Advanced Taxation KASNEB Notes

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PAPER NO. 16 (S1) ADVANCED

TAXATION UNIT DESCRIPTION

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to solve complex tax issues, implement tax planning initiatives and administer tax in various business environments.

 

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

  • Compute the tax liability of enterprises, entities and specialised business
  • Handle all value added tax matters
  • Apply the procedure for conducting a tax investigation
  • Explain the tax dispute resolution mechanism
  • Explain the tax implications for cross border business
  • Develop tax policies

 

CONTENT

 

  1. Taxation of business income and specialized business activities

 

  • Partnership business
    • Admission of a new partner and retiring partners during the year
    • Conversion of partnerships into liability companies
    • Incomplete records pertaining to partnership businesses
    • Case law on taxation of partnership businesses

 

  1. Limited companies
    • Taxation of companies, including holding company, subsidiaries, branches and related parties
    • Incomplete records pertaining to limited companies
    • Minimum tax
    • Shortfall tax computation
    • Taxation of dividends
    • Case law on taxation of limited companies
    • Rental income, including residential rent income, Commercial rent income and Real estate investment trusts (REITS)
    • Charitable institutions
    • Leasing entities, including hire purchase lease agreements
    • Co-operative societies, Saccos
    • Trade associations, amateur sporting association and clubs
    • Trust bodies, settlements and estates under administration
    • Financial institutions: Banks, insurance companies
    • Sea and air transport undertakings
    • Collective investment schemes
    • Professional, training, management, agency, and consultancy fees
    • Property developers and contractors
    • Taxation of extractive industries
    • Capital gain tax
    • Digital service tax
    • Application of relevant case law

 

  1. Value added tax administration
    • Obligations of a taxable person and offences relating to VAT
    • Value added tax computation
    • Restriction of input tax claimable
    • Imported services and VAT withholding agents
    • VAT refunds and bad debt relief computation
    • VAT Accountant certificate
    • Value added tax automated assessments
    • I tax significance and application in value added tax administration
    • Application of relevant case law

 

  1. Tax investigations
    • Tax fraud
    • Civil and criminal tax investigation
    • Events which may trigger an investigation
    • Back duty and in-depth examination
    • Customs and excise investigations
    • Negotiation for settlement: Tax amnesty, Tax Penalties and Enforcement for outstanding taxes
    • Types of tax audit and their significance
    • Application of relevant case law

 

  1. Tax dispute resolution mechanism
    • Tax disputes
    • Stages of tax dispute resolution process
    • Tax dispute resolution process cycle
    • Legal framework and objectives of Alternative Dispute Resolution
    • Types of tax disputes eligible for Alternative Dispute Resolution
    • Benefits of Alternative Dispute Resolution
    • Parties to Alternative Dispute Resolution and their roles
    • Issues exempted from Alternative Dispute Resolution
    • Alternative Dispute Resolution agreement terms and timelines
    • Termination of alternative dispute resolution
  2. Taxation of cross border activities
    • Distinction between trading in and trading with a country
    • Double taxation agreements; theory, design and application
    • Regional perspective with reference to the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA)
    • Most favored nation status
    • Nature, characteristics and significance of One Stop Border Posts (OSBPs)
    • Generalized system of preference and AGOA
    • Tax havens and treaty shopping
    • Tax information exchange agreements (TIEAS)
    • Transfer pricing: oecd guidelines
    • Application of relevant case law
  3. Tax planning
    • Tax planning for individuals: By way of Tax exempt activities, transactions that are allowable expenses and transactions attracting tax setoffs
    • Tax planning for body corporates
    • Identifying opportunities to alleviate, mitigate or defer the impact of direct or
    • indirect taxation
    • Evaluating remuneration packages
    • Tax avoidance and anti-tax avoidance provisions in the tax Act, short-fall distributions of dividends
    • Sectoral tax incentives
    • Disposal of business operations and restructuring of activities
    • Tax risk management

 

  1. Tax systems and policies
    • Types of tax systems
    • Role of taxation in economic development; tax base expansion, efficiency in tax systems
    • Design of a tax policy
    • Criteria for evaluation of a tax system
    • Tax reforms and modernisation of tax systems under various Acts
    • KRA structure – Large Tax Payer and Medium Tax Payer organisations

 

  1. Professional practice in taxation
    • Forms of tax practice and matters relating thereto
    • Matters relating to new clients
    • Handling of client work
    • Disclosures in tax returns, computations and correspondence with the Revenue Authority
    • Moral and ethical issues in taxation
    • Tax agents, appointment, obligations, professional liability
    • Cancellation of tax agents license
    • Role of tax agents in appeals procedure
    • Tax health check

SAMPLE WORK

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TOPIC 1

TAXATION OF BUSINESS INCOME AND SPECIALIZED ACTIVITIES

 

Introduction

Business income is among the specified sources of income which is taxable under sec 3(2) of the income tax. A business can be operated as a corporation, sole proprietorship or as partnership.

Factors to consider in evaluating whether the business is in the nature of trade

  • Profit motive-this must be underlying objective rather than incidental.
  • The nature of the asset acquired and the quantities involved.
  • Method of financing.
  • Method used in generating sales eg advertising.
  • Mode of asset acquisition.

 

Taxable business income

  1. Gains arising from selling and buying.
  2. An amount of insurance compensation for the loss or damage of stock (for non-current asset is not taxable).
  3. Bad debt recovered which were previously considered as allowable when they were written off.
  4. Realized foreign gains.
  5. Balancing charge and trading receipt.

 

Non-taxable incomes

  1. Income from foreign investment.
  2. Reduction in general provision for doubtful debt.
  3. Additional capital introduced.
  4. Capital gains eg sale of an asset at a gain.
  5. Unrealized profit.
  6. Dividends where the entity have atleast 12.5% equity ownership.
  7. Inheritance on an individual basis.
  8. Interest from government infrastructural bond with maturity period of more than 2 years.
  9. Interest from post bank.
  10. Insurance compensation for non-current assets

 

Allowable expenses

They are expenses which are wholly and exclusively incurred in the production of incomes. The guiding principle is subject to the provision of income tax act. They include:

  1. Specific trade bad debt.
  2. Capital allowances.
  3. Subscription to a trade association.
  4. Legal cost in connection with acquisition of lease of not more than 99 years.
  5. Interest on loan for business development.
  6. Marketing and advertising expenses.
  7. Loss brought forward from previous years with a limit of 4 years.
  8. Legal fees paid on listing securities.
  9. Cost incurred for prevention of soil erosion.
  10. Scientific research related to business.

 

Disallowable deductions

They are expenses not wholly or exclusively incurred on day to day operating income generating

  1. Capital expenditure on acquisition of non-current assets.
  2. Depreciation, impairment and amortizations.
  3. Personal and private expenses.
  4. General provision for bad debt but specific is allowable.
  5. All provisions.
  6. Tax related expenses.
  7. Legal fees and other profession fees of capital nature in relation to borrowing, valuation of property and preparation of partnership deeds.
  8. Capital repairs including cost of extension and replacement.
  9. Fines and penalties.
  10. Other expenses regarded as non-business such as donation

 

Donations are not allowable except in the following circumstance:

  • Where the donation is to the charitable organization.
  • Where the tax payer provides evidence of donation payment.
  • Donations provided can be quantified in monetary value.
  • Donor cannot claim a refund.
  • The donor is not benefiting in any way in monetary terms.

 

Specified sources of income 

  • Business income
  • Employment income
  • Property income e.g. rent and royalties
  • Investment income e.g. dividend and interest income
  • Agricultural/farming income
  • Income from past employment e.g. pension.

 

1.1 PARTNERSHIP BUSINESS

Introduction

A partnership is a relationship that subsists between two or more people carrying on business together with a view to making profits. Gains or profits from a partnership are assessed on the partners and not the partnership. The profits/losses arising from the partnership is added to the partner’s total income from another source. A partnership is usually established by an agreement known as a “partnership deed” which outlines the following: –

  1. Amount of capital to be contributed by each partner
  2. Salaries to be paid to partners
  3. Interest to be charged on drawings by partners
  4. Interest to be paid on capital contributed by partners
  5. The profit-sharing ratio

In the absence of a deed it is assumed that, there is no interest paid on capital, no interest charged on drawings, no salaries payable to partners and that, profits & losses will be shared equally

 

Taxation of Partnerships

The income of the partnership is taxed on the partners.

The net profits/losses of a partnership must be adjusted for taxation of purposes, this includes adding back disallowable expenses if already deducted and deducting non- taxable incomes if already included. These adjustments are: –

  1. Expenses to be allowed must have been expended wholly and exclusively in the production of that income.
  2. Capital expenses are not allowable
  3. Personal expenses are not allowable
  4. Salaries to partners are not allowed
  5. Interest on capital to partners is not allowable
  6. Interest paid by partners on drawings is not taxable
  7. Wife’s salaries are not allowable
  8. Drawings are not allowable
  9. Disposal of fixed assets is not taxable

Non allowable expenses for partners

  1. Partner’s private expenses
  2. Partners’ drawings
  3. Partners’ salaries and commissions
  4. Interest on partners’ capital
  5. Goodwill written off
  6. Non allowable expenses like any other business.

Allowable expenses for partners

  1. Medical expenses or medical cover of up to Shs. 1,000,000 per annum per partner
  2. Contribution to a registered home ownership saving plan of up to Shs. 96,000 per
    annum
  3. Contribution to a registered individual retirement scheme of up to Shs. 240,000 p.a
  4. Owner occupier interest of up to sh. 300,000 p.a

 

After these adjustments, net amount is then distributed to the partners as per the deed

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