officials and staff on financial management, budgeting, and public financial accountability.

➧ Use of Technology: Promote the adoption of financial management systems and technologies that enhance transparency and accountability i.e IFMIS and E-promis. Digital platforms for financial reporting, budget tracking, and expenditure monitoring can provide real-time data to the public and improve financial governance.

➧ Performance-Based Budgeting: Encourage counties to adopt performance-based budgeting, where funding is linked to the achievement of specific outcomes and targets. This approach ensures that public funds are allocated based on measurable results and promotes accountability for results.

➧ Citizen Engagement and Participation: Promote citizen engagement in the budgeting process, allowing public input on budget priorities and spending decisions. This participatory approach fosters transparency and ensures that public funds align with community needs.

➧ Independent Evaluation and Monitoring: Set up an independent body or commission responsible for evaluating and monitoring financial management practices at the county level. This body can assess financial performance, identify areas of improvement, and make recommendations for better financial accountability.

➧ Establishing County Audit Committees: Each county should have an audit committee composed of independent experts that oversee the financial management and internal control processes of the county government.

➧ Enforcing Legal Consequences: Strengthen legal consequences for financial mismanagement and misuse of public funds at the county level. This includes prosecuting individuals found guilty of financial irregularities and imposing appropriate penalties.

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QUESTION 4b

Q Compute the annual taxable income of Peter Chawawa from year 2012 to year 2016.
A

Solution


Peter chawawa
Capital statement for the year ended 31 Dec
Assets
Furnitures
Premises
Motor vehicle
Stock
Debtor
Bank
Cash
Savings account
Total Asset(A)

Liabilities
Mortgage
Creditors
Total liabilities (B)
Net worth(A - B)
Growth in net worth
Add: Drawings
living expenses
Less: Interest with WH Final
Mortgage interest
Wear and tear
Taxable income 		2011
1,000
2,000
500
250
160
81
9
-
4,000


1,000
200
1200
2800
-
-
-
-
-
-

 2012
1,000
2000
500
255
173
109
10
300
4,347


750
230
980
3,367
567
5
300
(25)
(100)
(155.5)
591.5 		2013
1,000
2,000
500
302.5
190
194
10
900
5096.5


500
241
741
4,355.5
988.5
5
400
(75)
(75)
(130.5)
1,113 		2014
1,000
2,000
500
332.5
208
281
10
100
4431.5


250
253
503
3,928.5
(427)
5
450
(90)
(50)
(109)
(221) 		2015
1,000
2,625
500
366
230.5
409.5
10
725
5,866


0
272
272
5,594
1,665.5
5
500
(70)
(25)
(73)
2,002.5 		2016
1,000
2,625
400
402.5
253
(32)
10
750
5,508.5


0
291.5
291.5
5,217
(377)
5
600
(60)

(157)
11


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QUESTION 5a

Q Compute the capital gain or loss arising from the sale of the above house.
A

Solution


Mawada property developer Itd
Computation taxable income for the year 2016
Revenue
Less: Incidental cost
Repair of the houses
Advertisement
Agent commission
Valuation fee
Legal fee
Net transfer value
Costs:
Purchase cost
Mortgage interest 12% × 4,000,000 × 2
Audit fee
Valuation fee
Legal fees on conveyance
Door replacement



78,000
24,200
12,000
148,000
42,800


4,000,000
960,000
48,400
120,000
80,000
96,000

 8,000,000





(305,000)
7,695,000






(5,304,400)
2,390,600


Capital gain tax 5% x 2,390,600 = 119,530

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QUESTION 5b

Q (i) A statement of adjusted taxable profit or loss for the year ended 31 December 2016.
(ii) Corporation tax payable, if any, by Dawa Ltd.
A

Solution


Dawa Ltd
Computation of taxable profit or loss for the year ended 31 December 2016

Net profit
Add back disallowable expenses
General exp:- Purchase of processing machine
:- Purchase of factory building
:- Provision of corporation tax
Purchase of furnitures
Vat appeal
Delivery van
Credit note received
Impairment loss
Advertising: neon sign
Depreciation of delivery van
Property tax
Legal expense: - Acquisition of bank loan
:- Preparation of MOA
:- Liquidation cost
:- Patent right
Staff cost-personal computers
Overcast opening stock 2,200 × 10 / 110
Undercast closing stock 2,800 × 30/70
Deduct: Non-taxable income & other income
Capital gain on sale of asset
Insurable recovery on motor vehicle
Dividend from subsidiary
Interest on fixed deposit
Capital allowances
ID = 100% (1,280 + 800)
Wear and Tear :- Furniture = 12.%% × 360
:- Computer 30% × 360
:- Neon sign 12.5% × 129
:- Delivery van 25% × 720
Taxable profit
Other specified sources of income
Interest on fixed deposit
Adjustable taxable profit		 Sh 000
7,521

800
1,280
394
360
120
720
135
390
129
24
136
90
260
468
340
360
200
1,200

(468)
(450)
(942)
(300)

(2,080)
(45)
(108)
(16.125)
(180)
10,337.875

300
10,637.875


(ii) Tax payable
= 30% x 10,637,875 = 3,191,362.5


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