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95.5% Pass Rate

CPA
Advanced Leval
Advanced Tax November 2019
Suggested Solutions

Advanced Public Finance & Taxation
Revision Kit

QUESTION 1a

Q Examine four reasons for the increased importance of information exchange programmes in relation to taxation among various countries. (4 marks)
A

Solution


Reasons for the increased use of information exchange programmes in relation to taxation

➢ It has contributed in reducing money laundering

➢ Government use it as a platform to exchange information relating to economic integration.

➢ Has assisted in reducing tax evasion and corruption .

➢ It adds in transferring of technology and labour mobility

➢ Fast, efficient and inexpensive medium for the exchange of information

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QUESTION 1b

Q As a tax consultant, draft a letter of objection to the revenue authority indicating the grounds of appeal in compliance with tax legislation. (6 marks)
A

Solution


Companies Name
Companies Address
P.O Box
Telephone no:

DATE
To Kenya Revenue Authority
Domestic Tax Department

RE APPLICATION FOR WAIVER ON PENALTY FOR THE YEAR "2018" ON PIN NUMBER "xxxxxxxxx"

Dear [Name of Revenue Authority],

I hope this letter finds you well. I am writing on behalf of Majani Ltd (hereinafter referred to as "the Company"), a longstanding taxpayer operating in our country for over 20 years. I would like to formally lodge an objection against the penalty imposed on the Company in the amount of Sh 484,840, as communicated in your correspondence dated [Date of Penalty Notice].

The grounds for our objection are rooted in the unique circumstances surrounding the delay in signing the Company's accounts for the year ended 31 December 2018, and we believe that these circumstances warrant a reconsideration of the penalty. I would like to bring the following key points to your attention:

  1. Unforeseeable Medical Circumstances: The delay in signing the Company's accounts was primarily attributed to an unforeseen and unavoidable medical trip abroad by the Chief Executive Officer (CEO), which resulted in his absence from [Date of CEO's Absence] to [Date of CEO's Return]. This absence directly impacted the ability of the directors to sign the accounts within the stipulated timeframe. The CEO's medical situation was beyond his control and could not have been anticipated.
  2. Timely Resumption of Duties: Upon his return on 1 August 2019, the CEO promptly resumed his duties and oversaw the finalization of the accounts, which were then subsequently signed by the directors. This demonstrates the Company's commitment to complying with its statutory obligations as soon as circumstances permitted.
  3. Sincere Intention to Comply: The Company maintains a strong track record of tax compliance and adheres to the requirements set forth by tax legislation. The delay in signing the accounts was not indicative of any intention to evade tax liabilities or obstruct the revenue authority's processes. It was an unfortunate and isolated incident resulting from a medical emergency.

Given these circumstances, we kindly request that the revenue authority reconsider the imposition of the late returns penalty on Majani Ltd. We firmly believe that the penalty is disproportionate to the underlying reasons for the delay and runs counter to the Company's consistent commitment to tax compliance.

In accordance with relevant tax legislation, we respectfully request a waiver or reduction of the penalty imposed. We are prepared to provide any necessary documentation or evidence to substantiate the Company's position.

Thank you for your attention to this matter. We are hopeful that the revenue authority will take into consideration the unique circumstances outlined above and grant a favorable resolution to this objection.

Please feel free to contact me at [Your Phone Number] or [Your Email Address] if you require any further information or documentation to support our appeal.

Yours sincerely,

[Your Signature]
[Your Name]
[Your Title]
[Contact Information]

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QUESTION 1c

Q (i) Taxable profit or loss of the partnership for the year ended 31 December 2018.(8 marks)

(ii) A schedule showing the partners allocation of taxable income or loss. (2 marks)
A

Solution


Workings

W1 commission to partners 100,000 + 400,000 - 360,000 = 140,000

W2 advertising expenses 150,000 + 610,000 - 340,000 = 420,000

W3 Royalty income = 240,000 + 160,000 - 100,000 = 300,000

WS Salaries & Wages 1,390,000 + 410,000 - 130,000 = 1,670,000

W6 interest on drawings: Sharon = 8% x 60,000 = 4,800

Primus = 8% × 0

Debtors A/C
Bal b/b
Credit sales

1,700,000
5,800,000
7,500,000		 Receipt
Bal C/d

1,600,000
5,900,000
7,500,000


Payables A/C
Payments
Bal b/b

 1,000,000
2,000,000
3,000,000		 Bal C/d
Purchases

1,600,000
1,400,000
3,000,000




(i)
Sharon and Primus
Computation of taxable profit or less for the year ended 31 dec 2018
Sales
Cost of sales:
Purchases
drawings (110+60)
Gross profit
computer leasing charges
insurance compensation
Allowable Expenses:
Advertising Expenses
Salaries & Wages
Motor Vehicle Expenses
Electricity Expenses
Meals To Employee
Loan Interest
Goods Destroyed (60-35)
Wear & tear:
Office partition 12.5% ×60,000
Office equipment 12.5% ×97,000
Taxable profit


1,400,000
(170,000)




420,000
1,670,000
240,000
80,000
200,000
35,000
25,000

7,500
12,125

 Sh.
5,800,000


(1,230,000)
4,570,000
6,000
35,000










(2,689,625)
1,921,375


(ii)
Partner allocation schedule

Salary 60×9
Commission (W1)
Interest On Drawing (W6)
Profit Share
Taxable Profit
Royalty Income (W3)
Adjusted Taxable Income		 Sharon
540,000
93,333
(4,800)
470,783
1,099,316
200,000
1,299,316 		Primum
540,000
46,667

235,392
822,059
100,000
922,059 		Total
1,080,000
140,000
(4,800)
706,175
1,921,375




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QUESTION 2a

Q Explain four roles of such departments. (4 marks)
A

Solution


Roles of external resources department

➢ Ensure effective administration of financial agreements between the government and donors and monitor the use of loans.

➢ Incorporate donor commitments into the annual estimations and budgeting process.

➢ Identify, negotiate and obtain external funding sources on behalf of the government.

➢ Ensure regular participatory,monitoring and evaluation of all budget projects and programs.

➢ Ensure full participation in the evaluation of new projects.

➢ Facilitate donors to provide technical assistance to government ministries.

➢ Strengthen the coordination of bilateral consultation meetings between governments and donors.

➢ Continuous forecasting and analysis of resources, inputs and expenditures for all projects and programs

➢ Accelerate the authorization of disbursement of donor funds to implementing agencies.

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QUESTION 2b

Q Discuss three reasons for the failure of a number of projects under public private partnerships (PPPs). (6 marks)
A

Solution


Reasons for due failure of PPPs project

• Lack of clear identification of powers and responsibilities.

• Inadequate resources allocated to contract management.

• Unfamiliarity with contract complexity, context and dependencies.

• Lack of experience with public sector/supplier teams.

• Conflicts between project team personnel.

• Contracts drafted poorly and of low standards.

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QUESTION 2c

Q The correct VAT position for the company for the period between February 2019 and May 2019. (8 marks)
(ii) What action to take based on your analysis in (c) (i) above. (2 marks)
A

Solution


Xyeng China company Itd.
VAT account for the month btw February and May 2019
Input tax
Purchase
Drilling machine
Mobile crane
Concrete mixture
Poker vibrator
Photocopying machine
Forklift
Cement
Bottled mineral water
Executive boardroom table
Postal rental box
Paint from ABC ltd
Retrieval for truck engaged


5,220,000 × 16/116
3,045,000 × 16/116
3,770,000 × 16/116
906,250 × 16/116
174,000 × 16/116
1,584,125 x 16/116
28,125,565 x 16/116
137,460 × 16/116
145,000 × 16/116
13,920 × 16/116
3,117,500 × 16/116
1,200,960 × 16/116
Total
720,000
420,000
520,000
125,000
24,000
218,500
3,879,388
18,960
20,000
1,920
430,000
88,960
6,466,728
Output tax
Contract fee
Telefaxing contract fee
Total Output tax
 52,000,000 x 16%
18,000,000 x 16%

8,320,000
2,880,000
11,200,000


VAT payable = 11,200,000 - 6,466,728 = 4,733,272

(ii) The company should appeal to the commissioner since the assessment notice amount of 5,600,000 is more than actual VAT of 4,733,272.


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QUESTION 3a

Q With reference to the above scenario, explain four effects of the proposed legislative changes on Saccos. (4 marks)
A

Solution


Impact of withholding tax on saccos.

  1. This will lead to a reduction in investment projects by saccos and will focus more on the loan of members since the income from such investments will be taxed.
  2. This will reduce savings rates as the sacco member will be subject to a higher withholding tax.
  3. Members will have access to more lending facilities as sacco will reallocate funds to members as interest on members will be exempt.
  4. Members may be forced to look for other form of investments that attracts less or no tax such as capital investments

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QUESTION 3b

Q Discuss three incentives provided by your country to spur the growth ofthe housing and construction sector. (6 marks)
A

Solution


Incentive provided to spur the growth of the housing and construction sector.

• The tax deduction for capital construction costs incurred by an individual in the construction sector is allowable for tax purposes.

• Interest on income from all listed bonds used to raise money for infrastructure and social services is exempt from taxation.

• VAT exemption on building materials for publicly funded projects.

• Reduction in rental tax from 12% to 10% of the gross rent received which is final tax.

• Reduction of corporate tax rate to 15% from 30% for real estate developers who construct at least 400 qualifying units.

• Providing land to developers to encourage the development of low-cost and affordable houses.

• 15% tax relief for tax payers who purchase houses under the affordable housing scheme, and scrapping of stamp duty for first time buyers of home.

• The government has created Kenya Mortgage Refinance Company that will lend banks and saccos in cash to extend the cheap mortgage to low-income earners.

• The government has also made a commitment to install critical infrastructure such as sewer lines, water supply, electricity, roads and drainage in areas where investors have proposed to build affordable housing.

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QUESTION 3c

Q (i) Taxable profit or loss of Maisha Mema Insurance Company Limited for the year ended 31 December 2018. (8 marks)

(ii) Tax payable (if any) from your computations in (c) (i) above. (2 marks)
A

Solution


(i)
Maisha Mema insurance company Itd
Computation of taxable profit or loss for the year ended 31 Dec 2018
Incomes
Gross premium received
Add: Premium balance c/d
Less: Premium balance b/d
Returned premiums
Reinsurance - premium paid
Commission ceded
Reduction in reserves (1000-200)
Foreign exchange gained realised
Less Allowable expenses
Claims paid
Claims bal c/d
Claims bal b/d
Claims covered on re-insuarance
Commission accepted
Legal expenses(400-100)
Agency fees(400-200)
Management fees
Entertainment expenses
Wear and tear:
- Furniture 12.5 % × 600
- Computers 30% × 300
Taxable operating profit
Other specified sources of income
Rental income (1,600-200)
Interest from bank 850÷0.85
Interest from treasury bond
Adjusted taxable profit 		Sh"000"
30,000
12,000
(6,000)
(5,000)
(4,000)




4,000
900
(600)
(3,000)
20
300
200
120
400

75
90






 Sh "000"




27,000
800
800
3,500












(2,505)
29,595

1,400
1,000
350
32,345


(ii) Tax payable 30% x 32,345,000 = 9,703,500


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QUESTION 4a

Q (i) Explain the meaning of OSBPs. (2 marks)

(ii) Summarise four benefits of OSBPs. (4 marks)
A

Solution


(i) Explain the meaning of one stop border post (OSBPs)

The OSBP refers to the legal and institutional framework, facility and associated protocals that enable goods, people and other movable amenities to stop in a single facility in which they undergo necessary controls following applicable regional and national laws to exit one State and enter the adjoining State.

One stop boarder post (OSBP) is a border facility that combines two stops for national boarder control processing into one and consolidates boarder control function in a shared space for existing one country and entering another. It uses simplified procedures and joint processing wherever appropriate.

(ii) Benefits of one stop boarder post

• Harmonizes border control regulations and procedures in two or more countries, thus accelerating and enhancing the efficiency of the border control mechanism.

• The number of stops at border crossings is reduced as border control activities are carried out in one place.

• This allows border control officers from different countries to undergo joint technical training,interact and share cultural values to enable a common understanding of border control operations

• The free movement of people and the development of cross-border countries are improved and unified.

• Improved border transit procedures since one does not deal with border officials separately in a "solitude" fashion as before

• Reduced operating costs due to reduced turnaround time and process when dealing with multiple countries at the same time.

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QUESTION 4b

Q Describe four functions of tax agents. (4 marks)
A

Solution


Functions of a tax agent

• providing tax advice with the jurisdiction of tax laws

• submitting returns and payment of taxes of behalf of tax payer

• Offering profession services and determining tax liability payable by the taxpayer

• Dealing with tax commissioner on behalf of tax payer on tax matters

• Designing a more effective tax policies and procedures for the tax payers which are consistent with government policies.

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QUESTION 4c

Q A schedule showing the taxable profit and tax payable (if any) by Benita Contractors Ltd. as at 31 December 2018 (10 marks)
A

Solution




Workings

Wear and Tear
Hospital Project = 12.5% × 190,000 = 23,750
Office Complex 12.5 % x ( 150,000 + 120,000) = 33,750

Benita contractors ltd
Computation of taxable income for the year ended 31" Dec 2018

Incomes:
Value of work certified
Less: work certified b/d
Work certified for the year
Less Allowable expenses:
Material balance b/d
Purchases:- From supplier
:- From store
Material transfer out
Material (sales)
Material: Closing stock
Sub contractors fee
Consultancy fees(30,000-40)
Inspection fee
Salaries and wages (120+1-1.5)
Head office expenses
Plant lease charges
Direct expenses (3+1-0.2)
Wear and Tear:
Plant 12.5% (190,000)
Taxable profit 		Hospital project
Sh"000")
700,000
(200,000)
500,000

6,000
100,000
10,000
(10,000)
-
(40,000)
-
(29,960)
(10,000)
(119,500)
-
(400)
(3,800)

(23,750)
246,590 		Office complex
Sh"000"
860,000
(160,000)
700,000

4,000
128,000
14,000
(17,000)
(22,000)
50,000
(18,000)
(29,960)
(5,000)
(180,000)
(2,000)
(500)
(2,400)

(33,000)
371,550


Tax payable
Total taxable profit
Hospital
Office
Total profit 		Sh. "000"
246,590
371,550
618,140


Tax thereon 30% x 618,140,000 = 185,442,000


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QUESTION 5a

Q Evaluate the significance of any four information contained in the consolidated report, (8 marks)
A

Solution


Significant information contained in the consolidated report submitted at the natural meeting by CS responsible for public investment and public debt.

➢ Monitor the ownership structure of state-owned enterprises versus government ownership, particularly if it provides essential services that should not remain in private hands.

➢ The report reminds stakeholders of the date and purpose of the company to ensure that it is operating within its mandate.

➢ Assists the Government in assessing the extent to which secured loans threaten the Government's overall debt portfolio.

➢ Assess the ability of the Crown corporation/public investment to repay loans secured by the Government.

➢ Monitor public investment as a viable Crown corporation in terms of wealth creation for its citizens by monitoring its financial performance.

➢ The amount of funding in the form of grants to assess its effectiveness, and whether citizens receive value for their money.

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QUESTION 5b

Q (b) Explain four ways through which the Public Debt Management office may enhance the functions of the commission on revenue allocation in your country. (4 marks)
A

Solution


Ways through which public debt office might may enhance function of commission of revenue allocation in your country.

• Develop a medium-term debt management strategy based on the Fiscal Policy Statement so that CRA can assess fiscal targets for the appropriate allocation of resources to all counties.

• The activation of the CRA determines the proportion of resources allocated to decentralized units from the government's borrowing plan for the approved annual budget.

• The Office of Public Debt Management's annual performance report will allow the CRA to monitor whether the county government is meeting debt and borrowing levels,

• Through statistical and analytical reports on debt and lending, CRA will be able to assess current economic conditions and the medium-term financial outlook for lending, and contribute to the preparation of the policy statement budgetary.

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QUESTION 5c

Q Discuss four fiscal responsibility principles that the National Treasury and Planning must enforce when managing the national government public finance in your country. (8 marks)
A

Solution


Responsibilities that the national treasury must enforce when managing the government public finance

➢ Ensure that over the medium a minimum of 30% of the national and county government budget is allocated to the development expenditure.

➢ Ensure that debt and public liabilities are maintained at a sustainable level as approved by Parliament for the National Government and the County Assembly for the County Government.

➢ Ensure that national government borrowings over the medium term are used only to finance development expenditures and not recurring expenditures.

➢ Ensure that national government expenditure on civil servant salaries and benefits does not exceed a certain percentage of national government revenue.

➢ Provide a reasonable degree of predictability regarding the level of the tax rate and tax bases are maintained in light of any future tax reform.

➢Ensure that fiscal risks are managed prudently.

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