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Hbc2245:Taxation Issues Question Paper
Hbc2245:Taxation Issues
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESITON ONE – (30 MARKS)
(a) With an aid of decided cases, explain the main avenues of tax planning. (10 Marks) (b) Discuss the anti tax avoidance provisions as contained in the income tax Act CAP 470. (5 Marks) (c) Discuss the implications of capital budgeting decisions on tax planning. (3 Marks) (d) The following details relates to 2 companies for year ended 31st December 2005 Details Company A Company B
No. of Shares 50,000@ 5 par 500,000 @5 par
10% preference shares 250,000@ 5 par -
10% debentures - Sh.1,250,000
Gross income Sh.2,500,000
Required: Compute the effective corporation tax and the cost of debt. (4 Marks) e) The directors of Gakoromone I Ltd. A foreign Company have identified Kenya as the probable oversees location for investment. They have two options.
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Option 1 To build a factory from the scratch and incur the following cost Factory building Shs.100m
New machinery Shs.300m
Executive office furniture Shs.20m
3 phase power supply Shs.40m
Computer soft ware Shs.46m
Loose tools Shs.5m
Staff canteen Shs.1m
Lorry 2.8 tons Shs.3m
Non commercial vehicle Shs.6m
Computers Shs.4m
Staff quarters Shs.2m
Office partitions Shs.3m
Kitchen utensils Shs.2m
Option 2 To lease a factory build and ready for use. The lease will be for 10 years. The lease charges would be Sh.435m on 20% p.a cost of capital.
Required Advice the company which option to undertake. Base your answer on tax provisions. (8 Marks)
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QUESTION TWO – (20 MARKS)
The management of Shamrock Bank Ltd has sought your professional guidance in determine the Bank’s tax liability for the year ended 31 December 2007. The income statement of Ufanisi Bank Ltd for the year ended 31 December 2007. The income statement of Ufanisi Bank Ltd for the year ended 31 December 2007 is given below:
Income Ksh ‘000’ Kshs ‘000’ Interest on loans and advances to customers 540,800 Interest on government securities 120,600 Interest on placements with other banks and institutions 40,650 Fees and commissions income 39,360 Rental income 2,190 Income from foreign exchange dealings 31,980 Gains disposal of property and equipment 12,300 Other operating income 42,950 Total income 830,830 Expenses; Salaries and employee benefits 360,400 Occupancy expenses 20,350 Deposit protection fund contributes 12,360 Depreciation expenses 43,700 Interest on customer’s deposit 202,450 Interest on deposit from other banks and institutions 80,200 Director’s emoluments; Fees 11,200 Other 3,600 14,800 Auditors’ remuneration; Current year 2,100 Under provision for the previous year (2006) 300 2,400 Operating lease rental 16,300 Loss on disposal of equipment 7,250 Other administrative expenses 20,620 Provision for bad and doubtful debts 80,500 Provision for interest suspense 20,950 Total expenses 882,280 Loss for the year (51, 450) Additional information
1. Salaries and employee benefits comprise: Sh.000 Leave benefits 720 Pension contributions 1,460 Termination costs 2,860 Provision for staff accruals 9,960
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2. Included in the Directors “other’ emoluments are: Sh.000
School fees for the Chairman children 1,200
Entertainment allowance (used on clients) 1,800
Travelling costs for a newly recruited expatriate director
600
3. The movement in provision for bad and doubtful debts during the year was as follows; Specific provisions Shs. ‘000’ General provisions Shs. ‘000’ Total Sh. ‘000’ At 1 January 2007 630,500 630 631,130
Charge for the year 83,800 15,300 99,100
Released during the year (18,600) - (18,600)
At 31 December 695,700 15,930 711,630
4. Provision for interest suspense represents non-performing loans and advances on which interest has been suspended. The management has confirmed that the loans and advances are fully secured. 5. Capital allowances for the year ended 31 December 2007 amounted to sh.18,900,000 6. Lease rental charges relate to office equipment leased from AB office solutions for use in the entire bank network.
Required: (a) (i) Taxable income of Ufanisi Bank Ltd for the year ended 31 December 2007. (11 Marks) (ii) Taxable payable (if any) on the taxable income computed in (i) above. (2 Marks) (b) Given the Ufanisi Bank Ltd’s taxable income for the year ended 31 December 2006, was assessed at Sh.2,400,000, show how the tax computed in (a) (ii) above is to be paid, inclusive of the due dates. (5 Marks) (c) Explain the implication of Income Tax Act – section 15(7) (e) (specified sources of income) on Ufanisi Bank Ltd. income. (2 Marks)
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QUESTION THREE – (20 MARKS)
(a) Discuss the main allowable expenses of a petroleum company. (5 Marks) (b) Tullop Limited, a company incorporated in Kenya has recently concluded a petroleum agreement with the government of Kenya. Under the terms of the petroleum agreement, the company has been allowed to explore along the Kenyan waters and shares the proceeds with the government on a 50:50 basis. The company has subcontracted TNM Ltd to carry out exploration surveys along waters for a period of 3 months. You are provided with the following information with regard to Tullop Limited
Tullop Limited Drafty income statement Kshs. ‘000’ Kshs. ‘000’
1,000,000
Geological and geophysical costs 20,000
Intangible drilling costs 10,000
Production expenditure 5,000
Salaries and wages to production staff 2,000
Entertainment of directors children 4,000
Payment to government (50:50 basis) 1,000
Executive and general admin expenses 1,000
Magement fees to KLM consultancy 3,000
Professional fees to Ernst & Young for consultancy services 2,000
Services fee paid to TNM Ltd 200,000
Interest on loan at arm’s length from Uganda Commercial bank
10,000
Exploration machinery purchased 10,000 (268,000)
732,000
Required: (i) Compute the taxable profit for Tullop Limited. (10 Marks) (ii) Compute the amount of the payable by TNM Ltd and the dates for the payment. (5 Marks)
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QUESTION FOUR – (20 MARKS)
Explain the following terms as used in taxation
(a) Tax design (b) In depth examination (c) Tax planning (d) Tax havens (e) Tax clinics (f) Top slice income (g) Tax mitigation (h) Thin capitalization (i) Tax shelter (j) Tax rebate (20 Marks)
QUESTION FIVE – (20 MARKS)
(a) Explain the difference between trading in and trading with a country. (5 Marks) (b) Explain the provisions of the income tax Act CAP 470 with regard to authority to grant double taxation in Kenya. (5 Marks) (c) Chris Ouma, a married Kenya resident, had income of Kshs.360,000 for year of income 2013 and also received income from Zambia net of tax Kshs.180,000. The tax Zambia was Kshs.60,000. Kenya has a double taxation relief treaty with Zambia.
Required: (i) The double taxation relief in Kenya (ii) The tax payable by Ouma. (5 Marks) (d) Explain the objectives of East African Community. (5 Marks)
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