KASNEB Advanced Taxation - Question 2a

The following information relates to Msanii Sacco Ltd. for the year ended 31 December 2020: Income statement for the vear ended 31 December 2020Incom... [Click to view full question and step-by-step solution]

KASNEB Advanced Taxation - Question 4a

Describe the features that indicate the possible existence of a tax haven. ... [Click to view full question and step-by-step solution]

Advanced Taxation December 2021 Past Paper & PDF Solutions

1a

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

As economies continue to recover from the impact of the COVID-19 pandemic, tax collection in many countries continues to face challenges. This trend has resulted in some revenue authorities resorting to some drastic measures to boost tax revenue.

One recent measure taken is monitoring of social media accounts and postings to assess taxation compliance.

Required:

Justifying your response with practical reasons, argue the case for or against monitoring of social media accounts to assess taxable capacity and compliance. (Note: marks will be awarded for only one position taken).

1b

Taxation of cross border activities Tax systems and policies

A delegation comprising government officials and entrepreneurs from a neighbouring country has visited your country, which is a beneficiary of the African Growth and Opportunity Act (AGOA) to learn more on AGOA and its benefits.

Required:

Prepare a brief to be presented to the delegation covering the following:

(i) Background information on AGOA.

(ii) Conditions to be considered as an AGOA beneficiary country.

(iii) Trade benefits provided under AGOA.

1c

Tax dispute resolution mechanism

Alternative Dispute Resolution (ADR) is a method of handling tax disputes outside the Judicial process. All applications for ADR should go through a suitability test before the application is submitted for ADR.

Required:

(i) Summarise the disputes that may not be suitable for the ADR mechanism.

(ii) Describe the documents that must be submitted to support and facilitate the ADR discussions.

2a

Limited companies

The following information relates to Msanii Sacco Ltd. for the year ended 31 December 2020:

Income statement for the vear ended 31 December 2020
Income	Sh. "000"	Sh. "000"
Interest from members' loans		16,200
Interest from Treasury bills		3,200
Interest from government infrastructure bonds: (5 years)		1,800
Interest from ABA Bank		1,500
Rental income		3,200
Dividend from Mazao Sacco		1,000
Dividends from Sopa Co-operative Ltd.		600
Gross income		27,500
Expenditure:
Office expenses	5,600
General expenses	1,400
Credit loss (bad debts)	60
Repairs of rental property	1,300	(8,360)
Net profit		19,140

Additional information:

1.	Office expenses include:
		Sh. "000"
	Salaries to Sacco employees	1,200
	Salary to the caretaker of rental property	200
	Purchase of office computers	400

2.	General expenses include depreciation of Sh. 484,000 and non-performing loans to members of Sh. 620,000 which were written off.
3.	Corporate tax rate during the year was 25%.
Required:
(i).	Adjusted taxable profit or loss for the year ended 31 December 2020. Hint: Start with the reported profit.
(ii).	Таx liability for the year ended 31 December 2020.

2b

Limited companies

Triplecom Insurance Company Ltd. is a resident company carrying on both general and life assurance businesses. The following information relates to the insurance company's business for the year ended 31 December 2020:

	General insurance	Life assurance
	Sh. "000"	Sh. "000"
Profit on sale of investments	14,200	-
Premium received in the year	15,450	100,000
Commission ceded	8,000	-
Premium returned	374	-
Recovery from reinsurance company	1,200	-
Premiums paid to reinsurance company	7,680	-
Commission expenses	1,050	2,960
Management expenses	2,034	25.000
Travelling expenses	1,200	-
Marketing expenses	314	1,820
Fees paid to investment managers	900	-
Legal expenses relating to claims	740	120
General expenses	8,490	4,640
Bad and doubtful debts	468	1,280
Claims paid in the year	9,800	-
Bonus utilised in reduction of premiums	180	-

Additional information:

1.	Claims outstanding for general business were as follows: As at 1 January 2020 Sh.6,640,000. As at 31 December 2020 Sh.7,000,000.
2.	General expenses under general insurance include cost of computers Sh. 800,000 and cost of saloon car Sh.3,260,000.
3.	Reserves for unexpired risks for general insurance were as follows: As at 1 January 2020 Sh.3,240,000. As at 31 December 2020 Sh.6,200,000.
4.	The Life assurance fund balance was valued by an actuary at Sh. 310,000,000 as at 31 December 2020. 8% of this fund balance was recommended to be transferred for the benefit of shareholders. At the beginning of the year, the fund had been valued at Sh.250,000,000. 10% of the surplus was recommended to be transferred for the benefit of shareholders.
5.	Outstanding premiums in respect of life insurance business were as follows: As at 1 January 2020 Sh.12,000,000. As at 31 December 2020 Sh.9,200,000.
6.	Other income received by Triplecom Insurance Company Ltd. comprised: Interest from fixed deposit account Sh.780,000. Dividend received from qualifying company Sh.3,000,000 (net). The company owns the building which houses its offices. Part of the office space is rented out to other tenants. In the year to 31 December 2020, the company received Sh.2,800,000 net rental income from their estate agents. Property management fees amounting to Sh.3,200,000 for the year to 31 December 2020 had not been deducted.

Required:

The taxable income or loss for Triplecom Insurance Company Ltd. for the year ended 31 December 2020.

3a

Professional practice in taxation Tax systems and policies

You have been appointed as the first tax consultant of ABC International PLC, a newly incorporated company in your country.

Required:

Draft a letter to the Revenue Authority for income tax registration for ABC International PLC.

3b

Value added tax administration

Reward Investment Company Ltd., a company registered for value added tax (VAT) purposes, provided the following details in respect to the month of January 2021:

Purchased goods on credit for Sh.696,000 and for Sh.464,000 in cash respectively.
Invoices were issued for sales of Sh.371,200 to non-VAT registered customers. The invoices issued included exempt sales amounting to Sh.174,000 and the balance were at standard rate.
Purchased goods for Sh.672,800 from VAT registered businesses. However, goods valued at Sh.139,200 were returned to suppliers.
Received a debit note for erroneous invoicing of goods valued at Sh.73,080.
Issued credit notes for Sh.26,680 in respect of returns by credit customers. (c)
Settled electricity bills amounting to Sh.32,480.
Settled audit fees of Sh.27,840 by cash.
Received credit notes of Sh.62.640 for invoices received which had been overcast.
Exported goods to Dubai for Sh.690,000.
Imported goods from Zambia for Sh.250,000 when import duty was at 20%.
Total goods sold as exempt supplies during the month amounted to Sh.494,000. These supplies could not be traced from goods purchased at the standard rate.
Catering services to employees amounted to Sh.58,000 from a local restaurant.
A debtor for goods valued at Sh.45,240 was declared bankrupt and a bad debt relief granted.

All transactions are stated inclusive of VAT at the rate of 16% where applicable unless otherwise stated.

Required:

Prepare a statement showing the following with regard to the transactions above:

Input and output VAТ.
Deductible input tax.
VAT payable by or refundable to Reward Investment Company Ltd.
Comments on the VAT payable or refundable.

3c

Tax planning Professional practice in taxation

Describe the types ofrisk that require an organisation to develop a tax risk management framework.

4a

Taxation of cross border activities Tax systems and policies

Describe the features that indicate the possible existence of a tax haven.

4b

Taxation of business income and specialized business activities

Lipa and Mali are in partnership trading as Lima Enterprises where they share profits and losses in the ratio of 2:1 respectively.

On 1 April 2020, Sasa was admitted with one-third of the profit without altering the existing profit-sharing ratio of Lipa and Mali.

The following income statement for the year ended 31 December 2020 was provided by the partnership:

	Sh.	Sh.
Gross profit		2,960,000
Less:
Salaries and wages:
Staff	360,000
Partners	428,000
Interest on capital	150,000
Current Account:
Lipa	42,000
Mali	48,000
Insurance	24,500
Motor expenses	32,500
Electricity bills	58,000
Legal expenses	142,400
Audit and accountancy fees	47,500
Depreciation	128,400
Purchase of furniture	240,000
Provision for bad debts	18,400
Telephone and postage	14,200
General expenses	354,000	2,087,900
Net profit		872,100

Additional information:

1. Insurance represents Mr. Mali's life insurance policy for his family.

2. Interest on capital was prorated and shared according to the profit and loss sharing ratios.

3. Legal expenses included: expenses related to drawing of new partnership deed of Sh.28,000 on admission of Mr. Sasa, conveyance fees of Sh.14,900 and Sh.36,000 for negotiating a loan facility.

4. General expenses included cost of computers of Sh.90,000 and computer software of Sh.45,000.

5. The firm imported a motor car for use in the partnership business for Sh.800,000. This excluded import duty of 25% and value added tax at 16%.

Note: Assume that income and expenses accrued evenly during the year.

Required:

(i) Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2020.

(ii) Total taxable income for each partner.

5a

Professional practice in taxation

As a tax manager at the revenue authority in your country, prepare a brief on the following:

(i) Process of being appointed a tax agent.

(ii) Requirements for recognition as a tax expert by the revenue authority.

5b

Tax investigations

Linda Obari has been operating a retail business since year 2016. She has not been maintaining proper books of account over the years and is therefore under investigation by the revenue authority.

The following details were obtained from her business records:

	31 December 2016	31 December 2017	31 December 2018	31 December 2019	31 December 2020
	Sh.	Sh.	Sh.	Sh.	Sh.
Equipment	2,345,670	2,391,840	2,395,350	2,210,000	2,285,000
Investment in shares	300,000	150,000	270,000	320,000	325,000
Bank balance	3,000	4,500	6,000	7,000	7,500
Inventory	-	303,000	540,000	620,000	685,000
Debtors	-	180,000	450,000	720,000	830,000
Building	-	2,050,000	2,050,000	2,050,000	2,050,000
	2,648,670	5,079,340	5.711,350	5,927,000	6,182,500
Financed by:
Capital	2,648,670	2,844,340	3,254,350	3,239,000	3,263,500
Bank loan	-	1,425,000	1,566,000	1,716,000	1,866,000
Creditors	-	810,000	891,000	972,000	1,053,000
	2,648,670	5,079,340	5,711,350	5,927,000	6,182,500

Additional information:

1.	Personal expenses:
		31 December 2017	31 December 2018	31 December 2019	31 December 2020
		Sh.	Sh.	Sh.	Sh.
	Repairs of house	172,000	-	180,000	-
	House manager salary	259,000	302,000	344,000	358,000
	Cash withdrawn from bank account	192,000	220,000	300,000	340,000
	School fees	228,000	-	-	-
	House expenses	163,000	331,600	356,000	382,000
2	Non-business income:
		31 December 2017	31 December 2018	31 December 2019	31 December 2020
		Sh.	Sh.	Sh.	Sh.
	Rental income	182,000	166,560	120,000	218,000
	Interest from bank deposits	2,750	14,970	20,000	22,000

3.	For the year ended 31 December 2017, salaries paid to Linda Obari's husband by the business amounted to Sh.312,000 and this was increased every year by 15%.
4.	She received Sh.360,000 in cash as inheritance in the year 2019 from her late father.
Required:
(i)	Compute Linda Obari's correct taxable income or loss for the years ended 31 December 2017 to 2020.
(ii)	Describe the factors that a revenue authority considers in ascertaining the adequacy of living expenses under back duty investigations.

December 2021

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