KASNEB Advanced Taxation - Question 4b

The following is a statement of profit or loss for Express Commercial Bank Ltd. for the year ended 31 December 2022: Sh.“000”Sh.“000”Income: Interest on ... [Click to view full question and step-by-step solution]

Advanced Taxation December 2023 Past Paper & PDF Solutions

1a

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

Assume that you work for a tax consultancy firm. A client, Masterway Ltd., intends to develop a Transfer Pricing Policy document and has approached your firm for advice on information that it should include in the document.

Required:

Advise Masterway Ltd. on FOUR items that should be included in a transfer pricing policy document.

1b

Taxation of business income and specialized business activities

Asili and Tulivu established a partnership business sharing profits and losses in the ratio of 3:2 respectively. The following statement of profit or loss of the business for the year ended 31 December 2022 was provided:

	Sh.	Sh.
Sales		20,184,000
Gain on sale of shares		1,056,000
Foreign exchange gain-unrealised		450,000
Recovery from insurance on stolen stock		1,400,000
Discount received		552,000
Dividend - Wakaguzi Co-operative Society (gross)		153,000
Total incomes		23,795,000
Expenses:
Purchases	8,526,000
Purchase of computers	540,000
Partners salaries	2,160,000
Legal fees	2,040,000
Repairs and maintenance	1,705,200
Rent and rates	733,800
Interest on loan	498,600
General expenses	2,892,000
Motor vehicle expenses	2,520,000
Insurance	468,000
Preliminary expenses	788,400
Directors fees	1,800,000
Audit fees	444,600
Debenture interest	1,080,000
Travelling expenses	288,000	(26,484,600)
Net loss		(2,689,600)

Additional information:

1.	Purchases and sales of goods were inclusive of value added tax (VAT) at the rate of 16%.
2.	Closing inventory was valued at Sh.5,520,000 while opening inventory was 10% of sales net of VAT.
3.	The partnership was converted into a limited company by the name Asili Ltd. on 1 April 2022.
4.	Income and expenses accrued evenly throughout the year unless otherwise stated.
5.	Legal fees comprised:

		Sh.
	Notice for change of business name	194,400
	Conveyance fees of business premises	217,200
	Stamp duty	349,800
	Acquisition of business loan	62,400
	Recovery of bad debts	135,000
	Signing a 99 year lease agreement	385,200
	Purchase of Asili’s private residence	450,000
	Appeal against tax assessment	246,000
		2,040,000
6.	Repairs and maintenance comprised:
	Purchase of furniture	288,000
	Installation of neon sign	180,000
	Designing office block	1,170,000
	Painting of new office block	67,200
		1,705,200
7.	General expenses included:
	Registering of patents	336,000
	Negotiating for additional land for business expansion	168,000

8.	Interest on loan includes interest on partners capital of Sh.300,000 which was shared according to profit and loss sharing ratio.
Required: Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2022 for:
(i).	Asili and Tulivu partnership business.
(ii).	Asili Ltd. Company.
(iii).	A schedule showing allocation of adjusted partnership profit or loss computed in (b) (i) above, to the partners.

2a

Tax systems and policies Professional practice in taxation

Tax agents play a crucial role in helping micro and small enterprises (MSEs) comply with tax obligations.

In light of the above statement, explain THREE potential areas the revenue authority may collaborate with tax agents to bridge tax gaps in MSEs in your country.

2b

Taxation of cross border activities

Explain THREE ways in which the implementation of the Most Favoured Nation (MFN) status may impede the attainment of economic goals of individual member states within the East African Customs Union.

2c

Limited companies

ABC Ltd. acquired a building in March 2021 for Sh.8,500,000 and later on renovated it at a cost of Sh.465,000. Other costs incurred during the acquisition were valuation fees of Sh.84,000 and legal costs on acquisition of Sh.450,000. The building was later sold in October 2023 for Sh.12,400,000. The costs incurred in the process of selling the building were; advertisement Sh.140,000, agent fees Sh.128,000 and valuation fees Sh.136,000.

Required:

Compute the capital gains tax payable by ABC Ltd.

2d

The following incomes and expenses were extracted from the accounting records of Turkanah Oil Ltd. for the year ended 31 December 2022:

Income	Sh.“million”
Proceeds from sale of oil (2,800,000 barrels at Sh.15,000 per barrel)	42,000
Value of chargeable oil disposed of to local refineries	21,000
Value of chargeable natural gas and other incomes	26,500
Freight charges received from other oil transport	22,800
Expenses:
Royalties paid for crude oil exported	4,800
Staff accommodation expenses	2,820
Royalties incurred in respect of natural gas disposed of to local refineries	3,420
Interest on loan from foreign subsidiary company	1,890
Employee salaries and emoluments	8,200
Specific bad debts	240
Exploration and drilling costs of oil wells	12,960
Contribution to approved pension schemes	720
Customs duties on drilling machines	1,500
General expenses	7,800
Petroleum oil tankers (ships)	1,800
Cost of generator	500
Intangible drilling cost	1,380
Administration expenses	750
Exploration costs	1,680
Pipeline and storage tank	16,920
Buildings-onshore-factory	5,400
Fixtures and fittings	630
Purchase of drilling machines	5,500

Required:

(i) Prepare a statement of taxable profit or loss of Turkanah Oil Ltd. for the year ended 31 December 2022.

(ii) Identify the clarifications that the tax authority may seek from the company concerning exploration and drilling costs.

3a

Tax investigations

Tax investigation involves inquiries into a taxpayer’s affairs where the revenue authority has reasonable cause to believe that a taxpayer is not tax compliant. In relation to the above statement, describe FOUR circumstances that could trigger tax investigations.

3b

Tax systems and policies

Explain how the adoption of the following policy frameworks would strengthen revenue mobilisation in your country:

(i) Fiscal policy options.

(ii) Tax policy options.

3c

Limited companies

Titanic Air Ventures Ltd. is a company incorporated in Kenya that operates a fleet of passenger and cargo aircrafts in Kenya and other neighbouring countries. The trading results for the year ended 31 December 2022 are presented below:

	Sh.“million”	Sh.“million”
Revenue		106,115
Operating expenditure	66,564
Fleet ownership	13,653	(80,217)
Gross profit		25,898
Other income:
Interest income (net)	558,025
Bonus shares from associate company	174
Fair value gains on fuel derivatives	7,482
Gain on hedged exchange differences:
Borrowings	1,920
Fuel contracts	597	10,731.025
Total income		36,629,025
Expenses:
Overheads	24,898.5
Finance costs	2,228
Realised losses on fuel derivatives	5,656
Other losses	752
Deferred taxation on cash flow hedges	755	(34,289.5)
Net profit for the year		2,339.525

Additional information:

1.	Revenue comprises of:	Sh.“million”
	Cargo freight revenue	8,151
	Passenger revenue	94,257
	Handling	1,968
	Miscellaneous revenue	1,739
		106,115
2.	Operating expenditure analysis:	Sh.“million”
	Direct expenses	13,938
	Aircraft fuel and oil	12,795
	Aircraft landing, handling and navigation	21,832
	Passenger services	6,668
	Commission on sale of air ticket	4,869
	Aircraft passenger and cargo insurance	549
	Crew expenses	2,613
	Central reservation system	2,708
	Other miscellaneous expenses	592
		66,564
3.	Fleet ownership costs analysis:	Sh.“million”
	Hire of aircrafts	8,880
	Depreciation on aircrafts and engines	4,641
	Depreciation on rotables and equipment	393
	Aircraft purchase subsidy from government	(261)
		13,653
4.	Analysis of overhead costs:	Sh.“million”
	Administration expenses	15,262.5
	Staff costs	522
	Legal and professional fees	110
	Directors remuneration	16
	Audit fees	2.238
	General maintenance and supplies	2,094
	Depreciation of buildings and office equipment	1,290
	Amortisation of intangible assets	546
	Selling	997
	Advertising and publicity	413
	Bad debts written off	1,410
		24,898.5

5.	The company purchased two aircrafts in the course of the year at a total cost of Sh.560 million. This excludes the aircraft purchase subsidy from the government.

Required:

Compute the taxable income and tax payable (if any) by Titanic Air Ventures Ltd. for the year ended 31 December 2022.

4a

Taxation of cross border activities

Describe FOUR ways through which the Revenue Authority may address potential tax risks associated with the import and export activities of manufacturing firms in your country.

4b

Limited companies

The following is a statement of profit or loss for Express Commercial Bank Ltd. for the year ended 31 December 2022:

	Sh.“000”	Sh.“000”
Income:
Interest on loans and advances to customers		936,480
Royalty income (net of withholding tax)		11,400
Rebate on bills discounted		1,800
Interest on Treasury bills and bonds		168,000
Interest on placement with Central Bank		51,240
Fees and commission income		43,440
Investment revaluation surplus		11,232
Profit on sale of motor vehicle		5,256
		1,228,848
Expenses:
Rent and rates	75,250
Staff costs	347,720
Impairment of intangible assets	10,440
Depreciation	42,800
Deposit protection fund contribution	16,360
Interest on deposits from other banks	62,800
Directors remuneration	26,600
Interest on customer deposits	184,200
Audit fees	2,040
10% debenture stock	200,000
Redemption reserve	3,240
Purchase of delivery van vehicle	3,500
Installation of online banking system	32,600
Finance lease rentals	14,860
Loss on sale of equipment	19,640
Finance costs	70,200
Allowance for bad and doubtful debts	98,160	(1,210,410)
		18,438

Additional information:

1.	Staff costs include:	Sh.“000”
	Provision for proposed tax increment	480
	Ex-gratia payment	1,240
	Negotiating loans for staff	1,000
	Retrenchment costs	1,680
	Provision for staff leave arrears	8,680
2.	Directors remuneration include:
	Education trip cost for directors children	1,600
	Entertainment allowance for clients	1,560
	Air tickets for expatriate directors	720

3.	Allowance for bad and doubtful debt analysis:
		Specific provision Sh.“000”	General provision Sh.“000”	Total Sh.“000”
	Balance brought forward 1 January 2022	684,000	888	684,888
	Charge in the year	108,000	8,640	116,640
	Reduction in the year	(18,480)	-	(18,480)
	Balance carried forward 31 December 2022	773,520	9,528	783,048

Required:

(i) Compute the adjusted taxable income and tax payable by Express Commercial Bank Ltd. for the year ended 31 December 2022.

(ii) Express Commercial Bank Ltd.’s taxable income for the year ended 31 December 2021 was assessed as Sh.260,000,000.

Calculate the tax due as at 31 December 2022 clearly indicating the due dates for the payment of the tax.

5a

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

In a tax dispute resolution mechanism workshop, one of the facilitators noted that, “there is need for establishing a specialised tax court within the country to handle tax appeals from the Tax Appeals Tribunal”. Justify the above statement, citing THREE benefits that could be derived from establishing a specialised tax court.

5b

Value added tax administration

You have been appointed as the finance director of Pixes (Kenya) Ltd., which is a subsidiary of Pixes (UK) Ltd. The board of directors of Pixes (Kenya) Ltd. is concerned that the company may currently be incorrectly accounting for value added tax (VAT) following the numerous changes in the Kenyan tax system introduced through the finance Acts. In particular, they have drawn your attention to the following issues:

VAT treatment on exported taxable services.
Time of supply on imported taxable services.
VAT treatment on taxable digital services.

Required:

Advise the Board of Directors of Pixes (Kenya) Ltd. on each of the THREE issues raised above.

5c

Taxation of cross border activities

Alexia Gosselin was resident in Kenya during the year ended 31 December 2022. She has provided the following information on her income both from Kenya and Country Z during the year ended 31 December 2022:

Kenya and Country Z have signed a double taxation agreement.

Income from Country Z:

Employment income from Country Z was Zx. 72,000,000 (PAYE Zx. 9,000,000). The applicable foreign exchange rate was Ksh.1: Zx.30.

Income from Kenya:

Basic salary Sh.202,800 net of PAYE of Sh.37,200 per month.
Subsistence allowance Sh.14,000 per day for 10 days that she worked out of office.
Medical allowance of Sh.40,000 per month in respect of a policy that covered all employees.
Commercial property rental income for the year of Sh.2,400,000 after deducting cost of partitions Sh.460,000,
mortgage repayment Sh.540,000 (out of which Sh.120,000 was mortgage interest) and agent fees of Sh.180,000.
Interest income from Mjengo Company Ltd., Sh.405,000 net.

Required:

(i) Compute double taxation relief due to Alexia Gosselin for the year ended 31 December 2022.

(ii) Net tax liability (if any) payable by Alexia Gosselin in Kenya for the year ended 31 December 2022.

December 2023

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