ADVANCED PUBLIC FINANCE & TAXATION NOVEMBER 2020 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q Discuss five possible challenges Lto the harmonisation of tax systems and policies among the three countries above. (5 marks)

A

Solution

Common Challenges to the harmonization of tax systems among countries is an economic trading blocks

1. Mistrust between Member States

2. Political and economical instability in some member states

3. Fear of losing political and economic sovereignty

4. Member States' heavy external debt burden

5. Lack of technical experts

6. Corruption in some member states

7. Globalization issues

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QUESTION 1b(i)

Q Explain the role and composition of a petitions committee. (4 marks)

A

Solution

This petition committee is established under PPE Act, 2013. Composition and membership
The membership consist of:

The principle secretary who is the chairperson

Four other members appointed by the cabinet secretary

Three members from a quorum

Roles

Section 67 of the Act establishes a Petitions Committee to consider all petitions and complaints submitted by private parties during the tendering process and to enter into project agreements.

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QUESTION 1b(ii)

Q Describe the moneys that are required to be paid into the public private partnership project facilitation fund. (3 marks)

A

Solution

PPE facilitation funds shall be created and the source of fund include:

a) Grant and duration

b) Levy's or tarrifs as may be imposed on a project

c) success fee paid per project

d) Amounts paid by the ministry of finance

e) Appropriation in Aid (AIA)

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QUESTION 1c

Q (c) Summarise five functions ofthe Directorate of Public Debt Management. (5 marks)

A

Solution

Functions of directorate of Public Debt Management

1.Implement public debt management policies to reduce its long-term financing costs and take risks into account

2. Maintain a reliable debt database for all loans taken by the national, county government.

3. Prepare and update the annual medium-term debt management strategy, including debt sustainability analysis

4.Prepare and implement national government borrowing programs, including repayment of outstanding debt

5.Representation of the Treasury for the issuance of Treasury bonds

6. Monitor and evaluates all borrowings and debt related transactions representation of the treasury for the issuance of Treasury bonds to ensure that they are within the guidelines and risk parameter of the debt management strategy.

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QUESTION 1d

Q Discuss three negative impacts of taxation in a country. (3 marks)

A

Solution

Negative impacts of taxation in a country

1. Taxes affect the ability to work, save and invest. In effect, taxes reduce the cash held by society, which reduces saving and investment..

2. Taxation reduces taxpayers' disposable income. This will reduce their spending on necessities they need to be more efficient. As efficiency decreases, work capacity decreases.

3. Impact on resource allocation – Taxes can affect the amount or size of production in an economy by diverting resources in desired directions.

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QUESTION 2a

Q A statement ottaxable profit or loss for the year ended December 2019. (12 marks)

A

Solution

Incomes
Sale of oil to foreign subsidiary
Oil disposed to local refineries
Freight charges received
Sale of national gas
Allowable expenditure
Staff accommodation expenses (60,000-18,000)
Wages and salaries for employees
Royalties incurred in respect to crude oil exported
Interest on loan
Specific bad debt
Exploration and drilling cost
Contribution to approved provided fund
General expenses
Capital Allowances
Drilling machines 20% x 900,000
furniture 12.5% × 240,000
Saloon car 25% × 2,000,000
Lorries 37.5% × (2,400+1,800)
Exploration and casing of oil wells (20% × 24,500)
Taxable profit

Sh.
25,000,000
125,000
190,000
160,000

(42,000)
(15,000)
(42,000)
(31,250)
(8,500)
(24,500,000)
(65,000)
(65,000)

(180,000)
(30,000)
(500,000)
(1,575,000)
(4,900,000)
(6,478,750)

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QUESTION 2b

Q Evaluate four factors inhibiting efficient administration of value added tax in your country (8 marks)

A

Solution

Factors inhibiting efficient administration of value added tax
1. Tax payer identification

In Kenya, the VAT register is almost insignificant. The number of VAT registrations greatly exceeds the number of taxpayers actually filing VAT returns. 2. Corruption in tax administration

Corruption in tax administration involves tax officials, taxpayers, importers and customs clearance agents. Corruption finds other ways, like charging taxpayers for services that should be free, or helping taxpayers with complicated procedures, or charging taxpayers for tax exemptions.

3. Evasion and Avoidance

Tax evasion and avoidance is a problem facing the tax administration. Tax evoidance is the use of legal means to use the tax system to reduce the tax burden while evasion is the illegal way to reduce tax liability.

4. Cash transaction

Complications of tax administration can be seen when businesses conduct cash transactions. The parties involved in such arrangements have loopholes that are not recognized by the tax authorities, thus eroding the tax collected.

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QUESTION 3a

Q (i) Using the above information, prepare a statement that will form the basis ofcontesting the estimated assessment for the year of income 2018* (14 marks)
(ii) Advise the partners on the appeal position. (2 marks)

A

Solution

MK Enterprise Computation of taxable profit or loss For the year ended 31 Dec 2018
Sales W1 Expenses Transport expenses Telephone and postage Office meal Repair and maintenance Rent Advertising Office expenses (1,460-270-360-32-28) Capital Allowances Wear and tear: - Class I - Class II - Class III - Class IV Loss	Sh 1,881,400 (6,000) (5,600) (5,000) (4,800) (325,000) (240,000) (770,000) (675,000) (24,000) (622,500) (46,250) (842,750)

Distribution schedule
Salaries Loss share Loss	M 270,000 (589,100) (319,100)	K 360,000 (833,650) (523,650)	Total 630,000 (1,472,750) (842,750)

The partners should appeal the estimated assessment of Sh 78,000 since they made a loss therefore no tax payable during the period.

Working
W1

Total sales
Sales for the year Cash sales (note 2)	1,860,000 21,400 1,881,400

W2

Wear & Tear
Saloon car Computer Furniture and fittings Fax machine Switch board Book shelf Office kitchen utensil Television set Carpet Safe for cash office Lorry Motorbike Total Allowance	I 1,800,000 1,800,000 675,000	II 80,000 80,000 24,000	III 240,000 90,000 2,490,000 622,500	IV 96,000 48,000 64,000 18,000 9,000 54,000 36,000 45,000 370,000 46,250

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QUESTION 3b

Q (b) Citing four reasons, argue the case forcontinued provision oftax incentives by a country that is experiencing budget deficits. (4 marks)

A

Solution

1. TThe most important role for corporate tax incentives is to encourage businesses and individuals to engage in socially responsible behavior for the benefit of the community

2. If properly implemented, tax incentives can attract investment to one country or county.

3. Tax incentives encourage high capital transfers for investment, thereby promoting employment growth.

4. Tax incentives encourage investment in the hinterland, open up the economies of these regions and raise living standards.

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QUESTION 4a

Q a) Describe four tax policy challenges that the government is facing in the taxation of digital economy in your country. (8 marks)

A

Solution

Tax policy challenge facing government in taxation of digital economy

➢The digital economy makes it difficult for government to effectively enforce tax rules that target businesses that do not have a physical presence in the country.
➢Taking steps to tax the digital economy could help reduce the competitive advantage of companies operating in the digital economy, as these big tech companies allegedly face a lower tax burden than their traditional competitors.
➢Taxing the digital economy would also prevent an increase in taxation on less strained factors such as labor income
➢The growth of the digital economy and the digitization of the traditional economy require the acceptance of new realities and tax regimes that do not follow the development of new business models

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QUESTION 4b

Q (i) Prepare a capital statement showing taxable income for the years 2016 to 2019.(10 marks)
(ii) Comment on the tax position of Anita Warazo for each of the years of income, (2 marks)

A

Solution

Anita warozo Capital statement for the year 2016 to 2019
Total Assets Total liabilities Net Worth Growth in net worth Add: drawings School fees Insurance Fundraising contribution Less inheritance	2015 Sh"000" 6,065 (830) 5235	2016 Sh"000" 5,880 (1,558) 4,292 (943) 38 138 (400) (1,167)	2017 Sh"000" 6.060 (6,160) (100) (4,392) 138 (400) (4,654)	2018 Sh"000" 6558 (4,960) 1,598 1,698 42 (400) 1,340	2019 Sh"000" 6736 (5,660) 1,078 (520) 60 (400) (860)

ii) Anita Warozo should only pay tax in the year 2018 only. for the other period, she has a reported loss therefore not taxable.

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QUESTION 5a(i)

Q Explain 'the terms "related party transactions" and "transfer pricing (4 marks)

A

Solution

Related party transaction - Refers to the transfer of resources between related parties.

It is an arrangement concluded between two parties by a pre-existing business relationship.

Transfer Pricing - This is the price at which related parties negotiate with each other.

Transfer pricing is essential to achieve a fair and equitable price when a transaction is between two common entities.

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QUESTION 5a(ii)

Q Evaluate two benefits that may accrue to an entity that applies transfer pricing in transactions between related parties. (4 marks)

A

Solution

Benefit of adopting transfer policing
1. Transfer pricing allows companies to reduce their tax burden. This allows business entities to send goods to high tariff countries and pay the lowest transfer price, resulting in a lower tax base associated with the transaction.

2. Using the transfer pricing method, companies reduce income taxes in countries with relatively high taxes by overvaluing goods that are transferred to countries that enjoy lower tax rates. In this way, the business entity manages to achieve a higher profit margin.

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QUESTION 5b

Q Suggest a scheme of tax planning thatÑ«ould minimisé the tax liability of the family of Mr and MrsKimeli for the year Of income and subsequent years. (12 marks)

A

Solution

Tax planning schemes
1. Acquiring residential house through mortagage. The 1^1st 150,000 per annum or 12,500 per month of the interest is an allowable deduction.

2. Registered retirement benefit plan. Employee contributions to a registered pension fund or provident fund may be deducted from employment income.

3. Consider purchasing life or education insurance to take advantage of the insurance deduction, which will reduce taxable employment income.

4. To enroll in a housing savings scheme, contributions of up to Kshs 4,000 per month or Kshs 48,000 per year will be allowable deduction from employment income.

5. Filling taxes and returns on time to avoid penalties and interest.

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CPA
Advanced Leval
Advanced Tax November 2020
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Advanced Management accounting

Advanced Taxation

Comments on:

CPA
Advanced Leval
Advanced Tax November 2020
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