KASNEB Advanced Taxation - Question 4a

Evaluate four features that distinguish tax havens from other taxation regimes. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Taxation - Question 4b

Salama Insurance Company Ltd. provided the following financial records for the year ended 31 December 2015: Sh.Gross premium14,890,000Reserves for unexpire... [Click to view full question and step-by-step solution]

May 2016

1a

Management of Public Debts in both National and County Governments’

Country Y has recently introduced a number of reforms with regard to public sector financial management. One of the reforms involved the establishment of a debt management office (DMO).

Required:

Discuss four possible roles of the DMO as established in Country Y

1b

Public Sector Investment and enterprise management

Citing four reasons assess the importance of public investment reports as prepared by the National Treasury or equivalent ministry in your country.

1c

Public sector procurement

In the context of the Public Private Partnerships Act 2013 or equivalent legislation in your country:

(i) Explain the nature of public private partnerships (PPPs)

(ii) Discuss three factors that have motivated the growth of PPPs

2

Taxation of business income and specialized business activities

Weka Enterprises is a small retail business dealing in fast moving consumer products The Revenue Authority suspects that the business has been filing fraudulent returns and bas requested for financial statements from the business. The business provided the following derails for the years ended 31 December 2015 and 31 December 2014

Income statement for the year ended 31 December 2015
	Sh.	Sh.
Turnover		27,840,000
Less cost of goods sold		(15,354,000)
Gross profit		12,486,000
Proceeds from sale of furniture		240,000
Capital gain on sale of plot		156,400
		12,882,400
Less expenses
Purchase of furniture	360,000
General expenses	2,367,800
Rent and rates	160,000
Depreciation on motor vehicle	94,600
Customs duty	124,200
Hire purchase cost	226,000
Salaries and wages	1,680,000	(5,012,600)
Net profit		7,869,800

Statement of financial position as at 31 December 2015
Non-current assets	2015 Sh.	2016 Sh.
Furniture at cost	348,000	460,000
Motor vehicle at cost	1,660,000	1,565,400
	2,008,000	2,025,400
Current assets
Inventories	4,389,600	2,881,000
Accounts receivable	740,400	1,640,000
Prepaid general expenses	178,200	98,000
Prepaid rent and rates	72,800	24,600
Cash and cash equivalent	300,000	183,000
Total assets	7,689,000	6,852,000
Financed by:
Capital	1,000,000	800,000
Add net profit	7,869,800	5,780,000
	8,869,800	6,580,000
Less drawings	(2,200,000)	(1,320,000)
	6,669,800	5,260,000
Current liabilities
Accounts payable	979,200	1,528,000
Accrued rents and rstes	24,000	36,000
Interest due on higher purchase	16,000	28,000
Total capital and liabilities	7,689,000	6,852,000

Additional information:

1	Turnover and purchases were inclusive of VAT at the rate of 16%.
2	The turnover excludes cash sales. During the year ended 31 December 2015, the business paid the following expenses out of cash sales.

		Sh.
	Telephone and postage	48,000
	School fees	142,800
	Repairs and maintenance	94,600
	Insurance	36,600

3	The bank balance is included in the cash and cash equivalents. The following details were included in the bank statement:

		Sh.
	Personal expenses	294,000
	General expenses	792,800
	Rent and rates	68,400
	Hire purchase interest	29,600
	Payments to creditors	2,460.000
	Receipts from debtors	5,890,000

4	The following assets used by the business were not included in the assets register. Sh

	Computers	368,000
	Fax machine	120,000
	Salon car	2,800,000
	Delivery van	720,000
	Computer software	150,000

The revenue authority has established that the statement of financial position forms a good basis for recomputing the taxable profit. All expenses are to be adjusted on the basis of the statement of financial position.

Required:

(a) Using suitable computations, confirm the accuracy or otherwise of the taxable profit of enterprises for the year ended 31 December 2015

(b) Summarise five types of preliminary information that you might require from the business in order to further ascertain the accuracy of the taxable profit

3a

Taxation of cross border activities

Tax information exchange agreements (TIEAs) are increasingly forming part of the agenda during bilateral and multilateral trade discussions among various countries.

(i) Explain the nature of tax information exchange agreements.

(ii) Citing three reasons, discuss the purpose of TIEAs.

3b

Value added tax administration

Zawadi Ltd. has been in operation since 1 January 2014. The company is under a tax investigation relating to value added tax (VAT) transactions.

The following details were obtained from the company's records for the month of September 2015:

Stock in trade brought down in the month of September 2015 was valued at Sh.719,200.
Sales ledger records in the company's books showed an amount of Sh.1,786,400 while as per VAT returns, it was Sh.1,429,120.
The company had not claimed input tax on a building put into use on 1 January 2014 at a cost of Sh.2,784,000. However, in September 2015, the company set-off the input tax against the output tax for the month.
Purchases amounting to Sh.174,000 did not have supporting fiscal receipts. The total purchases amounted to Sh.928,000.
Since 1 January 2014, the company had not been filing VAT returns on time and all the penalties are outstanding.
The company had imported goods on cost, insurance and freight (CIF) terms of Sh.450.000. The clearing and transport costs amounted to Sh.80,000 and Sh.60,000 respectively. The goods were later sold at a mark up of 20%. Import duty on these goods was at a rate of 20%.
Tax officers established that imports were understated by Sh.150.000 as per import documents.
Input tax on fuels and oils for motor vehicles used in the business amounted to Sh.51,200.
Returns outward journal was understated by Sh.139,200 while the purchases ledger was overstated by Sh.174,000.
Debit notes received by the company were overstated by Sh.232,000.
Credit notes issued to customers were overstated by Sh.162,400.
Input tax on catering services amounting to Sh.12,800 had been debited in the VAT account.
Further examination revealed that VAT records needed recomputation to establish the correct VAT position.

Transactions are inctusive of VAT at a rate of 16% where applicable.

Required:

Analyse the above records and compute the correct VAT position for Zawadi Ltd. for the month of September 2015.

4a

Taxation of cross border activities

Evaluate four features that distinguish tax havens from other taxation regimes.

4b

Limited companies

Salama Insurance Company Ltd. provided the following financial records for the year ended 31 December 2015:

	Sh.
Gross premium	14,890,000
Reserves for unexpired risk (1 January 2015)	486,000
Re-insurance premiums paid	384,000
Claims paid	9,364,000
Claims due: 1 January 2015	670,000
31 December 2015	800,000
Life assurance fund	1,240,800
Commission on reinsurance ceded	760,200
Commission on reinsurance accepted	1,940,000
Foreign exchange loss	342,500
Rent income	678,300
Purchase of computers	300,000
Cost of computer software	150,000
Claims recovered on reinsurance	562,800
Agency expenses	1,380,700
Investment income	1,824,300
Management salaries	948,200
Repair of rented property	28,800
Neon signs	48,000
Depreciation	150,400
Legal expenses relating to claims	64,800
Rent and rates	760,400

Additional information:

1 The company operates both general insurance business and life insurance business in the same building where rent and rates are shared in the ratio of 2:3 respectively.

2 Agency expenses include general manager's salary of Sh.280,000 working in the life insurance business.

3. Investment income includes dividends of Sh.114,000 net of tax from a subsidiary company and Sh.78,400 from proceeds of sale of a car involved in an accident.

4. Gross premium includes sale of insurance policies to life insurance company amounting to Sh.748,400.

5. The company constructed a commercial building with shops, offices and showroom at a cost of Sh.6,400,000 on 1 January 2015. Rent income from the property amounted to Sh.5,536,400 before deducting capital allowances and expenses amounting to Sh.84,600.

Required:

(i) A statement of taxable profit or loss for the year ended 31 December 2015.

(ii) Tax payable (if any).

5a

Taxation of cross border activities

Country Z has recently been admitted into a regional economic block. As part of the country's full integration into the economic block, it is required to undertake certain legislative and other reforms.

Required:

Advise Country Z on four fundamental reforms that could be considered in the process of integration into the economic block.

5b

Limited companies

Mjengo Ltd. is a real estate development company. In the year ended 31 December 2015, the company provided the following information:

Bought 100 acres at Sh.6,000.000 each for building low cost houses in an approved development area.
Cost of surveying was Sh.4.600,000 and conveyance fees amounted to Sh.6,960,000.
The cost of constructing each unit was Sh.1,450,000. The company constructed 240 units on a 20 acre piece of land.
All the units were sold at a price of Sh.1,600,000 in the year 2015.
Building materials for constructing each unit amounted to Sh.742,400 inclusive of VAT at the rate of 16%.
Professional fees paid to quantity surveyors inclusive of VAT was Sh.417,600 and for civil engineers was Sh.243.600.
Drainage system and sewerage line cost Sh.960,000 for connecting all units built and to be built on 100 acres.
The interest on loan to acquire the 100 acres was Sh.7,800,000.
Hire expenses for bulldozers used in the construction was Sh.600,000 for each of the three months used for the construction.
Charges paid to the government in respect of approval of plans were Sh.678,000.
Cost of constructing a site office was Sh.800,000.
Hire cost for a saloon car for the site manager was Sh.40,000 per month.
A commercial building was also constructed at a cost of Sh.5.600,000 in a part of the land. The building was rented at a monthly rent of Sh.480,000 with effect from 1 May 2015.
The costs relating to the total 100 acres are to be apportioned according to the acreage used.

Required:

(i) Statement of adjusted taxable profit or loss for Mjengo Ltd. for the year ended 31 December 2015.

(ii) Tax payable by Mjengo Ltd. (if any) for the year ended 31 December 2015.

May 2016

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