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Advanced Taxation Question Paper
Advanced Taxation
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 300-A: ADVANCED TAXATION (Day& Evening)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
Wananchi Ltd. is a wedding-dress making company. The business is fully established in Kajiado town.
The company’s accountant has prepared the following profit and loss account for the year ended 31
December 2009
Sh Sh
Salaries and wages 2,000,000 Net sales 9,000,000
Rents rates and insurance 150,000 Profit on foreign exchange 2,200,000
Painting of extensions 1,200,000 Premiums on shares issued 720,000
Pension 600,000 Dividend from a fully owned
subsidiary company
1,100,000
Commission Paid for issue
of shares
30,000 Interest 230,000
Legal expenses 1,050 000 Insurance recovery 400,000
Bad debts 600,000
Subscriptions and
donations
750,000
Bank charges and interests 550,000
Depreciation 250,000
Training expenses 750,000
Income tax paid 850,000
Traveling expenses 270,000
Audit fees 335,000
Motor vehicle running
expenditure
670,000
Loss in value of stock 520,000
Net profit 3,075,000
13,650,000 13,650,000
2
The following information and schedule are attached to the profit and loss Account:
Bad debts include an increase in general provision of Ksh. 150,000
Ksh
Legal expenses: purchase of director’s private house 150,000
Issuing of notices to defaulting debtors 100,000
Acquisition of copyrights for designs 200,000
Contracts for royalties payable by customer 220,000
Renewal of lease for 50 years 180,000
Arranging a mortgage for director 200,000
1,050,000
Training expenses:
These include Ksh. 400,000 paid for director’s son studying in Hong Kong. The company intends to
employ him after his studies.
Pension amounting to Ksh. 600,000 were paid to retired staff.
Interest of Ksh 230,000 was from deposits in foreign banks
Rents and rates include Ksh 80,000 paid to the income tax for the previous year
Subscriptions and donations include:
Ksh
Chamber of Commerce and Industry 300,000
Pastor AB Uhuru Park Crusade 120,000
Flying Doctors Service 50,000
Donations to a political party 280,000
750,000
Salaries and wages include the salary for the director’s son of Ksh. 15,000 per month
Repairs and extensions include: Ksh
Seminar room extensions 400,000
Redecorations 200,000
Overhaul of machinery 600,000
1,200,000
Traveling expenses include business trips to India and Taiwan. One tenth of the expenses were used in
seeing tourists’ attractions.
Insurance recovery is in connection with fire suffered in the previous year
Required:
Determine the adjusted profit for tax purposes and the tax payable in respect thereof. (15 Marks)
(Total: 15 Marks)
3
QUESTION TWO
a) Citing appropriate instances, explain tax planning stating how an individual can engage in the same
within the Kenyan tax law. (4 Marks)
b) Mr. Fredrick Kanoute is a citizen of Rwanda. He received two job offers in Kenya for which he has
sought your advice. Both offers require him to commence work on 1 January 2011.
Offer A
Mr. Fredrick Kanoute would be employed as corporate communications manager with Tetrapack
(EA) ltd, a regional company with its headquarter in Nairobi Kenya. The offer provides for the
following:
1. A basic salary of ksh 130,000 per month to be increased by 10% semi-annually.
2. A monthly bonus of 5% of the basic pay to be received on the ninth day following that to which
the pay relates.
3. Fuel allowance of ksh 10 per kilometer. He estimates to cover 10,000 kilometers per annum,
three quarters of which will be on official duties.
4. Access to loan facilities from the employer to a maximum of five million shillings per annum.
He plans to obtain two million shillings at 5% interest rate per annum on 1 August 2011.
Assume a prescribed interest rate of 12% per annum.
5. The company will provide him with free return air tickets worth ksh 8,000 on 30 June and 31
December each year to enable him visit his family in Rwanda.
6. Entrance fees of ksh 3,000 to join Corporate Communication Society of Kenya would be paid for
him by the company. He would however personally pay the subscription to the society
amounting to ksh 1,200 per month commencing 1 February, 2011.
7. He will be provided with free mobile phone airtime worth ksh 5,000 per month commencing 1
February 2011. This will be utilized on official calls.
8. The company will provide him with a house whose market rental value is ksh 18,000 per month.
The company will deduct ksh 3,000 from his pay in respect of the house each month. The
company will furnish the house at a cost of ksh 800,000. In addition the company will provide
a night watchman and a house servant each of whom will be earning ksh 2,000 per month.
Offer B
Mr. Fredrick Kanoute would be employed as a director of operations with Sarova Whitesands ltd, a
private limited company. The offer provides for:
4
1. A basic salary of ksh 150,000 per month and an allowance of ksh 2,000 per month for attending
board meetings.
2. An annual allowance of ksh 220,000 for the purchase of office attire in line with his new status.
3. A provision for sending directors to their Burundi office on a month job rotation. Mr. Fredrick
Kanoute will be sent to Burundi in November 2011 and he will receive his monthly pay there,
though he will still attend the board meetings in Nairobi for that month.
4. A Mercedes Benz saloon car costing ksh 1,800,000 (3,000 cc) will be provided to him.
5. A night watchman (at a monthly salary of ksh 2,000).
Required:
Evaluate the tax impact of each job offer and advise Mr. Fredrick Kanoute on which one he should
accept. (Assume the rates f tax for 2009). (16 Marks)
(Total: 20 Marks)
QUESTION THREE
a) Persons registered for VAT are entitled to input tax deductions for VAT paid on inputs which
relate directly to their taxable supplies except where the law prohibits these non deductible.
List three items that are prohibited for input tax deductions. (4 Marks)
b) State the conditions that must be fulfilled for a claim for relief in respect of bad debt to be valid
under the provisions of the VAT Act (2 Marks)
c) Maendeleo (K) Ltd is a leading manufacturer of a wide range of goods which are either consumed
locally or exported. During the month of September 2009, the following transaction took place.
September
2 Paid Ksh.1044,000 to George Williams an American who had come to design the
company’s website.
4 Received architects certificate amounting to Ksh.3,480,000 for the extension to the
factory building which had been completed. Out of this amount, Ksh.1,000,000
represents retention money.
5 Purchased goods on credit from KLM Ltd worth Ksh.1,392,000
6 Purchased stationery for use in the business on credit from text book centre worth
Ksh.580,000
6 Sold goods worth Ksh.3,016,000 on credit to options (K) Ltd.
7 Sold goods to Zim Bank (K) for Ksh.2,088,000
5
9 Paid Mersk shipping lines Ksh.350,000 for transporting goods purchased by Zim Bank
(K) Ltd.
11 Options (K) Ltd returned goods worth Ksh.300,000 due to some major defects
11 Sold goods worth Ksh.860,000 on credit to Homa Bay Wholesalers
12 Returned defective office stationery, which had cost 50,800 to Text Book Centre
14 Sold goods for Ksh.1,220,000 to Rwanda Miners Ltd, a company based in Rwanda
16 Goods worth Ksh.200,000 were stolen while in transit to Rwanda
18 Granted to Ksh.20,000 allowance to Rwanda miners Ltd for some miner defects on
some items.
18 Agreed to counsel the account receivable from Zim Bank (K) Ltd in exchange for
services rendered by them to the company in the coast province.
20 Sold goods fro cash amounting to Ksh.2,734,000
23 Homa Bay Wholesalers was declared insolvent by high court and a winding up order
issued
30 Telephone and electricity bills for the month were received. The VAT on the telephone
and electricity bills was Ksh.30,000 and Ksh.17,500 respectively.
Required:
a) The VAT account for Maendeleo (K) Ltd for the month of September 2009. (where applicable
prices and payments made are VAT inclusive) (8 Marks)
b) Amount of VAT payable and when it’s due (2 Marks)
c) Briefly describe the procedure for payment of VAT on an imported service (2 Marks)
d) Comment on any information not used in (i) above (2 Marks)
(Total: 20 Marks)
QUESTION FOUR
a) Distinguish between the “most favoured nation status” and “double tax agreement” with respect to
cross border activities (4 Marks)
b) With reference to the Customs and Excise Act (Cap 472), write short notes on the following:
i) Four categories of goods liable to forfeiture to the Customs Department (3 Marks)
ii) Four privileged persons or institutions exempted from pre-shipment inspection of
imports (3 Marks)
c) Explain the potential benefits of regional economic integration with specific reference to Kenya as
a member of the East African Community (EAC) (5 Marks)
(Total: 15 Marks)
6
ADVANCED TAXATION EXAMINATION
RATES OF TAX (Including wife’s employment, self employment and professional income rates of tax). Year
of income 2009.
Monthly taxable pay Annual taxable pay Rates of tax
(Shillings) (Shillings) % in each shilling
1 - 10164 1 -121968 10%
10165 - 19740 121969 - 236880 15%
19741 - 29316 236881 - 351792 20%
29317 - 38892 351793 - 466704 25%
Excess over 38892 Excess over -466704 30%
Personal relief Ksh.1.162 per month (Ksh.13,944 per annum)
Prescribed benefit rates of motor vehicles provided by employer
Monthly Annual
Rates rates
(Ksh) (Ksh)
Capital allowances:
Wear and tear allowances:
Class I 37.5%
Class II 30% (i) Saloons, Hatch Backs
Class III 25% and Estates
Class IV 12.5%
Industrial building allowances: Up to 1200 cc 3,600 43,200
Industrial buildings 2.5% 1201- 1500 cc 4,200 50,400
Hotels 10 % 1501- 1750 cc 5,800 69,600
Farm work allowances 50 % 1751- 2000 cc 7,200 86,400
Investment deduction allowances: 2001- 3000 cc 8,600 103,200
2003 - 70% Over 3000 cc 14,400 172,800
2004 - 100%
2005 - 100% (ii) Pick-ups, Panel Vans (Unconverted)
Shipping investment deduction 40%
Mining allowance: Up to 1750 cc 3,600 43,200
Year 1 - 40% Over 1750 cc 4,200 50,400
Year 2-7 - 10% (iii) Land Rovers/ Cruisers 7,200 86,400
OR 2% of the initial capital cost of the vehicle for each month.
Commissioner’s prescribed benefit rates
Monthly rates Annual rates
Services Ksh. Ksh.
(i) Electricity (common or from generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
(iii) Provision of furniture (1% of cost to employer)
If hired, the cost of hire should be brought to charge
(iv) Telephone (Landline and mobile phones) 30% of bills
Agriculture employees: reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800
Other benefits:
Other benefits for example, servants, security, staff meals etc are taxable at the higher of fair market value and
actual cost to employer.
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