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CPA
Intermediate Leval
Public Finance & Taxation November 2016
Suggested Solutions

Public Finance & Taxation
Revision Kit

QUESTION 1(a)

Q Explain the following terms as used in public finance management:

(i) Vote.

(ii) County government linked corporation.
A

Solution


Public Finance Management Terms


(i) Vote:


In the context of public finance management, a "vote" refers to the allocation of funds or budgetary provisions for specific government expenditures. Governments, both at the national and sub-national levels, allocate their budget into different votes to categorize and control spending. Each vote corresponds to a specific government ministry, department, or program. The budget is typically presented in the form of votes, with each vote representing a distinct area of government responsibility.

(ii) County Government-Linked Corporation:


The term "county government-linked corporation" typically refers to entities established or owned by a county government. In a decentralized system of public administration, counties may create or own corporations to handle specific functions or services.



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QUESTION 1(b)

Q Discuss three responsibilities of the Senate Budget Committee with regard to public finance.
A

Solution


Senate Budget Committee Responsibilities


The Senate Budget Committee plays a crucial role in the oversight and management of public finance. Its responsibilities include:

  1. Budget Formulation:

    The committee is responsible for participating in the formulation of the federal budget. It reviews budget proposals, assesses fiscal priorities, and makes recommendations to ensure the government's financial plans align with national needs and priorities.

  2. Budget Oversight:

    Oversight is a key function of the committee. It monitors the execution of the budget, assesses whether spending is in line with legislative intent, and ensures that public funds are used efficiently and effectively.

  3. Fiscal Policy Review:

    The committee evaluates and reviews fiscal policies to determine their impact on the economy. This includes examining tax policies, government expenditures, and long-term fiscal sustainability to promote economic growth and stability.

  4. Legislative Recommendations:

    Based on its assessments, the committee may make legislative recommendations to address budgetary issues. This could involve proposing changes to tax laws, expenditure priorities, or other fiscal measures to achieve the government's financial goals.

  5. Debt Ceiling and Appropriations:

    The committee plays a role in setting the debt ceiling and approving appropriations. It ensures that government borrowing is within acceptable limits and that appropriations are in line with the overall budget framework.



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QUESTION 1(c)

Q The purpose of the Intergovernmental Budget and Economic Council is to provide a forum for consultation and cooperation between the national and county governments on various issues.

With reference to the above statement, summarise five issues for consultation between the national and county governments as envisaged in the Public Finance Management Act.
A

Solution


Issues for Consultation: Intergovernmental Budget and Economic Council


  1. Division of Revenue:

    Determining the equitable allocation of revenue between the national and county governments.

  2. Budgeting and Fiscal Policy:

    Coordinating fiscal policy to ensure consistency and sustainability in both national and county budgets.

  3. Debt Management:

    Collaborating on debt management strategies and monitoring borrowing by both levels of government to maintain fiscal discipline.

  4. Economic Planning and Development:

    Aligning national and county economic plans and development priorities to promote coherence in overall economic strategy.

  5. Revenue Collection and Sharing:

    Establishing mechanisms for revenue collection and sharing to ensure fairness and efficiency in the distribution of resources.

  6. Implementation of Devolved Functions:

    Coordinating the implementation of functions devolved to county governments to enhance efficiency and effectiveness.

  7. Conditional Grants:

    Discussing and determining the terms and conditions for conditional grants to county governments, including the purpose and performance expectations.

  8. Intergovernmental Transfers:

    Facilitating the transfer of funds and resources between the national and county governments to support devolved functions.

  9. Dispute Resolution:

    Resolving disputes and conflicts that may arise between the national and county governments regarding financial matters.

  10. Monitoring and Evaluation:

    Collaborating on monitoring and evaluating the performance of both levels of government in financial and economic management.

    11.

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QUESTION 2(a)

Q The National Treasury is expected to prepare and submit financial statements each year to the Auditor General in respect of the Contingencies Fund.

With reference to the above statement, highlight four contents of the financial statements prepared for the Contingencies Fund.
A

Solution


Contingencies Fund Financial Statements


  1. Statement of Financial Position:

    This provides a snapshot of the financial position of the Contingencies Fund at a specific point in time. It includes assets, liabilities, and the fund balance.

  2. Statement of Revenue and Expenditure:

    This statement outlines the revenue received by the Contingencies Fund and the expenditures made during the fiscal year. It shows the sources of funds and how they were utilized.

  3. Cash Flow Statement:

    This statement details the cash inflows and outflows related to the Contingencies Fund. It provides insights into the fund's liquidity and its ability to meet short-term obligations.

  4. Notes to the Financial Statements:

    These are explanatory notes that provide additional information and context to the items presented in the financial statements. They may include details about specific transactions, accounting policies, and other relevant information.

  5. Statement of Changes in Fund Balance:

    This statement highlights the changes in the fund balance over the reporting period. It may include details about the opening balance, additions, deductions, and the closing balance.

    6.

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QUESTION 2(b)

Q Propose three committees that should be established by a county procuring entity to ensure that procurement and asset disposal decisions are made in a systematic and structured manner.
A

Solution


County Procuring Entity Committees


  1. Procurement Planning Committee:

    Responsibilities:

    • Assessing procurement needs and developing an annual procurement plan.
    • Coordinating with various departments to identify their procurement requirements.
    • Ensuring alignment with the overall strategic objectives of the county.

  2. Procurement Evaluation Committee:

    Responsibilities:

    • Evaluating and assessing supplier proposals and bids.
    • Ensuring fairness, transparency, and adherence to procurement regulations in the evaluation process.
    • Making recommendations for contract award based on evaluation results.

  3. Contract Management Committee:

    Responsibilities:

    • Monitoring and overseeing the implementation of awarded contracts.
    • Ensuring compliance with contract terms and conditions.
    • Addressing issues and disputes that may arise during contract execution.

  4. Asset Disposal Committee:

    Responsibilities:

    • Developing policies and procedures for the disposal of assets.
    • Overseeing the proper disposal of surplus or obsolete assets.
    • Ensuring transparency and accountability in asset disposal processes.

  5. Procurement Ethics and Compliance Committee:

    Responsibilities:

    • Ensuring adherence to ethical standards in procurement practices.
    • Reviewing and addressing any reported cases of unethical behavior in the procurement process.
    • Promoting awareness of procurement regulations and compliance requirements.

  6. Procurement Risk Management Committee:

    Responsibilities:

    • Identifying and assessing potential risks in the procurement process.
    • Developing risk mitigation strategies and contingency plans.
    • Ensuring that risk management is integrated into the overall procurement framework.


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QUESTION 2(c)

Q The VAT payable or refundable to Mark Malechi for the month of May 2016.
A

Solution


OUT PUT TAX
Cash sales 16 / 116 x 900,000
Credits sales (30 - 60) 16/116 x 920,000
"61-90 days 16 / 116 × 1,840,000
91-120 days 16 / 116 x 632,000
Donations 16 / 116 x 480,000
Bad debts recovered 16 / 116 x 90,000
Advance sales to customer 16 / 116 x 150,000
Export sales 0% x 1,300,000
Goods returned 16 / 116 × 68,000

 124,138
126,897
253,793
87,172
66,207
12,414
20,690
0
(9,379)
681,932
INPUT TAX
Purchases 16 / 116 x 1,500,000
Agency fees debt collection 16 / 116 × 160,000
Legal fees 16 / 116 × 300,000
Contractors fees 16 / 116 × 3,000,000
Pickup 16% x 1,035,000
Advertising 16 / 116 x 260,000
Telephone 16 / 116 × 180,000
Electricity 16 / 116 x 74,000
Bad debt relief (Over 3 years) 16 / 116 x 232,000
Bankruptcy 16 / 116 x 120,000

206,897
22,069
41,379
413,793
165,600
35,862
24,828
10,207
(32,000)
(16,552)
872,083


V.A.T refundable / Refundable = Out put tax input tax - Bankruptcy

681,932 - 872,083 = 190,151

Workings


W1
Pickup
Purchase Price
Custom Duty
Exercise Duty
Logistics 40% x 200,000
Insurance In Transit 25% x 180,000
Total Cost
700,000
70,000
140,000
80,000
45,000
1,035,000


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QUESTION 3(a)

Q Explain the following theories of tax shifting:

(i) Diffusion theory.

(ii) Demand and supply theory.

(iii) Concentration theory.
A

Solution


Theories of Tax Shifting


  1. Diffusion Theory:

    Diffusion theory suggests that the burden of a tax can be spread or diffused across various economic agents, such as producers, consumers, and factors of production. In this theory, it is believed that the impact of a tax is not borne entirely by one group but is shared among different stakeholders in the economy. The diffusion theory recognizes that taxes can affect prices, wages, and returns on capital, leading to adjustments across the entire economic system.


  2. Demand and Supply Theory:

    According to the demand and supply theory of tax shifting, the burden of a tax is determined by the relative elasticities of demand and supply in a market. If the demand is more elastic than supply, consumers may bear a greater share of the tax burden, and vice versa. The theory emphasizes how the responsiveness of market participants to price changes influences the distribution of the tax burden between buyers and sellers.


  3. Concentration Theory:

    Concentration theory posits that taxes tend to be concentrated on specific groups or factors of production within the economy. This theory suggests that certain individuals, industries, or factors of production may bear a disproportionate share of the tax burden. The concentration theory highlights the unequal distribution of tax burdens and the potential impact on income distribution and economic behavior.


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QUESTION 3(b)

Q (i) Taxable income for Peterson Menza for the year ended 31 December 2015.

(11) Tax payable (if any) on the income computed in (b) (i) above.

(iii) Comment on any information not used in your computations under (b) (i) and (b) (ii) above
A

Solution


(i) Taxable income for Peterson Menza for the year ended 31 December 2015.


Basic salary 150,000 × 12
Entertainment allowance 6,000 x 20
Employees contribution to unregistered pension schemes 10,000 × 12
Furniture - 1% x 200,000 x 12
Car benefits:
➫ CC ratings 1900 cc →
➫ 2% x 800,000 x 12 →
864,000
192,000
}higher of:

House benefit:
➫ 15% x 2,256,000 →
➫ Less: Norminal rent 3% x 1,800,000 →

➫ Fair market rental value 18,000 × 12 →
338,400
(54,000)
284,400
216,000
}higher of:

Less: Allowable deduction
Contribution by employee to a registered fund:
➫ Actual contribution 22,000 x 12 →
➫ Set limit →
➫ 30% x 2,540,400
264,000
240,000
762,120
}lower of;
Less: contribution to Hosp:
➫ Actual contribution 5,000 x 12 →
➫ Set limit →
60,000
48,000
}lower of;
Total taxable employment income
Other income:
Farming income:
Dividend from Busala co-operative society Ltd
Total taxable income		 1,800,000
120,000
120,000
24,000


192,000
2,256,000



284,400

2,540,400



(240,000)



(48,000)
2,252,400

240,000
67,200
2,559,600


(ii) Tax payable (if any) on the income computed in (b) (i) above.


First 121,968 @10% 114,912 @60%
Surplus (2,559,600 - 466,704) @ 30%
Gross tax payable
Less: Personal relief
P.A.Y.E 36,000 × 12
Insurance relief
➫ 15% x 440,000 →
➫ Set limit →
66,000
60,000
}lower of;
withholding tax on dividend 15% x 67,200
Net tax payable		 81,144.0
627,868.8
709,012.8
(13,944.0)
(432,000.0)


(60,000.0)
(10,080.0)
192,988.8


(iii) Comment on any information not used in your computations under (b) (i) and (b) (ii) above


  1. Medical expense reimbursements are considered non-taxable benefits when covered by an employee non-discriminatory medical scheme.
  2. Earnings from a fixed deposit account are classified as qualifying interest, subject to a final 15% withholding tax.
  3. Interest earned from housing development bonds is exempt from tax up to the initial Ksh 300,000; any surplus is subject to a final withholding tax of 10%.
  4. Dividends received from Bidii Co-operative Bank are qualifying and incur a final withholding tax of 5%.


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QUESTION 4(a)

Q With reference to Tax Procedure Act 2015, outline the penalties that arise from the following offences

(i) Failure to submit a tax return by the due date

(ii) Failure to keep, retain or maintain documents required for a reporting period without a reasonable cause

(iii) Tax avoidance or fraudulent claim for a refund
A

Solution


Penalties under Tax Procedure Act 2015


(i) Failure to submit a tax return by the due date:


A person who submits a tax return after the due date shall be liable to a penalty:

  • 25% of the tax due or Ksh. 10,000, whichever is higher, for returns related to employment income.
  • Ksh 5,000 for returns related to Turnover Tax.
  • In other cases, a penalty of 5% of the tax amount payable under the return or Ksh 25,000, whichever is higher.

(ii) Failure to keep, retain, or maintain documents required for a reporting period without a reasonable cause:


A person who, without reasonable cause, fails to keep, retain, or maintain required documents under a tax law for a reporting period shall be liable to a penalty equal to the higher of:

  • 10% of the amount of tax payable by the person under the tax law for the reporting period.
  • When no tax is payable by the person for the reporting period, the penalty shall be Ksh. 100,000.

(iii) Tax avoidance or fraudulently makes a claim for a refund:


If the Commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax avoidance penalty equal to double the amount of the tax that would have been avoided.


A person who fraudulently makes a claim for a refund of tax shall be liable to pay a penalty of an amount equal to two times the amount of the claim.



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QUESTION 4(b)

Q (i) Capital allowances due to Ziwani Ltd. for the year ended 31 December 2015.

(ii) A statement of adjusted taxable profit or loss for Ziwani Ltd. for the year ended 31 December 2015
A

Solution


(i) Capital allowances due to Ziwani Ltd. for the year ended 31 December 2015.


INVESTMENT ALLOWANCE

Asset
Conveyer belt
Water pump
Sugar processing machine
Heating plant
Factory building

 Qualifying cost
280,000
480,000
6,200,000
2,300,000
6,440,000
15,700,000		 IA @100%
280,000
480,000
6,200,000
2,300,000
6,440,000


INDUSTRIAL BUILDING ALLOWANCE

Asset
Show room
Retail shop
Godown
Staff quarters

 Qualifying cost
1,200,000
960,000
2,860,000
1,620,000

 Rate
25% = 300,000
25% = 240,000
10% = 71,500
10% = 40,500
652,000		 Residue
900,000
720,000
2,788,506
1,579,500


Godown = 10% x 2,860,000 x 3 / 12 = 71,500

Staff quarters = 10% x 1,620,000 x 3 / 12 = 40,500

WEAR AND TEAR ALLOWANCE

Class I
37.5%		 II
30%		 III
25%		 IV
12.5%
W.D.V. 01/01/2015
Additions
Computer
Furniture
Tractors
Saloon car
Pick up
Bill board
Disposal
Tractor
Net Asset
Wear and tear



890,000




(2,200,000)
6,700,000
(2,512,500)
4,187,500

820,000







820,000
(246,000)
574,000




4,800,000
8,600,000



13,400,000
(3,350,000)
10,050,000


250,000



250,000


500,000
(62,500)
437,500


(ii) A statement of adjusted taxable profit or loss for Ziwani Ltd. for the year ended 31 December 2015



Reported Net profit
Add:
Depreciation
Billboard for advertisement
Conveyor belt
V.A.T Supplies
Parking files
Stamp duty
Less:
Profits on disposal of tractor
Dividend from Ukulima co-operatives
Capital allowance: IA
IBA
WTA
Adjusted loss		 Sh
4,180,000

120,000
250,000
280,000
1,800,000
120,000
480,000

(560,000)
(1,200,000)
(15,700,000)
(652,000)
(6,271,000)
(17,153,000)


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QUESTION 5(a)

Q As a tax dispute resolution mechanism, a tax payer who is not satisfied with the commissioner's decision regarding his objection, has a right to appeal to the local committee.

In relation to the above statement. highlight four instances when a taxpayer can appeal to the local committee.
A

Solution


Taxpayer's Right to Appeal to the Local Committee


As a tax dispute resolution mechanism, a taxpayer who is not satisfied with the commissioner's decision regarding his objection has a right to appeal to the local committee.

Instances When a Taxpayer Can Appeal to the Local Committee:


  • Disputed Tax Liability: If the taxpayer disputes the assessed tax liability determined by the commissioner and is not satisfied with the decision on their objection.

  • Penalties and Interest: In cases where the taxpayer disagrees with the imposition of penalties or interest by the commissioner and seeks a review of such charges.

  • Other Tax-related Decisions: Any other tax-related decisions made by the commissioner where the taxpayer believes there has been an error or injustice, and the objection resolution was not satisfactory.

  • Disallowed Deductions or Credits: If the commissioner disallows certain deductions or credits claimed by the taxpayer, and the taxpayer disagrees with this decision.

  • Transfer Pricing Disputes: In cases where the taxpayer is involved in cross-border transactions, disputes related to transfer pricing adjustments can be appealed to the local committee.

  • Employment Tax Issues: Disputes related to employment taxes, such as Pay As You Earn (PAYE), where the taxpayer disagrees with the commissioner's assessment.



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QUESTION 5(b)

Q Outline four recent measures introduced by the government of your country to prevent dumping of imported goods into your country.
A

Solution


Measures to Prevent Dumping of Imported Goods


Governments implement various measures to prevent the dumping of imported goods. Commonly used measures include:

  • Anti-Dumping Duties: Imposing additional duties on specific imported goods that are determined to be sold at unfairly low prices.
  • Anti-Subsidy Measures: Addressing instances where foreign governments provide subsidies to their industries, affecting fair competition.
  • Investigations and Reviews: Conducting thorough investigations and periodic reviews to assess the pricing practices of foreign exporters.
  • Application of Tariffs: Adjusting tariff rates on certain imported goods to ensure fair competition and protect domestic industries.
  • Implementation of Safeguards: Introducing safeguards, such as quotas or restrictions, to prevent a surge in imports that may harm domestic industries.
  • Imposition of Quotas: Setting limits on the quantity of goods that exporters deemed to be dumping can export to the country.
  • Charging of High Import Duties: Implementing elevated import duties to make it financially prohibitive for individuals engaged in acts of dumping.
  • Preshipment Inspection: Conducting preshipment inspections with the issuance of clean reports to ensure the accuracy of goods being exported.
  • Port Entry Inspection: Inspecting imported goods at the entry points to ensure their correspondence with the declared documents of importation.
  • Import Declaration Form: Requiring the submission of an import declaration form to declare the goods being imported.


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QUESTION 5(c)

Q (i) The taxable income for Loise Lubandi for the year ended 31 December 2015.

(ii) Tax payable (if any) by Loise Lubandi.
A

Solution


(i) The taxable income for Loise Lubandi for the year ended 31 December 2015.

Sales
Less: cost of sales
Opening stock
Purchases
Less: Drawing
Less: Closing stock
Gross profit
Discount received
Commission received

Less: Allowable expenses
Salary wages: 1,660,400 - 184,000 + 150,000 - 72,000
Rates and insurances 320,800 + 50,000 - 72,000
Transport
Bank charges
General expenses
Loan interest
Discount allowed
Bad debts written off
Wear & tear Allowance
➫ Motor van 25% x (960,000 + 600,000)
➫ Furniture 12.5% x 120,000
Taxable loss

1,241,600
2,972,200
(100,000)
(1,480,600)

















 3,009,200




(2,633,200)
376,000
151,200
68,000
595,200

(1,554,400)
(298,800)
(56,400)
(3,000)
(145,400)
(120,000)
(50,600)
(72,000)

(390,000)
(15,000)
(2,110,400)


Debtors control A/C
Bad b/d
Credit sales



 781,000
1,389,200


2,170,200		 Discount
Bad debt w/off
Cash received
Bal c/d

 50,600
72,000
1,226,200
821,400
2,170,200


Creditors control A/C
Discount received
Cash payment
Bal c/d

 151,200
1,005,200
1,180,000
2,336,400		 Bal b/d
Credit purchases


 985,000
1,351,400

2,336,400


(ii) Tax payable (if any) by Loise Lubandi.


There is no tax payable since he reported a loss of 2,110,400

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