TAX INVESTIGATION QUESTIONS AND ANSWERS

QUESTION 1

Assume that you are a senior tax assessor with the revenue authority of your country. You have been conducting back-duty investigations on a taxpayer and are now about to make your final recommendations on the action to be taken against the taxpayer.

Required:

Discuss five factors that you would take into account in making your final recommendations.

 

Factors you have to put in consideration in making the final recommendations

  • The intention of tax payer
  • The amount of cash involved
  • The cooperation of tax payer i.e. the extent to which the tax payer cooperated during the investigations
  • The duration and period involved in the tax activities
  • Whether or not voluntary declarations were made by tax payer

 

QUESTION 2

Circumstances under which imported goods are considered to have been dumped in Kenya; 

  • Goods are sold in Kenya at a price lower than the cost of Importing i.e. cost of insurance, freight, duty taxes, cost of’ goods etc. In the country exporting the goods.
  • The export price in the country which is exporting the gods is less than the fair market value of price of goods in that country.
  • If the country exporting to Kenya had imported the goods and:
    • The export price of goods in the original country of export is less than fair market price in that county
    • The export price of goods in the country which is exporting to Kenya after importing is less than fair market price in that country.

 

QUESTION 3

List four circumstances under which duty paid on imports is refundable.

  • Capital goods of more than $5m per investment for new investment aimed at net forex savings or earnings
  • Goods imported by oil exploitation or oil prospecting companies iii) Capital equipment’s and machinery imported or purchased solely for use in. a  manufacturing under bond / or in licensed customs bonded factory for export only.
  • Goods used in an official aid funded capital investment project v) Goods imported under bond for manufacture of experts

 



Explain the term “thin capitalization.”  

 Thin capitalization (see 16 (2) (i). A firm is said to be thinly capitalized if its debt / equity ratio is more than 3 times. For a thinly capitalized firm, controlled by 4 or less nonresident individuals, the interest expense associated with debt capital is restricted as  allowable expense to the extent which the CIT may consider to be just and equitable.

 

Name four incentives given by the government to encourage the growth of capital market in Kenya.

Incentives for growth in capital market

  •  Taxation of dividends at a low rate of 5% withholding final tax
  •   Taxing the newly listed companies at 27% to encourage investments in them
  •   Exempting some dividends and interest from taxation (special provisions)
  •  Taxing individuals on interest at 15% withholding final tax

 

Explain briefly the meaning of “goods subject to customs control” under the Customs and Excise

            Act (Cap. 472) 

  •  Imported goods through the post office
  •  Dutiable goods and excisable goods
  •  Seized goods or goods under notice of seizure over
  •  Goods on board and aircraft
  • Goods under drawback
  • time of taxation
  •  Goods subject to restriction on exportation
  •  Goods pending exportation and are stored in a custom area with the permission of a proper officer
  •  Goods subject to export duty from failure of bringing them to the port for export to the

 

Explain the requirements of an application for refund of VAT paid in respect of Bad debts.

  • Requirements of application for Bad debt refund of VAT
  •  Where the debtor has been legally declared insolvent by the courts
  •  The debt has been outstanding for more than 3 years (esc 24A Cap 476)
  •   Refund to be claimed within 5 years

 

For the purpose of determine thin capitalization, debt capital will consist of.-  – Long term debt / loan

  • short term loans
  • Bank overdraft
  • trade creditors
  • Overdrawn bank accounts

 

QUESTION 4

 It may be advantageous for a trader whose turnover is below the legislated turnover limits under the sixth schedule to the V AT Act to register for VAT voluntarily. Under what circumstances could this be beneficial?

 

  • Claim input
  • tax
  • Enjoys soft
  • loan
  • Improves the image of the company

 

QUESTION 5

Explain the meaning of tax evasion

 

These are illegal ways of reducing one’s tax burden. It entails tax payers, deliberately  misinterpreting or canceling the true state of their affair to the tax authorities to reduce tax  liability and includes in particular.

  1. Engaging in illegal or adventurous activities where the incomes have not been disclosed for tax purpose
  2. Rendering services where the income on service rendered will be received in kind and not in cash i.e. it is not recorded or disclosed
  3. Related party transactions e.g. transfer pricing.
  4. Preparation of fraudulent tax returns or dishonest tax reporting like under declaring and omission of taxable income, inflating deductible expenses or failure to submit or both.

 

QUESTION 6

Explain what is meant by Tax Avoidance?   

It is a professional way of reducing one’s tax burden. The tax payer study’s the income tax act  and detects some loophole which he can capitalize 011 to reduce the tax burden  It may be applied through different ways of tax panning e.g.

  1. Financing decision
  2. Lease or buy decision
  3. Investment decision i.e. investing in areas where the return is exempt or where the return will be subjected to lower taxes
  4. Non-distribution of dividends i.e. shortfall distribution
  5. The form of business ownership
  6. Production activities

 

QUESTION 7

Write brief notes on back duty.  

Back duty is a term used to refer to assessment and collection of which are in arrears

  • A taxpayer will be considered to have committed a crime if he doesn’t give in accurate returns on time
  • The commissioner can issue estimated returns to all tax payers the self-assessment

Tax can be in arrears due to the following:

  1.  Under declaration of incomes
  2.   Non declaration of incomes
  3.    Overstatement of expenses (allowable expenses)
  4.    Claiming allowances or receipt which one is not entitled

 

QUESTION 8

Define the term “shortfall distribution tax”. Under what circumstances can a company be  exempted from shortfall distribution tax?   

Shortfall is the difference between the amount of dividend determined by the commissioner and   the actual distribution mace by the company. The commissioner expects the companies to pay the

following amounts as dividends to their shareholders.

  • 40% of the I let Adjusted trading profit after Corporation Tax
  • 100% oil all ether non trading types of incomes e.g. interests, dividends, rent etc. of the company after corporation tax

Under the following circumstances, the companies will be exempted from shortfall distribution tax

  1. The company’s authorized capital is fully issued and therefore it cannot obtain further is from shareholders and can only rely on its internal reserves to finance its investments plans.
  2. The company does not have any liquid funds
  3. The company does have liquid funds but the company is reserving them to clear maturing obligations e.g. loans, mortgages or plans to purchase plant and machinery,  building etc
  4. The company is expanding its business and trading operations and requires additional commitment inventory,
  5. The company has committed itself to purchase another business as long as the company to be purchased is not a company that is a source of raw materials or a distribution  company for its products.
  6. Any company controlled directly or indirectly by the government of Kenya

 

QUESTION 9

Identify and explain instances when a capital statement may be required. 

  • When proper books of accounts have not been maintained
  • When no books accounts are maintained at all and estimates can be made.
  • When income provided by the tax payer is questionable this can instigate an investigation
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