TAXATION REVISION (QUESTIONS AND ANSWERS)

QUESTION ONE

Explain the meaning of the term “Residence” when applied to a company under Kenya Income Tax Act.  (5 marks)

• When applied to a company, “Residence” means:
• a body corporate incorporate under the laws of Kenya e.g. Companies Act Cap.486.      -a company whose management and control are exercised in Kenya.
• A company or body corporate which has been declared as a “resident” by Minister for Finance through a Kenya Gazette notice.

QUESTION TWO:   

Comment on any information not used above.(5 marks)   

Cost reimbursed by employer are mere reimbursements, which are not taxable.

Contributions to approve and unapproved scheme by employer is not a taxable benefit on employee.

Interest income for Mr. And Mrs. Mwongozo is subject to 15% W/T which is final.

Business income from Tanzania and dividends income from Tanzania are not taxable in Kenya.

City Council rates is private expenses and does not affect income.

Mortgage interest paid is not allowable since Mrs. Mwongo did not occupy her house during the years she was housed by the employer.

  PAYE was not deducted from the income of Mrs. Mwongozo.  Are Mr. And Mrs. Mwongozo to    blame for failure of the employer to deduct and pay PAYE?  Explain.    (3 marks)    

• And Mrs. Mwongozo do not have the responsibility to deduct and pay PAYE. This responsibility rests on the employer. If the employer does not deduct PAYE, he shall be liable to a fine of 25% of tax due subject to a minimum of sh.10,000.

QUESTION FIVE

Comment briefly on the following matters of taxation:

Presumptive income.   

• This is farming income derived from certain agricultural produce such as coffee, cotton, pyrethrum, tea, maize, wheat, cashew nuts etc.

• Where a farmer derives such presumptive income, he has 2 options of paying tax.
• Pay the presumptive income tax at 2% of gross income (before deducting any allowable expense) which is final tax or
• Determine the net taxable income (gross income – allowable expenses) and pay tax on graduated scale.

• Reverse charge     
  • This is VAT payable on imported services
  • The Kenyan importer would pay VAT on such services
  • The reverse charge is input tax deductible against the firms output tax
  • It is payable using form VAT 4
• Insurance reliefs   With effect from 1^st January 2003, the Minister for Finance reintroduced the insurance relief to  be offset against gross tax liability of individuals. The relief shall be the lower of: Set limit of Ksh.36,000 p.a (3,000 p.m) 15% of premium paidFor an individual to qualify for this relief he must have:

   

  Taken a life or education policy with a maturity period of not less than 10 years The policy must have been taken after 1/1/2003.

• Taxation of Export Processing Zones Enterprises.   
• EPZ enterprises enjoy the following tax incentives:
  • A 100% investment deduction on building and machine used to manufacture exports
  • Exports are zero rated hence they can claim a refund of input VAT paid.
  • Refund or customs duty paid on imported raw material to manufacture exports.

  (Total: 20 marks)

  A 10 year tax holidayA 25% corporate tax rate between years 11 – 20