Advanced Taxation December 2024 Past Paper & PDF Solutions

1a

Professional practice in taxation

Tax practioners face significant ethical and moral challenges in their work primarily due to the dual obligations they have to the client and the revenue authority. Balancing these responsibilities can be complex as they must navigate conflicting interests while adhering to legal and ethical standards.

Required:

Evaluate THREE ethical and moral challenges faced by tax practioners in the professional tax practice.

1b

Taxation of business income and specialized business activities

Kamaly and Kalangi have been trading as Kaka Enterprises. The entity had reported a net profit of Sh.484,900. However, the reported profit was disputed by the revenue authority during the year of income 2023. The assessed taxable profit for the partnership by the revenue authority was Sh.3,880,000.

The partners have provided the following details to assist them prepare for an adjusted taxable profit which would assist in determining whether the assessment by the revenue authority was fair:

Receipts and payments (Bank account)
	Sh.		Sh.
Balance brought forward 1 January 2023	1,840,000	Cash purchases	500,000
Receipts from debtors	3,600,000	Payments to creditors	1,890,000
Cash sales	720,000	Electricity	188,000
Sale of motor vehicle	360,000	Telephone	172,000
15% bank loan	400,000	Purchase of furniture	350,000
Balance carried forward	960,000	General expenses	3,700,000
		Salaries and wages	480,000
		Office computers	180,000
		Rent expenses	240,000
		Insurance	96,000
		Advertising	84,000
	7,880,000		7,880,000

Additional information:

1.	The partners contributed capital of Sh.400,000 and Sh.600,000 for Kamaly and Kalangi respectively which was included in the opening balance in the receipts and payments account.
2.	General expenses included the following items which were debited in the statement of profit and loss account:

2		Sh.
	Computer software	90,000
	Donations to a political party	300,000
	Defending Kalangi in a land dispute	350,000
	Withholding tax	32,000
	Installation of neon signs	48,000
	15% bank loan repayment inclusive of interest	200,000
	Lease rental payments	82,000
	Purchase of motor vehicle	1,200,000
	Purchase of piece of land for business	742,000
	Purchase of motorbike for office use	200,000
	Auditing fees	96,000
	Partners drawings	360,000

3.	Other details included:
		1 January 2023 Sh.	31 December 2023 Sh.
	Creditors for goods	550,000	1,460,000
	Debtors for goods	640,000	820,000
	Salaries and wages accrued	120,000	89,000
	Rent expenses prepaid	36,000	24,000
	Office computers	150,000	240,000
	Inventories for goods in trade	192,000	120,000
	Cash at bank	840,000	960,000

4.	Salaries and wages included salaries paid to domestic workers for partners amounting to Sh.96,000.
5.	Total sales and purchases for the year 2023 were undercast by 20%.
6.	The 15% bank loan of Sh.400,000 relates to repairs to private residence of Kalangi.
7.	Telephone expenses amounting to Sh.60,000 related to partners personal calls.
8.	Rent expenses were understated by 25%.
Required:
(i).	Prepare a revised statement of adjusted profit or loss for the partnership business.
(ii).	Advise the partners in relation to the assessed profit by the revenue authority as compared to the adjusted taxable profit obtained in (b) (i) above.

2a

Tax investigations Professional practice in taxation

Bright Star Electronics Enterprise is a small business operating in the retail sector. The business has experienced steady growth in sales over the years. The owner, John Irungu handles most of the financial and accounting tasks. The revenue authority has noticed discrepancies in the tax returns over the last two years where there are significant variations in the reported income and expenses. The business has also claimed several large deductions that appear unusual for the size of the business. These red flags prompted the revenue authority to issue a notice of tax audit. John Irungu has engaged you as a tax agent to assist him in this matter:

Required:

(i) Explain to John Irungu THREE objectives of a tax audit initiated by the revenue authority.

(ii) Analyse THREE responsibilities of a tax agent to the client during the tax audit process.

2b

Limited companies

Ocean Ltd. is a holding company operating through two independent branches, the head office branch and Wekah branch located in a different town. The company acquired 100% shares of Zurih Ltd. in the year 2022. The following information has been provided to assist in determination of taxable income:

	Head Office Branch Sh.	Wekah Branch Sh.	Zurih Ltd Sh.
Sales	345,800,000	148,000,000	280,000,000
Cost of sales	(123,678,000)	(73,890,000)	(136,800,000)
Gross profit	222,122,000	74,110,000	143,200,000
Other incomes:
Profit from sale of marketable securities	3,800,000	-	-
Dividend: Wezesha Co-operative Society (Net)	800,000	-	640,000
Interest: Banks (Net)	300,000	250,000	160,000
Total incomes	227,022,000	74,360,000	144,000,000
Expenses:
Repairs and maintenance	17,400,000	3,850,000	8,900,000
Finance charges	20,700,000	12,680,000	7,560,000
Legal fees	560,000	-	300,000
Depreciation	9,345,000	5,890,000	11,890,000
Computer software	-	460,000	-
Lorry - scrapped	630,000	-	-
Loss on investment	640,000	-	890,000
Travelling costs	14,670,000	3,690,000	9,490,000
Staff pension contribution	26,890,900	-	13,670,000
Intangible assets written off	45,450,000	8,960,000	19,956,000
Directors allowance	28,670,000	-	6,850,000
Rent and rates	32,450,000	6,700,000	16,900,000
Investors loss	-	670,000	-
Staff salaries	23,469,700	9,880,000	-
	(220,875,600)	(52,780,000)	(96,406,000)
Net income	6,146,400	21,580,000	47,594,000

Head office branch sales include goods sold to Wekah branch and Zurih Ltd. worth Sh.3,450,000 and Sh.10,470,000 which have been marked up by 15%.
Legal fee for Head office branch and Zurih Ltd. consist of 30% for 100 year lease while the balance was for 5 year lease for Head office and 15 year lease for Zurih Ltd.
Head office branch finance charges consist of interest on 10% loan of Sh.5,000,000 from Zurih Ltd. advanced on 1 January 2023.
The insurance company agreed to cover 40% of inventory loss. This has not been adjusted in the above inventory loss.
Head office branch staff salaries consist of Sh.9,655,000 paid on behalf of Zurih Ltd. and Sh.320,000 for Wekah branch.

Required:

(i) Compute the taxable profit or loss for Ocean Ltd. and Zurih Ltd. for the year ended 31 December 2023.

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

3a

Tax systems and policies Tax planning

Government provides various tax incentives to both individuals and entities with the intention of achieving various tax policy objectives. Analyse TWO tax incentives provided by the government to encourage home ownership in your country.

3b

Taxation of cross border activities Tax systems and policies

Tax Information Exchange Agreements (TIEAs) are bilateral agreements between two countries aimed at improving tax compliance and reducing tax evasion. While TIEAs are intended to enhance transparency and ensure that taxpayers are meeting their obligations through information sharing, they also present challenges for developing countries.

Required:

Argue FOUR cases against Tax Information Exchange Agreements (TIEAs) that are encountered by developing countries.

3c

Limited companies

Septer Energy Ltd. is a company registered and operating in Kenya in the business of petroleum exploration and extraction. The management of the company has provided the following information to assist in determination of taxable income for the year ended 31 December 2023:

	Sh.
Disposal of interest in a contract area	7,890,000
Exploration expenditure	380,000,000
Depreciation	945,000,000
Management and administrative expenses	580,000,000
Oil and gas storage facilities	15,200,000
Decommissioning costs	580,610,000
Amortisation of intangible assets	680,760
Instalment tax paid	7,248,540,000
Hire of saloon cars	3,800,000
Hire of tractors	2,380,000
Custom duty on drilling machines	560,000
Sale of natural gas	975,800,000
General expenses	78,000,000

Additional information:

1.	Crude oil sold locally	59,000 barrels
	Crude oil sold to a company in UK	1,920,000 barrels
	Crude oil sold to a company in USA	3,381,000 barrels

2.	The selling prices of crude oil was as follows during the year: Local sales Sh.9,600 per barrel Company in USA: 50 US Dollars per barrel Company in UK : 44 UK£ per barrel
3.	The average exchange rates were as follows: US dollars to shilling - 1 dollar: Sh.120 UK£ to shilling - 1£ : Sh.190
4.	The following details relate to capital expenditure:

4.	Item	Date	Cost(Sh)	Location
	Oil rig	1 April 2022	12,800,000	Offshore
	Telecommunication equipment	1 January 2023	2,500,000	Offshore
	Pipelines and storage tanks	1 September 2023	10,480,000	Offshore
	Computers	1 January 2023	3,000,000	Offshore

Required:

(i) Prepare adjusted taxable profit or loss for Septer Energy Ltd. for the year ended 31 December 2023.

(ii) Determine the corporate tax payable if any, for the year ended 31 December 2023.

4a

Taxation of cross border activities Tax planning

(i) Explain the term “treaty shopping” as used in taxation.

(ii) Evaluate THREE obstacles that the government in your country could encounter when dealing with multinational corporations engaging in treaty shopping to undermine government efforts in maximising tax revenue.

4b

Value added tax administration

Sokoh Plc, a company registered for value added tax (VAT) purposes buys and sells goods locally and in the foreign markets. The following transactions were extracted from the books of the company for the month of September 2024:

September 2:	Purchased goods from local market for Sh.103,240.
September 4:	Imported goods from Japan with a landed cost of Sh.340,000 excluding import duty and value added tax. The import duty rate was 25%
September 6:	Sold goods to the local market for Sh.180,960 on credit.
September 8:	Paid audit fees of Sh.17,400 in respect to establishing an internal control system.
September 10:	Goods valued at Sh.20,880 were returned to the business by credit customers and a credit note issued immediately.
September 12:	Paid for catering expenses Sh.26,680 in respect to a restaurant facility managed by another firm.
September 14:	Sold goods to a firm operating in Egypt for Sh.480,000.
September 16:	Received debit notes for 62,640 in respect to erroneous invoices received earlier.
September 18:	Exported goods to Malawi valued at Sh.240,000.
September 20:	Purchased computer and computer software for Sh.208,800 for use in the business.
September 22:	Supplied unprocessed fruits and milk to Starlight Enterprise for Sh.170,000.
September 24:	Sold goods to Lucky Enterprise for Sh.64,960.
September 26:	Purchased oils and fuel of Sh.9,280 for a generator used in the business.
September 28:	A customer owing the business goods worth Sh.20,300 was declared bankrupt and the debt was written off immediately.
September 30:	Sold goods exempt from VAT for Sh.250,000.

All transactions are inclusive of value added tax (VAT) where applicable unless otherwise stated.

Required:

(i) Calculate the value added tax (VAT) payable by or refundable to Sokoh Plc for the month of September 2024.

(ii) Advise the management of Sokoh Ltd. on TWO omissions that if committed constitute VAT offences.

5a

Limited companies Tax systems and policies

The taxation of capital gains in Kenya represents a significant shift in the country’s tax policy. While its reintroduction has increased government revenue and aligned Kenya with international practices, it also presents challenges. Hence ongoing improvements and adjustments in its administration is crucial for optimising the benefits of capital gains tax while minimising its drawbacks.

Required:

(i) Analyse TWO circumstances that constitute transfer of property for purpose of computing Capital Gains Tax.

(ii) Explain TWO challenges encountered in administration of Capital Gains Tax in your country.

5b

Tax systems and policies

In a tax seminar, one of the facilitators noted that, “generally there are two main types of tax systems that are adopted by different countries, that is, unified tax system and multiple tax systems”.

With reference to the above statement, argue THREE cases against multiple tax systems adopted by different countries.

5c

Taxation of cross border activities

Tamala Nyambura is a resident of Kenya. During the year ended 31 December 2023, she received the following income:

From employment in Kenya Sh.720,000 gross.

From employment in Zambia Sh.540,000 (net of Sh.78,000 paid as tax in Zambia)

Assume that:

Kenya has a double taxation agreement with Zambia.
Income from Zambia has already been converted into equivalent Kenya Shillings.

Required:

Compute double taxation relief due to Tamala Nyambura and net tax payable if any for the year ended 31 December 2023.

5d

Limited companies

Hightec Contractors Ltd. has been in the construction business for many years. The following information relates to one of its construction contracts for the year ended 31 December 2023:

Balances as at 1 January 2023:
	Sh.“000”
Material on site	30,000
Accrued wages	2,000
Rent prepaid (contract related)	4,000
Plant (written down value)	20,000
Transactions during the year:
Material sent to site	100,000
Plant purchased	10,000
Wages paid	8,000
Inspection fees	2,000
Subcontractors’ fee	1,000
Consultancy fee	3,000
Materials sold (cost)	1,500
Casual labour	2,000
Head office expenses	3,000
Depreciation (provision)	4,000
Rent paid (non-contract related)	8,000
Other expenses (allowable)	2,000
Value of work certified in the year	120,000
Cost of work uncertified	20,000
Cash received from client	80,000
Balances as at 31 December 2023:
Materials on site	50,000
Wages accrued	4,000
Rent accrued (contract related)	5,000

Additional information:

Investment allowances agreed with the commissioner of revenue authority is at the rate of 10% on plant.
The company policy recognises two-thirds of annual profits when they arise for tax purposes.
Any contract losses are recognised in full in the year of their occurrence.

Required:

(i) Compute contract profit or loss for the year ended 31 December 2023 for Hightec Contractors Ltd.

(ii) Determine taxable profit or loss for the year ended 31 December 2023, assuming that there were no other contracts.

December 2024

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