Advanced Taxation December 2023 Past Paper

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). Year of income 2022.

Personal relief Sh.2,400 per month (Sh.28,800 per annum).

Investment allowance:

Capital expenditure incurred on: Rate of investment allowance Residual value (25% per year on equal instalments) Prescribed benefit rates of motor vehicles provided by employer
(i) Saloons, Hatch Backs and Estates
Monthly Annual
rates rates
(Sh.) (Sh.)
(a) Buildings:
• Hotel building
• Building used for manufacture
• Hospital buildings
• Petroleum or gas storage facilities
• Educational/hostels building
• Commercial building
50% in the first year of use 50% in the first year of use 50% in the first year of use 50% in the first year of use
10% per year on straight line basis 10% per year on straight line basis
25% Up to 1201 –
1501 –
1751 –
2001 –
Over – 1200 cc
1500 cc
1750 cc
2000 cc
3000 cc
3000 cc 3,600
14,400 43,200
(b) Machinery:
• Machinery used for manufacture
• Hospital equipment
• Ships or aircraft
• Motor vehicles and heavy earth moving equipment
• Computer software, calculators, copiers and duplicating machines
• Furniture and fittings
• Telecommunication equipment
• Film equipment by a local producer
• Machinery used to undertake operations under prospecting rights and exploration under mining rights
• Other machinery 50% in the first year of use 50% in the first year of use 50% in the first year of use
25% per year on straight line basis 25% per year on straight line basis
10% per year on straight line basis
10% per year on straight line basis 25% per year on straight line basis 50% in the first year of use

10% per year on straight line basis 25%

25% (ii) Pick-ups, Panel Vans (unconverted)
Up to – 1750 cc Over – 1750 cc
(c)Purchase/acquisition of right to use
fibre optic cable by telecommunication operation 10% per year on straight line basis (iii) Land Rovers/Cruisers 7,200 86,400
(d)Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Services (Sh.)

Annual rates (Sh.)

(i) Electricity (Communal or from a generator)
(ii) Water (Communal or from a borehole)

1,500 18,000

500 6,000

Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

(a) 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.
Advise Masterway Ltd. on FOUR items that should be included in a transfer pricing policy document. (4 marks)
(b) 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:

Sh. Sh.
Sales 20,184,000
Gain on sale of shares 1,056,000
Foreign exchange gain-unrealised 450,000
Recovery from insurance on stolen stock 1,400,000
Discount received 552,000
Dividend – Wakaguzi Co-operative Society (gross) 153,000
Total incomes 23,795,000
Purchases 8,526,000
Purchase of computers 540,000
Partners salaries 2,160,000
Legal fees 2,040,000
Repairs and maintenance 1,705,200
Rent and rates 733,800
Interest on loan 498,600
General expenses 2,892,000
Motor vehicle expenses 2,520,000
Insurance 468,000
Preliminary expenses 788,400
Directors fees 1,800,000
Audit fees 444,600
Debenture interest 1,080,000
Travelling expenses 288,000 (26,484,600)
Net loss

Additional information: (2,689,600)
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:
Notice for change of business name 194,400
Conveyance fees of business premises 217,200
Stamp duty 349,800
Acquisition of business loan 62,400
Recovery of bad debts 135,000
Signing a 99 year lease agreement 385,200
Purchase of Asili’s private residence 450,000
Appeal against tax assessment 246,000 2,040,000
6. Repairs and maintenance comprised:
Purchase of furniture 288,000
Installation of neon sign 180,000
Designing office block 1,170,000
Painting of new office block 67,200 1,705,200
7. General expenses included:
Registering of patents 336,000
Negotiating for additional land for business expansion 168,000
8. Interest on loan includes interest on partners capital of Sh.300,000 which was shared according to profit and loss sharing ratio.

Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2022 for:
(i) Asili and Tulivu partnership business. (6 marks)
(ii) Asili Ltd. Company. (7 marks)
(iii) A schedule showing allocation of adjusted partnership profit or loss computed in (b) (i) above, to the partners. (3 marks)
(Total: 20 marks)
(a) 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)
(b) 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)
(c) 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.
Compute the capital gains tax payable by ABC Ltd. (3 marks)
(d) The following incomes and expenses were extracted from the accounting records of Turkanah Oil Ltd. for the year ended 31 December 2022:

Income Sh.“million”
Proceeds from sale of oil (2,800,000 barrels at Sh.15,000 per barrel) 42,000
Value of chargeable oil disposed of to local refineries 21,000
Value of chargeable natural gas and other incomes 26,500
Freight charges received from other oil transport 22,800
Royalties paid for crude oil exported
Staff accommodation expenses 2,820
Royalties incurred in respect of natural gas disposed of to local refineries 3,420
Interest on loan from foreign subsidiary company 1,890
Employee salaries and emoluments 8,200
Specific bad debts 240
Exploration and drilling costs of oil wells 12,960
Contribution to approved pension schemes 720
Customs duties on drilling machines 1,500
General expenses 7,800
Petroleum oil tankers (ships) 1,800
Cost of generator 500
Intangible drilling cost 1,380
Administration expenses 750
Exploration costs 1,680
Pipeline and storage tank 16,920
Buildings-onshore-factory 5,400
Fixtures and fittings 630
Purchase of drilling machines 5,500
(i) Prepare a statement of taxable profit or loss of Turkanah Oil Ltd. for the year ended 31 December 2022.
(6 marks)
(ii) Identify the clarifications that the tax authority may seek from the company concerning exploration and drilling costs. (2 marks)
(Total: 20 marks)

(a) 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)
(b) Explain how the adoption of the following policy frameworks would strengthen revenue mobilisation in your country:
(i) Fiscal policy options. (2 marks)
(ii) Tax policy options. (2 marks)
(c) 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:

Revenue Sh.“million” Sh.“million”
Operating expenditure 66,564
Fleet ownership 13,653 (80,217)
Gross profit
Other income:
Interest income (net)
558.025 25,898
Bonus shares from associate company 174
Fair value gains on fuel derivatives Gain on hedged exchange differences:
Borrowings 7,482

Fuel contracts 597 10,731.025
Total income
24,898.5 36,629.025
Finance costs 2,228
Realised losses on fuel derivatives 5,656
Other losses 752
Deferred taxation on cash flow hedges 755 (34,289.5)
Net profit for the year 2,339.525
Additional information:
1. Revenue comprises of: Sh.“million”
Cargo freight revenue 8,151
Passenger revenue 94,257
Handling 1,968
Miscellaneous revenue 1,739
2. Operating expenditure analysis: Sh.“million”
Direct expenses 13,938
Aircraft fuel and oil 12,795
Aircraft landing, handling and navigation 21,832
Passenger services 6,668
Commission on sale of air ticket 4,869
Aircraft passenger and cargo insurance 549
Crew expenses 2,613
Central reservation system 2,708
Other miscellaneous expenses 592
3. Fleet ownership costs analysis: Sh.“million”
Hire of aircrafts 8,880
Depreciation on aircrafts and engines 4,641
Depreciation on rotables and equipment 393
Aircraft purchase subsidy from government (261)

4. Analysis of overhead costs: Sh.“million”
Administration expenses 15,262.5
Staff costs 522
Legal and professional fees 110
Directors remuneration 16
Audit fees 2,238
General maintenance and supplies 2,094
Depreciation of buildings and office equipment 1,290
Amortisation of intangible assets 546
Selling 997
Advertising and publicity 413
Bad debts written off 1,410

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.

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)
(a) 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)
(b) The following is a statement of profit or loss for Express Commercial Bank Ltd. for the year ended 31 December 2022:
Income: Sh.“000” Sh.“000”
Interest on loans and advances to customers 936,480
Royalty income (net of withholding tax) 11,400
Rebate on bills discounted 1,800
Interest on Treasury bills and bonds 168,000
Interest on placement with Central Bank 51,240
Fees and commission income 43,440
Investment revaluation surplus 11,232
Profit on sale of motor vehicle 5,256
Rent and rates 75,250
Staff costs 347,720
Impairment of intangible assets 10,440
Depreciation 42,800
Deposit protection fund contribution 16,360
Interest on deposits from other banks 62,800
Directors remuneration 26,600
Interest on customer deposits 184,200
Audit fees 2,040
10% debenture stock 200,000
Redemption reserve 3,240
Purchase of delivery van vehicle 3,500
Installation of online banking system 32,600
Finance lease rentals 14,860
Loss on sale of equipment 19,640
Finance costs 70,200
Allowance for bad and doubtful debts 98,160 (1,210,410)
Net profit 18,438

Additional information:
1. Staff costs include:
Provision for proposed tax increment Sh.“000”
Ex-gratia payment 1,240
Negotiating loans for staff 1,000
Retrenchment costs 1,680
Provision for staff leave arrears 8,680
2. Directors remuneration include:
Education trip cost for directors children 1,600
Entertainment allowance for clients 1,560
Air tickets for expatriate directors 720
3. Allowance for bad and doubtful debt analysis:
Sp ecific provision General provision Sh.“000” Sh.“000” Total Sh.“000”
Balance brought forward 1 January 2022 684,000 888 684,888
Charge in the year 108,000 8,640 116,640
Reduction in the year (18,480) – (18,480)
Balance carried forward 31 December 2022 773,520 9,528 783,048

(i) Compute the adjusted taxable income and tax payable by Express Commercial Bank Ltd. for the year ended 31 December 2022. (10 marks)
(ii) 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)
(a) 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)

(b) 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.

Advise the Board of Directors of Pixes (Kenya) Ltd. on each of the THREE issues raised above. (6 marks)

(c) 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.

(i) Compute double taxation relief due to Alexia Gosselin for the year ended 31 December 2022. (6 marks)

(ii) Net tax liability (if any) payable by Alexia Gosselin in Kenya for the year ended 31 December 2022.
(2 marks)
(Total: 20 marks)

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