TUESDAY: 5 December 2023. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Any assumptions made must be clearly and concisely stated. Do NOT write anything on this paper. RATES OF TAX (Including wife’s employment, self-employment and professional income rates of tax)
QUESTION ONE
1. 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. (4 marks)
2. 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:
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:
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:
Asili and Tulivu partnership business. (6 marks)
Asili Ltd. Company. (7 marks)
A schedule showing allocation of adjusted partnership profit or loss computed in (b) (i) above, to the
partners. (3 marks)
(Total: 20 marks)
QUESTION TWO
1. 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. (3 marks)
2. 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. (6 marks)
3. 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. (3 marks)
4. The following incomes and expenses were extracted from the accounting records of Turkanah Oil Ltd. for the year ended 31 December 2022:
Required:
Prepare a statement of taxable profit or loss of Turkanah Oil Ltd. for the year ended 31 December 2022.
(6 marks)
Identify the clarifications that the tax authority may seek from the company concerning exploration and
drilling costs. (2 marks)
(Total: 20 marks)
QUESTION THREE
1. 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. (4 marks)
2. Explain how the adoption of the following policy frameworks would strengthen revenue mobilisation in your country:
Fiscal policy options. (2 marks)
Tax policy options. (2 marks)
3. 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:
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. (12 marks)
(Total: 20 marks)
QUESTION FOUR
1. 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. (8 marks)
2. The following is a statement of profit or loss for Express Commercial Bank Ltd. for the year ended 31 December 2022:
Required:
Compute the adjusted taxable income and tax payable by Express Commercial Bank Ltd. for the year ended 31 December 2022. (10 marks)
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.
(2 marks)
(Total: 20 marks)
QUESTION FIVE
1. 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. (6 marks)
2. 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. (6 marks)
3. 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:
Compute double taxation relief due to Alexia Gosselin for the year ended 31 December 2022. (6 marks)
Net tax liability (if any) payable by Alexia Gosselin in Kenya for the year ended 31 December 2022.
(2 marks)
(Total: 20 marks)
