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CPA Advanced Taxation – May 2021 Past Paper & Answers

Unit: Advanced Taxation

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Download CPA Advanced Taxation May 2021 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
Public sector procurement Introduction to Public Financial Management
​There are different types of public private partnership (PPP) contracts depending on the type of project, level of risk transfer, investment level and the desired outcome. 

Required: 
Citing relevant examples, describe four types of public private partnership contracts.
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1b
Tax systems and policies
​​During a conference held by the Organisation for Economic Co-operation and Development (OECD) on policies for rebuilding post covid-19 economies, one speaker noted that "once countries stabilise their fiscal recoveries amid the Corona virus crisis, they should seize the chance to build their economies through taxation policy". 

Required: 
Evaluate six tax policy measures that developing countries should adopt for rebuilding Post-Covid 19 economies.
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1c
Limited companies
​ ​ ​​The following details were obtained from the records of Maendeleo Bank Ltd. for the year ended 31 December 2020:

1.
The net loss for the year was Sh.22,160,000 after the following had been recorded:

Sh.
Income from trading activities of a foreign bank subsidiary
980,000
Gain on sale of shares
294,000
Fees and commission income
1,460,500
Interest from government treasury bills
936,400
Interest on deposits with other banks
1,740,600
Interest on loans and advances to customers
12,460,300
Contributions to deposit protection fund
428,000
Interest on customer deposits
8,484,000
Rent and rates
864,000
Directors emoluments
1,480,000
Income from foreign exchange dealings
1,243,600
Depreciation
445,300
Provision for interest expenses
184,400
Auditors fees
236,800
Loss on disposal of collaterals
1,560,000
Installment tax
724,800
Installation of a new online banking system
1,820,000
Staff costs
1,680,000
Operating lease rentals
268,200
Capital redemption reserve
920,000
12% debenture stock
1,200,000
Purchase of double cabin pickup October 2020
2,400,000
Profit and loss account
964,000
(Dr)
Rebate on bills discounted
296,000
2.
Staff costs include:
Sh.
Provision for salary increase
220,000
Cost of negotiating loans for staff
140,000
Senior staff club membership
360,000
3.
The online banking system was installed in May 2020 and it included the cost of computer software of Sh.200,000 and new computers at a cost of Sh.620,000. 

Required: 
Statement of adjusted taxable income or loss for Maendeleo Bank Ltd. for the year ended 31 December 2020.
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2a
Introduction to Public Financial Management
​​A number of countries have enacted legislation on public financial management (PFM) which have their main objects as follows: 

  • Provide for the effective management of public finances by the national and county governments. 
  • Oversight responsibility of parliament and county assemblies. 
  • Provide for the different responsibilities of government entities and other bodies. 
Required: 
Discuss the key provisions of the PFM Act, 2012 or equivalent legislation in your country, with regard to regulation of grants administration.
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2b
Public Sector Investment and enterprise management
​​Assume that you are a senior government officer managing public investments. The Cabinet Secretary in your Ministry is set to present a paper to a group of local and international investors on why the government should continue participating in public investments. 

The Cabinet Secretary has approached you for input in preparation of the paper for presentation. 

Required: 
Explain four grounds that you would propose for inclusion in the paper, defending the government's participation in public investments.
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2c
Management of Public Debts in both National and County Governments’
​Many developing countries have resorted to increased reliance on public debt in order to finance their expenditure. This strategy has however resulted in negative impacts on projected economic growth rates. 

Required: 
With reference to the above statement, describe the negative implications of increased public debt in financing of recurrent expenditure by a government.
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3a
Tax systems and policies
​​Citing examples, differentiate between a "tax waiver" and a "tax amnesty.
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3b
Value added tax administration
​ ​ ​ ​ ​ ​ ​​Dera Suppliers Limited deals in both taxable and non-taxable supplies. 

The following transactions were extracted from the company's records for the month of September 2020:

Sh.
Purchases from local market
912,000
Sales to local market
1,710,000
Imports (exclusive of customs duty)
600,000
Export sales - South Africa
700,000
Export sales - Nigeria
350,000
Purchase of lubricants
456,000
Restaurant services paid
63,840
Tax consultancy fees
45,600
Printing and stationery
17,100
Electricity bills paid
31,920
Exempt sales
480.000
Ambulance services
20,000
Postage services
8,000
Audit fees
68.400

Additional information:
  1. Sales to the local market include goods supplied to Marine Fisheries and Fish Processors Ltd. for Sh.114,000. 
  2. Goods purchased at standard rate could not be directly identified from exempt sales. 
  3. The company received debit notes and credit notes of Sh.22,800 and Sh.36,480 respectively from suppliers. 
  4. The customs duty for imported goods was at 20%. 
  5. The company issued debit notes of Sh.74,100 in respect to sales at standard rate. 
  6. Sales and purchases to and from the local market were inclusive of VAT at the rate of 14% plus other transactions where applicable 
  7. A debtor of goods valued at Sh.28,500 was declared bankrupt and a debt relief waiver granted. Note: Assume transactions are quoted as inclusive of VAT at the rate of 14%, unless otherwise specified.
Required: 
Indicating any non-deductible input-tax and exempt supplies, compute: 

(i) Total input tax. 

(ii) Total output tax. 

(iii) Deductible input tax. 

(iv) Value added tax payable or refundable. 
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3c
Taxation of cross border activities
​Ali Salama is a resident tax payer in Kenya. During the year of income 2020, he had Sh.4,380,000 from employment in Kenya. He had also received Sh.480,000 from the United Kingdom (UK), which has a double taxation relief treaty with Kenya. Tax deducted in UK was equivalent to Sh.80,000. 

Required: 
(i) Double taxation relief in Kenya. 

(ii) Tax payable in Kenya by Mr. Ali Salama.
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4a
Taxation of cross border activities
​​ Discuss the factors that may have inhibited the full integration of the customs union in your regional trading block.
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4b
Limited companies
​ ​ ​ ​​Jamji Manufacturers Ltd. presented the following statement of profit and loss and other comprehensive income for the year ended 31 December 2020:

Sh. "000"
Sh. "000"
Turnover
384,900
Cost of sales
​\(\underline{(98,200)}\)​
Gross profit
286,700
Other incomes:
Gain on foreign exchange transactions
42,600
Capital gain on sale of motor vehicle
14,200
Refund of import duty 
8,400
Investment income
12,000
​\(\overline{363,900}\)​
Less expenses:
Purchase of copyright
24,800
Design of company website
1,200
Directors fees
4,600
Donations to charitable institutions
200
Depreciation expense
1,640
Advertisement
450
Professional fees
448
General expenses
3,640
Legal costs
1,840
Loan repayment
312
Provision for bad debts
142
Impairment loss of a building
280
(39,552)
Net profit
324,348

Additional information:
1.
On 1 July 2020, the company acquired Jilo Ltd., a manufacturing company for Sh.56,000,000 and took over all assets and liabilities, which included; 
1.
Assets
Sh."000"
  • Factory building
14,800
  • Furniture and fittings
1,400
  • Processing machinery
8,600
  • Lorry (4 tonnes)
1,500
  • Computers and printers
600
  • Delivery van
840
Liabilities:
  • 15% bank loan
6,000
  • Trade payables
1,720
  • Bank overdraft 
1,480
Jilo Ltd. had operated for only 6 months and had not claimed any investment allowances before it was closed down by the Environmental Authority.
2.
Turnover includes goods sold to the company's branch of Sh.72,000,000. It was established that at the end of the accounting period, 20% of these goods had not been sold by the branch.
3.
Professional fees included:
Sh."000"
Management fees
280
Tax consultancy fees
148
Audit fees
252
Preparing of tender documents 
185
Environmental assessment fees
360
4.
General expenses imcluded:
Sh."000"
Installation of Neon signs
420
Car grant to a director 
1,800
Partition of an office block
560
Directors Christmas party
240
Branch closure costs
180
Repayment of hire purchase loan
120
5.
Legal costs comprised:
Sh."000"
Drafting sale agreement between the company and Jilo Ltd.
458
Defending a company against breach of contract
386
Negotiating a bank loan
168
Preparing copyright documents
172
Drafting lease agreements (50 years)
656
6.
Provisión for bad debts include 15% of debts amounting to Sh.600,000 from a company which was declared irrecoverable.
7.
The corporate tax rate during the year was 25%.

Required:
(i)
A statement of adjusted taxable profit or loss for the year ended 31 December 2020.
(ii)
Tax liability and the instalments for the year 2020, assuming the actual profits were made.
     
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5a
Tax investigations Taxation of cross border activities
​​The Tax Authority in your country has appointed you as a tax auditor for digital services in Abacus Ltd. 

Describe three specific operational aspects in Abacus Ltd. that would constitute evidence of existence of digital services in the company.
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5b
Taxation of cross border activities
​ ​​Safari Aviators Ltd. is an air transport company registered in the United Kingdom. On their scheduled flights to East Africa, the company's planes land in Nairobi to connect passengers to other destinations in Africa. Ticketing and other transactions are done through an airline agent in Nairobi, Kenya, who would sell tickets and meet other necessary obligations on behalf of Safari Aviators Ltd. 

The agent sold Sh.12,690,000 worth of tickets on behalf of the company in year 2020. The following expenses were incurred in carrying out airline operations in Kenya.

Sh.
•
Salaries for security officers
1,480,000
•
Furniture for Agency offices
240,000
•
Trade subscriptions
96,000
•
Computers
180,000
•
Purchase of Aircraft (UK) cost
126,000,000
•
Jet fuel
4,900,000
•
Covid-19 tests for staff members
148,000
•
Upgrading Agency website
60,000
•
Airline Authority clearance fees
360,000
•
Purchase of saloon car
3,500,000

Additional information: 
1. 15% of ticket sales are allowed annually by the Tax Authority in UK to cover for depreciation of other office equipment. 
2. 2% of total ticket sales are allowed annually to cover head office expenses relating to the agency. 
3. Operating expenses for the agency are allowed in full. 
4. 5% of the investment allowance is allowable to the agent for tax purposes on investment in aircrafts. 

Required: 
(i) A statement of adjusted taxable income or loss for the year ended 31 December 2020.

(ii)  Comment on any further information you may seek from the airline agency to facilitate accuracy of tax liability. 
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5c
Tax planning Tax systems and policies
​​Explain two ways through which proper tax planning may contribute to economic stability of a country.
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