Advanced Taxation April 2024 Past Paper & PDF Solutions

1a

Limited companies Taxation of cross border activities Tax systems and policies

SpeedTech Corporation is a multinational technology company operating in Kenya. The company provides digital services to consumers in the country.

Required:

Analyse the impact of digital service tax on SpeedTech Corporation’s operations in Kenya.

1b

Taxation of business income and specialized business activities

The following information was extracted from the books of Henry and Titus who operate a partnership business and share profits and losses in the ratio of 3:2 respectively:

1.	An extract from the statement of financial position as at 31 December 2022 revealed the following information about the partnership:

1.	Asset	Cost/net book value	Sh.“000”
	Freehold land	Cost	64,000
	Office equipment	Net book value	4,160
	Furniture and fittings	Net book value	4,800
	Delivery vans	Net book value	8,000
	The net book values as at 31 December 2022 were the same as the tax written down values.

2.	Current assets and liabilities as at 31 December 2022 were reported as follows:

2.		Sh.“000”
	Stock	8,800
	Trade receivables	640
	Bank overdraft	480
	Cash in hand	64

3.	On 1 January 2023, each partner contributed additional capital of Sh.5,000,000. Interest on capital was at the rate of 5% per annum.
4.	Sales proceeds that were banked in the year amounted to Sh.160,000,000. The accountant had paid the following expenses from sales proceeds before banking the balance:

4.		Sh.
	Office rent	32,000 per month
	Office expenses	8,000 per week
	Laptop for office use	40,000
	Salaries and wages - casual workers	3,600 per week
	Carriage outwards	5,200 per week
	Salary to partners: Henry	16,000 per month
	Salary to partners: Titus	24,000 per month

5.	From the bank, the partnership made the following payments:

5.		Sh.
	Purchase of computers	102,400
	Purchase of motor cycle for salesmen	160,000
	Staff salaries per month	80,000
	Purchase of goods for resale	124,800,000
	Drawings per month: Henry	80,000
	Drawings per month: Titus	64,000
	Drawings per month: Stellah	36,000
	Bank charges per month	2,400
	Telephone bills per month	6,400
	Electricity bill per month	8,000

6.	On 1 September 2023, Stellah was admitted as a partner on the following terms: She was to contribute capital amounting to Sh.16,000,0000 She was to receive a salary of Sh.480,000 per annum and commission of 1% on the total sales made after her admission. Interest on capital was to be charged at 10% per annum from 1 September 2023. Profit and loss sharing ratio was changed to 3:2:1 for Henry, Titus and Stellah respectively.
7.	Analysis of other records revealed the following: Stock as at 31 December 2023 amounted to Sh.6,400,000. Included in the stock at year end were goods which had cost Sh.880,000 but could now be sold for Sh.640,000. Trade payables and trade receivables as at 31 December 2023 were Sh.1,280,000 and Sh.1,120,000 respectively. Discount received from suppliers amounted to Sh.576,000 for the year. Sales, purchases and expenses accrued evenly throughout the year.
8.	Partners’ capital as at 1 January 2023 was contributed equally by Henry and Titus.
	Assume a 52 weeks year.
Required:
(i)	Prepare a statement showing the taxable profit or loss of the partnership before and after admission of Stellah for the year ended 31 December 2023.
(ii)	Allocation of the profit or loss computed in (b) (i) above to the partners.

2a

Tax dispute resolution mechanism Professional practice in taxation Tax systems and policies

Explain THREE benefits emanating from the recent changes in Tax Dispute Resolution Mechanisms on taxpayer adherence to regulations and the efficiency of administrative processes in Kenya.

2b

Taxation of cross border activities Tax planning Professional practice in taxation Tax systems and policies

Describe FOUR strategies employed by multinational corporations in mitigating complex tax risks during corporate restructuring across multiple jurisdictions.

2c

Value added tax administration

Weddy Associates is a practicing law firm that was registered for VAT in the year 2022. The following transactions were reported by the law firm accountant for the month of October 2023.

October 2:	The firm provided consultation for legal information and advice to Weka Ltd. at a fee of Sh.1,200,000.
October 5:	Offered training services to practicing accountants on alternative dispute resolution during the annual conference and invoiced the Institute of Accountancy Sh.800,000. The payment had not been received at the end of the month.
October 9:	A client by the name Bima Ltd. was declared bankrupt. Weddy Associates had offered arbitration services to the client in April 2023 at a fee of Sh.480,000 but Bima Ltd. had only managed to settle Sh.200,000 by the time it was declared bankrupt.
October 11:	Weddy Associates entered into a contract with Apex Bank Ltd. to review the bank lease agreement following a dispute with the bank’s landlord on rent payment. The firm received an advance payment of Sh.400,000 from the bank and the balance of Sh.620,000 was to be received upon submission of the final legal report in November 2023.
October 16:	Royal Ltd. engaged the firm to draft its Memorandum and Articles of Association and register the company with the registrar of companies at a fee of Sh.50,000.
October 21:	Weddy Associates represented RR International Ltd., a diaspora client in arbitration case with a supplier and charged a fee of Sh.2,100,000. The client had only paid 30% of the total fee by end month.
October 25:	Weddy Associates engaged a professional legal firm in the United Kingdom (UK) to train the law firm employees on client mediation and arbitration process at a total fee of Sh.1,800,000 without VAT. The training was conducted just before the end month.
October 30:	The firm represented the following clients in the court in the course of the month and charged the fee as follows: Sh. Shakir family on property dispute 620,000 Bema Ltd. on breach of trade agreement 1,400,000 Safi hospital on patient negligence 360,000

The following expenses were incurred by Weddy Associates in the course of the month:

Electricity paid during the month was Sh.120,000 out of which Sh.20,000 was paid as deposit for the electricity meter to the power and lighting company.
Rent for the office space Sh.480,000.
Mandatory annual continuing legal education subscriptions for firm lawyers Sh.360,000.
Training fee for the advocates Sh.420,000.
Fuel for partners vehicles Sh.90,000.
Professional indemnity cover Sh.124,000.
Purchase of law practice management and accounting software Sh.1,620,000.
Office computers purchase Sh.2,400,000.
Stationery Sh.300,000.

Unless otherwise stated, all transactions were inclusive of value added tax (VAT) at the rate of 16% where applicable.

Required:

Compute the value added tax (VAT) payable by or refundable to Weddy Associates for the month of October 2023.

3a

Tax systems and policies Tax planning

Explain THREE tax reforms aimed at promoting investment and economic growth while ensuring fairness and equity in taxation in your country.

3b

Limited companies

Masterway Insurance Company Ltd. operates both general insurance policy in respect of motor vehicles and life assurance policy. The following details were obtained from the company records for the year ended 31 December 2023:

		Motor vehicle Sh.“000”	Life assurance Sh.“000”
Gross premium		757,000	189,000
Claims paid		124,900	128,000
Management expenses		112,640	36,000
Specific provision for bad debts		728	2,500
Reserve for unexpired risk:	1 January 2023	968	-
	31 December 2023	716	-
Claims owing:	1 January 2023	119,700	-
	31 December 2023	115,120	1,000
General expenses		1,280	-
Interest on policy holders outstanding premiums		240	-
Office utilities		300	120
Premiums returned		696	-
Commission on reinsurance ceded		684	-
Commission on reinsurance accepted		600	-
Agency expenses		344	-
Premiums paid to reinsurance company		4,720	-

Additional information:

1.	Life assurance fund balance was valued by an actuary at Sh.270,000,000 as at 31 December 2023. 5% of this fund balance was recommended to be transferred for the benefit of shareholders. As at 1 January 2023, the life fund had been valued at Sh.240,000,000. 15% of the surplus was recommended to be transferred for the benefit of shareholders.
2.	Premiums outstanding for life insurance business were as follows: As at 1 January 2023 Sh.15,000,000 As at 31 December 2023 Sh.12,000,000
3.	Masterway Ltd. owns the building which houses its offices and has let extra space to other tenants. The company received net rental income of Sh.1,800,000 for the year ended 31 December 2023. Property management fees amounting to Sh.2,600,000 relating to the rented space for the year had not been deducted.
4.	The company had invested in fixed deposits and shares and in the year 2023, the following incomes were earned: Sh. Interest from fixed deposits with a money market fund: 459,000 net Gross dividend from a foreign company: 180,000 Dividend from Highrise Ltd. where Masterway Insurance Company Ltd. owns 80% share capital: 820,000 gross
Required:
(i).	Compute the total taxable income or loss for Masterway Insurance Company Ltd. for the year ended 31 December 2023.
(ii).	Tax payable (if any) from the income computed in (b) (i) above.

4a

Professional practice in taxation Tax planning

In a tax master class, one of the facilitators noted that “Before accepting a new client in a taxation assignment, tax practitioners should consider whether acceptance of that particular engagement would create any threat to compliance with the requisite fundamental principles”.

In relation to the above statement, propose FOUR factors that a tax practitioner should consider in evaluating new clients before acceptance of a new tax assignment.

4b

Taxation of cross border activities Professional practice in taxation Tax planning Tax systems and policies

John Pritt, a citizen of Rwanda has received two job offers in Kenya for which he has approached you to advise on which job offer to accept.

Job offer A:

John Pritt would be employed as a finance officer with African Airway Ltd., a regional airline with its head office in Kenya. The offer provided for the following:

Basic salary of Sh.130,000 per month to be increased semi-annually by 10%.
A monthly bonus of 5% of the basic salary to be paid on the ninth day of the following month.
Fuel allowance of Sh.10 per kilometer where he is estimated to be covering 10,000 kilometers in a year, three quarters of which will be on official duties.
He will be provided with free return air ticket worth Sh.16,000 for each travel on 30 June and 31 December each year to visit his family in Rwanda.
The company will provide him with a house whose market rental value is Sh.30,000 per month.
The employer will deduct Sh.5,000 per month as rent. The house will be fully furnished at a cost of Sh.480,000.

Job offer B.

John Pritt would be employed as an accountant by Watts Ltd. The offer provides for:

Basic salary of Sh.145,000 per month and an allowance of Sh.5,000 per month for attending finance committee meetings.
An annual allowance of Sh.150,000 for the purchase of office attire in line with the company’s dress code.
A provision for sending him to their Uganda office on a one month per year job rotation. He will be sent to Uganda in November every year and he will receive his monthly pay as usual. During that month he will attend the finance committee meeting as planned in Kenya, as the company will facilitate him with a return air ticket.
He will be provided with a saloon car costing Sh.2,800,000 of 3000 cc.
The company will cater for his night watchman’s monthly salary of Sh.18,000. His monthly water bills and electricity bills will also be paid by the company.

Required:

(i) Evaluate the two job offers and advise John Pritt on which job offer to accept based on net annual income using the tax rates for the year 2023 as provided in the tax table.

(ii) Advise John Pritt on FOUR conditions that one is required to meet in order to qualify for double taxation relief in Kenya or your country.

5a

Professional practice in taxation Tax systems and policies Tax investigations

Explain FOUR initiatives undertaken by the revenue authority in your country to entrench ethics and integrity in administration of tax.

5b

Tax investigations Professional practice in taxation Tax dispute resolution mechanism

The revenue authority is mandated to actively investigate potential violations of the tax laws and regulations and related financial frauds and schemes.

Required: With reference to the above statement, analyse the procedure followed by the revenue authority tax officers in conducting a particular tax investigation.

5c

Limited companies

The following information was presented to you by the management of SmartTech Ltd. for the year ended 31 December 2023. The company deals in the sale of a variety of laptop models and sells them entirely to college and university students on hire purchase terms:

1.	SmartTech Ltd. buys the laptops at Sh.40,000 each
2.	The hire purchase price per unit comprises of a deposit of Sh.12,000 plus eight quarterly installments of Sh.6,000. The cash price per unit is Sh.50,000.
3.	For the year ended 31 December 2023, a total of 2,460 laptops were sold and the company had received total cash of Sh.86,600,000 from the sales.
4.	During the last quarter of the year 100 laptops were repossessed and the students had already paid Sh.2,400,000 on the repossessed laptops. This amount was included in the total cash collections for the year.
5.	Expenses incurred in the course of the year comprised of: Rent expense of Sh.420,000. Prepaid rent as at 1 January 2023 and 31 December 2023 amounted to Sh.180,000 and Sh.60,000 respectively. Legal expenses of Sh.1,200,000 out of which Sh.320,000 was in respect of defense against copyright license infringement. Marketing cost of Sh.525,000 out of which 40% was in respect of donation to Leo University research and development fund and Sh.120,000 for erection of a signpost. Salaries and management expenses of Sh.890,000. This included renewal of employment contracts of Sh.100,000 and provision for salary increment of Sh.200,000. Installation of CCTV cameras at Sh.200,000.
6.	SmartTech Ltd. had agreed with the revenue authority that profits for tax purposes should be computed on the basis of proportionate cash collected from the customers for the year sales.
7.	Other incomes of SmartTech Ltd. included: Income from lease of 20 laptops to Leo University at a lease charge of Sh.3,000 per month for the whole year. Sale of five defective laptops at Sh.15,000 each. Dividend from a unit trust of Sh.120,000 gross.

Required:

Compute the total taxable income or loss of SmartTech Ltd. for the year ended 31 December 2023.

April 2024

Download Complete Period

Questions

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?

Want to join the discussion?