W1-2-60-1-6

JOMO KENYATTA UNIVERSITY

OF AGRICULTURE AND TECHNOLOGY

University Examinations 2012/2013

YEAR III SEMESTER I EXAMINATION FOR THE DEGREE OF BACHELOR OF

COMMERCE

HBC 2216: ADVANCED TAXATION

DATE: AUGUST 2012 TIME: 2 HOURS
INSTRUCTIONS: ANSWER QUESTION ONE (COMPULSORY) AND ANY OTHER TWO QUESTIONS

QUESTION 1

a) Corporate tax planning is emerging as one of the popular methods of shielding a

company’s profits from negative effects of inflations. Explain five ways in which
corporate entities may engage in tax planning.
(10 marks)

b) Mark and John are in partnership trading as Majo Enterprises and sharing profits
and losses of 3:2 respectively. They have presented the following profit and
loss account for the year ended 31 December 2011.

Income; Shs.
Revenue 6,882,000
Refund of VAT 41,250
Dividend (Net) 42,800
Interest on Post Bank Savings A/C 8,750
Proceeds from sale of fixed assets 190,000
Expenditure: 7,164,800
Cost of sales 1,591,500
Lorry maintenance expenses 1,005,750
Household expansion mark 96,250
Salaries to partners 800,000
National Social Security Fund Contributions 170,000
National Hospital Insurance Fund Contributions 108,750
Repairs and maintenance – buildings 75,000
Advertising 156,750
Insurance premium 125,000
Interest on loan 200,000
Subscriptions to trade associations 40,000
Donations 20,000
Legal expenses 98,000
Income tax 240,000
General expenses 86,650
Bad debts 61,750
Water and electricity 81,000
Depreciation 19,500
Net profit 2,188,900
7,164,800
ADDITIONAL INFORMATION:

1. Included in Sales revenue were goods valued at Shs.150,000 consumed by the

partners. These goods had cost Shs.80,000 which was included in the cost of sales.

2. Insurance premiums include Sghs.70,000 included on the life Insurance Policy of John.

3. Bad debts comprise:

Shs.
Increase in general provisions 20,000
Increase in specific provision 41,750

4. Interact on loan and legal expenses relate to a mortgage acquired by mark for
purchase of his house.

5. Salaries to partners comprise:

Shs.
Mark 500,000
John 300,000
800,000

6. NSSF and NHIF contributes relate to the employees of the firm.

REQUIRED:

a) The adjusted partnership profit or loss for the year ended 31 December 2011.

b) An allocation of the adjusted profit and loss between the partners.

QUESTION 2

Msuri Insurance Ltd underwrites three classes of Insurance. The management has provided
you with the details show below on their operations for the year ended 31st December 2011.

Class of Insurance Fire Motor Vehicle Theft

Shs ‘000’ Shs ‘000’ Shs ‘000’
Gross premium written 46,176 49,328 19,560
Re insurance coded 29,494 30,014 9,644
Unearned premium b/f 8,410 12,586 2,932
Unearned premium c/f 4,070 18,518 1,336
Claims paid 4,432 11,076 2,430
Claims outstanding b/f 5,562 20,650 9,064
Claims outstanding c/f 5,510 18,832 17,512
Legal expenses on claims 1,290 840 250
Depreciation 120 250 170
Gains on sale of motor vehicles
Previously written off - 50 -
Specific bad debts 160 70 124
Management expenses 3,212 4,700 1,752
Commissions (Net) 310 3,092 1,780
ADDITIONAL INFORMATION:

1. The company invested surplus funds and earned investment income as follows:

Shs.
Interest from fixed deposit in local banks (Net) 1,524,900
Dividends from ABC Ltd 1,824,000
Interest from treasury bills (Net) 4,080,000
Gross dividends from Burundian Bank 900,000

2. The company paid Shs.1,490,000 to XYZ Investment management Services , their

fund managers for professional Services for the years ended 31st December 2011.

3. Mzuri Insurance Ltd owns 80% of the ordinary shares of ABC Ltd a locally
incorporated company.

4. The company owns Mzuri House which houses its offices. Part of the office space
or rented out of which they received Shs.4,400,000 net rental income firm their
estate agents. Properly management fees amounting to Shs.4,800,000 for the
year to 31 December 2011 had not been deducted.

5. Wear and tear deductions have been agreed with income tax department at Shs.908,000.

REQUIRED:

i) Compute the fixable profit or loss for Mzuri insurance Ltd for the year ended
31 December 2011.

ii) Compute the tax payable.

iii) Comment on any information not used. (20 marks)

QUESTION 3

a) State the key provisions of section 19 of the income top act relating to
the taxation of savings and credit co-operations societies. (3 marks)

b) Max Savings and credit co-operations Society Ltd reported the following
incomes and expenditure for the year 2011.

Shs.
Rental Income 200,000
Royalty Income 300,000
Interest on loans to members 2,000,000
Interest on fixed deposit account 500,000
Interest from savings account 1,000,000
Dividend income 600,000
Total Income 4,600,000
Expenditure
Repairs and maintenance 400,000
Administration expenses 360,000
Rent and rates 540,000
1,300,000
Surplus 3,300,000
 i) The surplus declared 60% of its income as dividends.

ii) Capital allowances amounted to Shs.20,000

REQUIRED:

Compute the taxable profit of Max Sacco Ltd for the year ended 31 December 2011.(14 marks)

c) Briefly explain the concept “thin capitalization” as applied in taxation

of companies. (3 marks)

QUESTION 4

a) Explain five circumstances in which a VAT registered person may be

de-registered. (5 marks)

b) The management of XYZ Ltd a registered supplier of vatable goods presented

the following information relating to the company’s transactions for the
six months ended 30 June 2011.

SALES PURCHASES
SHS. SHS.
January 1,500,000 2,200,000
February 1,800,000 2,700,000
March 1,700,000 2,000,000
April 1,500,000 900,000
May 400,000 600,000
June 2,000,000 2,600,000

ADDITIONAL INFORMATION:

1. Included in the sales for the month of May 2011 was Shs.200,000 for which the
debtor defaulted and was subsequently declared bankrupt on 30 June 2011.

2. Ten percent of the purchases made by the company in the month of April were
returned to the suppliers on the same month.

3. All purchases and sales are inclusive of VAT.

4. All purchases were made on cash basis while all sales were on credit sales was
received in the month following the month of sale.

REQUIRED:

i) Compute the VAT payable or refundable for each of the six months from
January to June 2011 (Prepare a VAT account)

ii) Suppose that the company did not file VAT return fro the month of February 2011
and that the VAT payable was also not remitted to the tax authority.

Further, the management of the company intends to remit the VAT for February 2011
on 30 June 2011. Determine the amount of VAT payable by XYZ Ltd (Inclusive
of penalties and interest) on 3oth June 2011 in relation to this VAT liability. (4 marks)
QUESTION 5

a) Write brief notes on the following:

i) Clean report on findings (2 marks)

ii) Bond security (2 marks)

iii) Import declaration form (2 marks)

iv) Pre-shipment inspection (2 marks)

v) Bonded warehouses (2 marks)

b) Explain five types of goods which are subject to customer’s control under
Section 12 of Cap 472. (10 marks)