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Advanced Taxation Question Paper
Advanced Taxation
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR STAGE 1EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 300: ADVANCED TAXATION
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ALL Questions
QUESTION ONE
a) With reference to section 7A of the Income Tax Act (Cap. 470), define the term
“compensating tax” (1 Mark)
b) The following information relates to ABC Ltd for the year ended 31 December 2008:
1. Profit before tax shs 4,000,000
2. Import duty refunded by tax authority sh.400,000
3. Dividend distributed by ABC ltd shs 8,800,000
4. Dividend received by ABC ltd shs. 3,000,000
5. Corporation tax rate 30%
Required
Compensating tax payable by ABC for the year ended 31 December 2008. (2 Marks)
c) Mr. Maji Mengi knows very little about double taxation agreements. He is a consultant, who works in many countries and in many cases; he has ended up paying taxes on the same income
more than once.
Required
Explain to Mr. Maji Mengi the concept of double taxation treaty. (3 Marks)
d) For the year of income 2008, Maji Mengi earned an equivalent of kshs 5,000,000 from
employment in Canada where he paid tax equivalent to kshs 4,000,000. in Kenya, he earned
consultancy fee of shs 2,000,000 and employment income of shs 900,000 (PAYE shs 220,000)
his Kenyan employer has provided his family with accommodation where rent paid is shs
85,000 per month. He is married to two wives and has 10 children. The wives do not earn any
income.
Required
i) The tax liability for Maji Mengi for the year of income 2008 (7 Marks)
ii) What is the tax position on ‘double taxation agreements’ in relation to non-residents?
(1 Mark)
iii) Define the ‘Tax Planning’ (2 Marks)
iv) Briefly explain two instances in which a business may apply the concept of tax planning
(4 Marks)
(TOTAL 20 Marks)
QUESTION TWO
a) Briefly explain the circumstances under which the income received by charitable trusts is exempted from tax (3 Marks)
b) Mavazi Ltd is a manufacturer of garments for the export Market. The company has availed the
following information for its trading period ended 31 December 2008;
Income: shs “000” shs “000”
Gross sales 24,000
Closing stock 1,500
Windfall gains 240
Profit on sale of land 40
Discount received 26
Total income 25,806
Expenses:
Purchases 10,500
Carriage inwards 600
Insurance 1,400
Import duty 3,750
Demurrage charges 146
Clearing and forwarding fees 84
Bank overdraft charges 16
Leasehold payments 360
NSSF contributions 120
Purchase of furniture 60
Legal fees 164
Wiring of new office block 42
Rent and rates 136
Bills payable 39
Depreciation 120
Staff party 450
Dividends paid 1,360
Loan repayment 470
Salaries and wages 3,256
Bed debts 103 23,176
Net profit 2,630
The following information is further obtained from the company’s records:
1) Insurance includes sh.400,000 paid in respect of imported machinery while in transits.
2) NSSF contributions relate to employees’ contributions only
3) Demurrage charges include shs 36,000 in respect of cargo handling fees.
4) Legal fees include shs 34,000 incurred on defending a company director in a private suit.
5) Bad debts analysis:
Bad debt account
Shs ‘000’ ‘000’
Bad debts written off 400 Balance brought forward:
Balance carried down: Specific provisions 379
Special provisions 46 General provisions 200
General provisions 236 Profit and loss accounts 103
682 682
Required
i) Compute the adjusted taxable profit or loss for Mavazi ltd for the year ended 31 December 2008.
(12 Marks)
ii) Determine the tax payable (if any) by the company (2 Marks)
(TOTAL 15 Marks)
QUESTION THREE
a) Write brief notes on the determination of the taxable income of resident insurance companies
(6 Marks)
b) Bima insurance company limited is registered in Kenya to carry out life and general insurance business. From its general ledger and other records for the year ended 31 December 2008, you have been able to extract the following
Life Business General Business Total
Shs Shs Shs
Insurance premiums received 360,000,000 740,000,000 1,100,000,000
Interest on fixed deposits (net) 119,000,000 63,000,000 182,000,000
Dividends received (net) 26,000,000 8,000,000 34,000,000
Interest on loans to policy holders 3,000,000 - 3,000,000
Interest paid on maturity of policies 27,000,000 - 27,000,000
Premiums returned 8,000,000 17,000,000 25,000,000
Interest on premiums returned 700,000 - 700,000
Premiums paid to reinsurance
Company 36,000,000 74,000,000 110,000,000
Commission received from
Reinsurance company 3,600,000 7,400,000 11,000,000
Agency expenses 36,000,000 88,800,000 124,800,000
Management expenses 15,160,000 74,000,000 89,160,000
Depreciation of fixed assets 22,000,000 33,000,000 55,000,000
Traveling expenses 6,000,000 11,000,000 17,000,000
Postage and telephone expenses 3,500,000 6,200,000 9,700,000
Advertising expenses 2,200,000 3,400,000 5,600,000
Bad debts (specific) 1,300,000 800,000 21,000,000
Rent income-Bima apartments 9,000,000 - 9,000,000
Rent expenses (office) 10,000,000 14,000,000 24,000,000
Additional information:
Reserves for unexpired risks as determined by Mr. Wafula Mengo, a registered actuary, were as follows:
Life business General business Total
Shs shs shs
I January 2008 29,000,000 89,000,000 118,000,000
31 December 2008 17,000,000 91,000,000 108,000,000
Claims Life Business General Business Total
Shs Shs Shs
Claims outstanding-1 January 2008 23,000,000 16,000,000 39,000,000
Claims paid during the year 39,000,000 113,000,000 152,000,000
Claims outstanding-31 December 2008 32,000,000 9,000,000 41,000,000
3. Wear and tear allowances for the year ended 31 December 2008, have been agreed with the
commissioner for income tax at shs 26 million for life business and 29 million for the general business respectively.
Required:
i) Taxable income of Bima Insurance Company ltd for the year ended 31 December 2008.
(12 Marks)
ii) Tax payable (if any), on the taxable income computed in (i) above (2 Marks)
(TOTAL 20 Marks)
QUESTION FOUR
a) i) In the context of the customs and exercise Act (Cap.472), what is meant by the term
“dumping”? (2 Marks)
ii) Identify the measures that a government may put in place to discourage dumping
(2 Marks)
iii) Outline four circumstances under which duty paid on imported goods may be refunded
(2 Marks)
b) The following transactions relate to Mapato Limited, a VAT registered company for
the month on June 2008:
1 June: Bought forward merchandise at sh.80, 000
3 June: Purchased vatable merchandise at sh.80, 000
4 June: Sold zero rated merchandise for sh.60, 000
6 June: Purchased merchandise from a trader at sh.100, 000. This trader was not
registered for VAT purposes.
7 June: Merchandise worth 16,000 was returned to the suppliers
9 June: Merchandise sold on 4 June for shs 25,000 was returned by customers.
12 June: Sold merchandise for shs 360,000
19 June: A customer who had purchased merchandise on 12th June for shs.18, 000 was declared
bankrupt before paying the amount due from him.
25 June: purchased merchandise as follows:
• From suppliers registered for VAT purposes - shs 80,000
• From suppliers not registered for VAT purposes shs 40,000
27 June: sold merchandise as follows:
• To customers registered for VAT purposes - shs 160,000
• To customers not registered for VAT purpose - shs 122,000
Required:
VAT account for the month ended 30 June 2008. (9 Marks)
(Where applicable, transactions are inclusive of VAT at the standard rate)
(TOTAL 15 Marks)
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