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CPA Advanced Taxation – December 2023 Past Paper & Answers

Unit: Advanced Taxation

14 Questions

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Download CPA Advanced Taxation December 2023 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

Access the full paper online, download the PDF, or study offline. Each question includes step-by-step solutions to help you understand key concepts in Advanced Taxation.

Other Advanced Taxation Past Papers

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.
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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.
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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.
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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.
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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.
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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.  
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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.
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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.
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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. 
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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.
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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.
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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.
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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.
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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. 
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