KASNEB Advanced Taxation - Question 2a

Analyse FOUR challenges of taxing digital economy by the Revenue Authority of your country. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Taxation - Question 3b

The following balances were extracted from the books of Sharp Bank Ltd. on 31 December 2023: Sh.“000”Government securities1,172,000Loans and advances to ... [Click to view full question and step-by-step solution]

KASNEB Advanced Taxation - Question 4b

The following information relates to Pembe Ltd. for the year ended 31 December 2023: 1.Trading income before tax was reported to be Sh.38,400,000 which i... [Click to view full question and step-by-step solution]

KASNEB Advanced Taxation - Question 4c

The following balances were extracted from the books of Bright Sacco Ltd as at 31 December 2023: Sh.Sh.Dividend from investments 1,407,400Rental income... [Click to view full question and step-by-step solution]

Advanced Taxation August 2024 Past Paper & PDF Solutions

1a

Tax dispute resolution mechanism

Britany PLC is a medium-sized manufacturing company operating in Kenya, engaged in the production of cosmetic products. In year 2023, the Revenue Authority conducted an audit and issued a tax assessment, alleging that the company had underreported its income and owed an additional Sh.18 million in taxes, penalties and interest.

The company disagreed with the Revenue Authority assessment, citing discrepancies in the audit process and claiming that certain allowable deductions were not considered. However, instead of taking the matter to the Tax Appeals Tribunal (TAT), the company opted to use the Alternative Dispute Resolution (ADR) framework to resolve the dispute.

Required:

(i) Explain to the management of Britany PLC on the steps that will be followed in the Alternative Dispute Resolution (ADR) process.

(ii) Summarise THREE potential benefits to Britany PLC from using ADR instead of proceeding directly to the TAT or the courts.

1b

Tax planning

Explain THREE tax planning strategies that corporations could use to maximise tax benefits when they dispose of business operations in Kenya.

1c

Tax investigations

John Mwema owns a private logistics company which he has been operating for the last six years. Recently, the Revenue Authority conducted an in-depth examination of his tax returns due to inconsistencies in his reported income, expenses, assets and liabilities over the past three years.

The following information was reported by John Mwema and later amended by the Revenue Authority:

Reported figures by the logistic company:

Year	Gross income	Business expenses	Personal expenses	Living expenses	Assets	Liabilities
-	Sh.	Sh.	Sh.	Sh.	Sh.	Sh.
2021	4,000,000	3,200,000	500,000	300,000	10,000,000	2,000,000
2022	4,500,000	3,600,000	600,000	400,000	11,000,000	2,500,000
2023	5,000,000	4,000,000	700,000	500,000	12,000,000	3,000,000

Assessed figures by the Revenue Authority after in-depth audit findings:

Year	Gross income	Business expenses	Personal expenses	Living expenses	Assets	Liabilities
-	Sh.	Sh.	Sh.	Sh.	Sh.	Sh.
2021	4,500,000	2,900,000	600,000	400,000	11,000,000	1,800,000
2022	5,000,000	3,200,000	700,000	500,000	12,000,000	2,300,000
2023	5,500,000	3,500,000	800,000	600,000	14,000,000	2,800,000

The corporate tax rate is at 30%.

Required:

(i) Determine the additional taxable income for each of the years ending 31 December 2021 to 31 December 2023.

(ii) Compute the total back duty tax liability that John Mwema’s Logistics Company Ltd. owes Revenue Authority for the three years.

2a

Taxation of cross border activities

Analyse FOUR challenges of taxing digital economy by the Revenue Authority of your country.

2b

Pelly and Mark have been partners trading as Pama Enterprises from 1 January 2021 having contributed Sh.12,000,000 and Sh.15,000,000 as capital for Pelly and Mark respectively. They prepare their accounts to 31 December every year. Due to the need of expanding their business, they decided to admit Colley on 1 May 2023 and changed the business name to Pamac Enterprise. Colley brought in Sh.18,000,000 as his capital contribution. Prior to the admission of Colley, the profit and loss sharing ratio was 2:3 between Pelly and Mark respectively. However, with the admission of Colley they revised the profit and loss sharing ratio to 2:3:4 for Pelly, Mark and Colley respectively.

The following information was extracted from the business records for the year ended 31 December 2023:

1.	Assets and liabilities as at 31 December:

1.		2022 Sh.“000”	2023 Sh.“000”
	Payables	7,200	11,050
	Accrued salary and wages	1,600	2,300
	Accrued rent	1,825	2,100
	Prepaid electricity bills	293	245
	Furniture and fittings	600	450
	Balance at bank	7,910	9,566
	Equipment	670	530
	Inventory	1,248	897

2.	During the year ended 31 December 2023, the partners banked all cash collections after deducting the following monthly expenses:

2.		Sh.
	Repair and maintenance	20,000
	Stationery	23,700
	Sundry expenses	32,000
	Motor vehicle expenses	20,500
	Purchase of goods for resale	190,000

3.	Payments made through the bank during the year ended 31 December 2023, have been summarised as follows:

3.		Sh.“000”
	Rent	2,250
	Motor vehicle expenses	420
	Web hosting cost	25
	Directors allowance	450
	General expenses	10,779
	Electricity	1,800
	Purchase of goods	52,640
	Floatation cost	200
	Salaries and wages	8,300
	Purchase of saloon car	4,500

4.	The partnership business was converted into a limited company by the name Pamac Limited on 1 September 2023 and the partners became the directors of the company. Upon conversion, the company issued 8% debentures of Sh.15,000,000.
5.	On average, the business sold all goods at a gross profit margin of 30%.
6.	Specific provision for bad and doubtful debts as at 1 January 2023 was Sh.8,300,000 while as at 31 December 2023 was Sh.3,400,000.
7.	There was no disposal of fixed assets during the year.
8.	The partners were charging interest on capital at the rate of 10% per annum.
9.	The partners annual salary was Sh.1,000,000, Sh.2,500,000 and Sh.3,000,000 for Pelly, Mark and Colley respectively. The partners salary was not included in the salary and wages for the year.
10.	Sales, purchase and expenses accrued evenly throughout the year.
Required:
(i)	In a columnar format, determine the taxable income of the partnership and Pamac Limited for the year ended 31 December 2023.
(ii)	Compute taxable income of each partner for the year ended 31 December 2023.

3a

Superlite Investments Ltd. acquired land from Wema Estate at a cost of Sh.15,600,000 in the year 2019. Other incidental costs incurred in relation to acquisition of the land included the following:

	Sh.
Legal fees	464,320
Commissions	3,400,000
Stamp duty	312,040
Survey fees	100,000
Land board consent facilitation	20,000

Superlite Investments Ltd. later sold the land to Express Ltd. on 1 May 2023 at the transfer price of Sh.31,200,000. However, Superlite Investments Limited did not pay capital gains tax at the time of transfer of the land to Express Ltd. The revenue authority issued an assessment on 30 June 2024 that is, after a period of one year and two months had elapsed since the date of transfer.

Required:

(i) Compute the capital gains tax payable by Superlite Investments Ltd. assuming the company had paid on due date.

(ii) Calculate the penalty and interest charged and the total tax payable by Superlite Investments Ltd., if the company paid after one year and two months from the due date of transfer.

(iii) The management of Superlite Investments Ltd. are considering on whether to negotiate with the revenue authority, in effort of being exempted from payment of penalties and interest.

Required:

Advise the management of Superlite Investments Ltd. on two factors that could be considered by the revenue authority while negotiating for settlement of taxes, penalties and interest.

3b

Limited companies

The following balances were extracted from the books of Sharp Bank Ltd. on 31 December 2023:

	Sh.“000”
Government securities	1,172,000
Loans and advances to customers	2,973,200
Cash and balances with central bank	628,500
Property, plant and equipment	504,000
Interest on loans and advances	435,400
Interest on government securities	238,200
Foreign exchange income	72,000
Fees and commission income	170,200
Deposits with other banks	115,000
Other fixed assets	32,000
Interest on placement and bank balances	36,000
Non-operating income	17,000
Customers deposits	4,240,000
Deposits and balances due to other banks	215,000
Depreciation expense	42,000
Directors emolument	12,500
Bad and doubtful debts expenses	34,000
Interim dividends paid	25,000
Staff costs	295,000
Interest on customers deposits	115,000
Interest on borrowed funds	35,000
Ordinary share capital	250,000
Auditors fees	3,500
Contribution to staff provident fund	14,500
Loss on sale of fixed asset	21,800
General administration expenses	142,500
Reserves	529,000
Legal and professional fees	20,000

Additional information:

Taxable profit for the year 2023 had been estimated at Sh.100,000,000 on 1 January 2023 for corporate tax purposes.
Final dividend has been proposed at 10%.
Accrued interest expense on customers deposit as at 31 December 2023 was Sh.30,000,000.
Unrecorded interest income on loans advanced to customers was Sh.1,500,000 as at 31 December 2023.

Required:

(i) Compute the taxable income for Sharp Bank Ltd. for the year ended 31 December 2023.

(ii) Determine the tax payable if any by Sharp Bank Ltd. for the year ended 31 December 2023.

(iii) Indicate the due dates, amount of tax payable and any penalty applicable for instalment tax payable by Sharp Bank Ltd. for the year ended 31 December 2023

4a

Tax systems and policies

The Revenue Authority of your country is under pressure from the national government to enhance the tax collection and administration efficiency in a bid to raise sufficient revenue.

To this end the revenue authority is considering adopting the tax base expansion strategies.

Required:

Advise the commissioner in charge of the revenue authority on FIVE tax base expansion strategies that the revenue authority could adopt.

4b

Limited companies

The following information relates to Pembe Ltd. for the year ended 31 December 2023:

1.	Trading income before tax was reported to be Sh.38,400,000 which included net rental income from a commercial property of Sh.4,800,000. The rental income was after deducting the following expenses:

1.		Sh.
	Advertising before letting	400,000
	Mortgage repayment (Interest Sh.360,000)	1,200,000
	CCTV cameras and partitions cost	360,000

2.	The trading income was before adjusting for the following transactions:

2.		Sh.
	Foreign exchange gains unrealised	1,926,000
	Insurance compensation on inventory	192,000
	Bad debts recovered previously written off	144,000

2.

The company had a loan of Sh.24,000,000 with an interest rate of 12% per annum. Accrued interest at year end was Sh.520,000 which was not factored in determining profit for the year.
Investment allowances deducted amounted to Sh.8,000,000. However, this was revised to Sh.6,000,000 following an audit and agreement with the revenue authority.

3.	Other incomes of the company included:
	Interest income from Mavuno Ltd.	Sh.480,000 (gross)
	Dividend from Biashara Bank Ltd.	Sh.142,500 (net)
	Dividend from Mazera Co-operative Society Ltd.	Sh.204,000 (net)

4.	Pembe Ltd. dividend payout ratio is 40% of trading income and 100% for any other income received during the year.
5.	Total dividends paid for the year ended 31 December 2023 amounted to Sh.7,600,000.
6.	Corporate tax rate is 30%.

Required:

Compute the shortfall distribution tax for the year ended 31 December 2023.

4c

Limited companies

The following balances were extracted from the books of Bright Sacco Ltd as at 31 December 2023:

	Sh.	Sh.
Dividend from investments		1,407,400
Rental income		2,495,000
Sundry provisions		892,500
Interest income SBN Bank		2,604,500
Interest income CMC Wealth Fund		804,000
Revaluation reserve		2,075,000
Statutory reserve fund		1,374,000
Entrance fees		430,000
Members deposits		70,000
Share capital		6,465,000
Sundry creditors		340,815
Bank overdraft		615,000
Interest received from members loans		3,200,000
Travelling expenses: Staff	88,030
Travelling expenses: Committee members	210,015
Bank charges	40,000
Bank interest	280,500
Salaries and wages	228,600
Committees education	500,000
Interest on mortgage for rented property	482,000
Printing and stationery	316,500
Annual general meeting expenses	1,070,000
Entertainment	105,000
Audit fees	613,650
Legal fees	440,000
Cash in hand	1,054,000
KUSCCO deposits	2,438,000
SBN Bank savings	3,240,000
Loans to members	69,333,420
Receivables (members)	2,268,500
Investment in CMC Wealth Fund	5,540,000
Receivables (non-members)	2,250,000
Other investments	2,115,000
Furniture and office equipment	90,000
	90,703,215	90,703,215

Additional information:

1.	The management committee has proposed the payment of honoraria amounting to Sh.1,120,000.
2.	Outstanding rental income as at 31 December 2023 amounted to Sh.86,000 and as at 1 January 2023 Sh.124,000.

3.	Dividend from investment companies:	Sh.
	Dividend received from Kenya Union of Saving and Credit Co-operatives (KUSCCO).	1,200,000
	Dividend received from Weka Ltd.	86,050
	Dividend received from Apex Ltd. – Uganda.	121,350

4.	Staff salaries amounting to Sh.315,000 had not been paid as at 31 December 2023.
5.	Members are to be paid dividend at the rate of 10% per share.
6.	Accrued interest on members loans as at 31 December 2023 amounted to Sh.480,000. Interest and dividends were stated at the gross amount.

Required:

Compute the taxable income and tax payable if any by Bright Sacco ltd. for the year ended 31 December 2023.

5a

Taxation of business income and specialized business activities Tax systems and policies

Evaluate FOUR ethical issues that policy makers are required to consider when designing tax systems.

5b

Taxation of cross border activities Tax systems and policies

In a tax seminar one of the facilitators noted that “most governments in developing countries are faced with challenges of regulating and combating the use of tax haven”.

With reference to the above statement, analyse FIVE challenges faced by governments in regulating and combating the use of tax havens.

5c

Value added tax administration

(i) Explain the term “value added tax (VAT) reverse charge”.

(ii) The following information relates to Laser Limited, a company engaged in supply of taxable goods for the month of May 2024. The company was registered for VAT on 1 May 2024.

1.	Inventory in trade at 1 May 2024 was valued at Sh.813,000.
2.	The company purchased goods on credit and cash worth Sh.4,750,000 and Sh.2,980,000 respectively. Goods purchased on cash worth Sh.180,000 did not have supporting fiscal receipts.
3.	The company sold goods worth Sh.8,768,000 during the month. These goods included exempt sales worth Sh.3,670,000 and exports to South Africa worth Sh.1,500,000.
4.	The company received credit notes and debit notes worth Sh.600,000 and Sh.540,000 respectively.
5.	During the month, the company purchased a motor vehicle on hire purchase at Sh.4,500,000 to be used in the business.The cash price was Sh.3,800,000.
6.	The company imported goods valued at Sh.2,400,000 (Cost, Insurance and Freight). The company incurred clearing and transport cost of Sh.450,000 and Sh.150,000 respectively. This import was not included in the purchases above. The import duty rate during the year was 25%.
7.	The company incurred the following expenses during the month:

7.		Sh.
	Legal expenses	350,000
	Salary and wages	1,334,000
	Office rent	580,000
	Water from county government	89,000
	Electricity	54,000

8.	The company could not identify goods sold as exempt when they were purchased and therefore restricted deductible input VAT.
9.	Transactions are inclusive of VAT at the rate of 16% where applicable.

Required:

Determine value added tax (VAT) payable by or refundable to Laser Limited for the month of May 2024.

August 2024

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