CPA ADVANCED LEVEL

ADVANCED TAXATION
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.
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 32,333 288,001 - 388,000 25%
Excess over - 32,333 Excess over - 388,000 30%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual value Prescribed benefit rates of motor vehicles
(25% per year provided by employer
on equal (i) Saloons, Hatch Backs and Estates
instalments) Monthly Annual

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Capital expenditure incurred on: rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200

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• Hotel building 1201 - 1500 cc 4,200 50,400

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50% in the first year of use 25%

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• Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600

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• Hospital buildings 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
• Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
• Educational/hostels building 10% per year on straight line basis Over - 3000 cc 14,400 172,800
• Commercial building 10% per year on straight line basis
(b) Machinery: (ii) Pick-ups, Panel Vans
• Machinery used for manufacture 50% in the first year of use 25% (unconverted)
• Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
• Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
• Motor vehicles and heavy earth 25% per year on straight line basis
moving equipment
• Computer software, calculators, 25% per year on straight line basis
copiers and duplicating machines
• Furniture and fittings 10% per year on straight line basis
• Telecommunication equipment 10% per year on straight line basis
• Film equipment by a local producer 25% per year on straight line basis
• Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
• Other machinery 10% per year on straight line basis
(c) Purchase/acquisition of right to use 10% per year on straight line basis (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual rates

Services (Sh.) (Sh.)
(i) Electricity (Communal or from a 1,500 18,000
generator)
(ii) Water (Communal or from a 500 6,000
borehole)
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

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 QUESTION ONE
(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.
Required:
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
Expenses:
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

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Preliminary expenses 788,400

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Directors fees 1,800,000

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Audit fees 444,600

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Debenture interest 1,080,000

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Travelling expenses 288,000 (26,484,600)
Net loss (2,689,600)

Additional information:
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:
Sh.
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.
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 Required:
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)

QUESTION TWO
(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.
Required:
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:

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Income Sh.“million”

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Proceeds from sale of oil (2,800,000 barrels at Sh.15,000 per barrel) 42,000

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Value of chargeable oil disposed of to local refineries 21,000

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Value of chargeable natural gas and other incomes 26,500
Freight charges received from other oil transport 22,800
Expenses:
Royalties paid for crude oil exported 4,800
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

Required:
(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)
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 QUESTION THREE
(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:

Sh.“million” Sh.“million”
Revenue 106,115
Operating expenditure 66,564
Fleet ownership 13,653 (80,217)
Gross profit 25,898
Other income:
Interest income (net) 558.025
Bonus shares from associate company 174
Fair value gains on fuel derivatives 7,482
Gain on hedged exchange differences:
Borrowings 1,920
Fuel contracts 597 10,731.025

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Total income 36,629.025

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Expenses:

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Overheads 24,898.5

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Finance costs 2,228

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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
106,115

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
66,564

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)
13,653
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 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
24,898.5

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.

Required:
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)

QUESTION FOUR
(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:

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Sh.“000” Sh.“000”

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Income:

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Interest on loans and advances to customers 936,480

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Royalty income (net of withholding tax) 11,400

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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
1,228,848
Expenses:
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

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 Additional information:
1. Staff costs include:
Sh.“000”
Provision for proposed tax increment 480
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:

Specific provision General provision Total
Sh.“000” Sh.“000” 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

Required:
(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.

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Calculate the tax due as at 31 December 2022 clearly indicating the due dates for the payment of the tax.

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(2 marks)

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(Total: 20 marks)

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QUESTION FIVE
(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.

Required:
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.

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 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.

Required:
(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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 CPA ADVANCED LEVEL

ADVANCED TAXATION
TUESDAY: 22 August 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.
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 32,333 288,001 - 388,000 25%
Excess over - 32,333 Excess over - 388,000 30%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual value Prescribed benefit rates of motor vehicles
(25% per year provided by employer
on equal (i) Saloons, Hatch Backs and Estates
instalments) Monthly Annual

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Capital expenditure incurred on: rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200

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• Hotel building 1201 - 1500 cc 4,200 50,400

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50% in the first year of use 25%

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• Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600

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• Hospital buildings 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
• Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
• Educational/hostels building 10% per year on straight line basis Over - 3000 cc 14,400 172,800
• Commercial building 10% per year on straight line basis
(b) Machinery: (ii) Pick-ups, Panel Vans
• Machinery used for manufacture 50% in the first year of use 25% (unconverted)
• Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
• Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
• Motor vehicles and heavy earth 25% per year on straight line basis
moving equipment
• Computer software, calculators, 25% per year on straight line basis
copiers and duplicating machines
• Furniture and fittings 10% per year on straight line basis
• Telecommunication equipment 10% per year on straight line basis
• Film equipment by a local producer 25% per year on straight line basis
• Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
• Other machinery 10% per year on straight line basis
(c) Purchase/acquisition of right to use 10% per year on straight line basis (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual rates

Services (Sh.) (Sh.)
(i) Electricity (Communal or from a 1,500 18,000
generator)
(ii) Water (Communal or from a 500 6,000
borehole)
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

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 QUESTION ONE
(a) Discuss how the following issues may generate ethical dilemmas to a tax professional:

(i) Conflict of interest. (3 marks)

(ii) Contingent fee tax representations. (3 marks)

(b) Describe THREE criteria for evaluating modern tax systems. (6 marks)

(c) Summarise FOUR signs that may point to tax fraud in a business entity. (4 marks)

(d) Citing FOUR reasons, argue the case for double taxation agreements as tax incentives. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) E and K commenced trading as partners under the name EK Enterprises on 1 January 2022. They share profits and
losses equally and were entitled to receive monthly salaries of Sh.240,000 and Sh.288,000 for E and K respectively.
The partnership did not maintain a complete set of accounting records. The following is a summary of the partnership’s
bank statement for the year ended 31 December 2022:
Bank Statement Summary
Receipts Payments
Sh. “000” Sh. “000”
Capital introduced: E 42,000 Office equipment 22,500
K 30,000 Salaries and wages 10,680
Cash sales 122,400 Godown rent 4,500
Dividend: Weka Co-operative Society (net) 20,400 Payment to suppliers 118,800

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Receipts from debtors 62,400 Repairs and maintenance 5,320

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Insurance 750

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Interest paid 7,344

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Motor vehicle expenses 2,022

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General expenses 2,616
Delivery van acquired 36,000
Fines and penalties 780
Electricity bill 540
Medical expenses 7,560
Balance carried forward 57,788
277,200 277,200

Additional information:
1. As at 31 December 2022, the partnership owed suppliers Sh.9,360,000 while the amount owed by customers
was Sh.10,740,000.
2. Rebate received from suppliers amounted to Sh.1,590,000 and discount allowed to customers amounted to
Sh.1,416,000.
3. Bad debts amounted to Sh.984,000 out of which Sh.240,000 relate to a loan advanced to E that was overdue.
4. Closing stock was valued at Sh.7,440,000 as at 31 December 2022.
5. Salaries and wages include salary to the partners for the year.
6. Included in the interest expense is interest on partners’ capital contribution at the rate of 8% per annum.
7. The annual rent for the godown was Sh.5,400,000.
8. As at 31 December 2022, electricity and insurance owing amounted to Sh.300,000 and Sh.153,600
respectively.
9. The following payments were made in cash from cash sales before banking:
Sh.
Motor vehicle expenses (per annum) 1,656,000
Wages (per annum) 1,944,000
Sundry expenses (per annum) 420,000
Weekly drawings: E 86,400
K 46,800

(Assume 52 weeks in a year).

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 Required:
(i) Compute the adjusted partnership profit or loss for the year ended 31 December 2022. (8 marks)

(ii) Distribute the profit or loss to the partners and thus ascertain the taxable income for each partner.
(3 marks)

(b) Alternative Dispute Resolution (ADR) methods are utilised by revenue authorities to resolve and expedite tax related
disputes on a timely basis. While ADR mechanisms present many advantages, they also face certain challenges when
applied to tax matters.

Explain SIX challenges faced in the administration of ADR in your country. (6 marks)

(c) Analyse the Income Tax Act provisions in relation to taxation of collective investment schemes. (3 marks)
(Total: 20 marks)

QUESTION THREE
(a) Evaluate FOUR methods that multinational companies operating in Kenya can use in order to adjust transfer prices
for purposes of computing taxable income as provided under the Transfer Pricing Rules (2006). (4 marks)

(b) Nalo Ltd. started a small merchandise business on 1 January 2022. The company did not maintain a set of complete
records and as such has not filed income tax returns for the year of income 2022. The Revenue Authority has sent
the company a demand notice of Sh.2,200,000 as the tax due for the year 2022.

The company director has approached you and requested that you assist in ascertaining the correct tax liability and
also advise him on whether to object the demand notice.

The following details have been availed:

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1. Analysis of the bank account for the year ended 31 December 2022 revealed the following:

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DR CR

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Sh. Sh.
Balance brought forward 1 January 2022 1,940,000 Fixtures and fittings (cost) 366,000
Cheques from customers 1,299,200 Suppliers of goods 1,392,000
Refund from suppliers 83,530 Bank charges 29,600
Rental income 1,040,000 Delivery van at cost 1,000,000
Sale of fixtures 96,000 Salaries and wages 1,060,000
Cash sales 8,816,000 Computers at cost 480,000
Rent and rates 124,000
Electricity 116,000
Telephone and postage 125,800
Refunds to customers 74,240
Computer software cost 120,000
Balance carried forward 8,387,090
13,274,730 13,274,730

2. Other information obtained from the books of accounts included:

1 January 2022 31 December 2022

Sh. Sh.
Inventory 4,320,000 2,250,000
Suppliers of goods 478,200 239,200
Trade debtors 348,000 960,000
Accrued electricity 66,000 116,000
Lorry 1,400,000 1,400,000
Prepaid wages and salaries 320,000 140,000
Rent and rates owing 45,000 17,000

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 3. All non-current assets were acquired in the course of the year. The cost of fixtures sold was Sh.220,000.
4. Opening and closing inventories were undervalued and overvalued by 20% and 10% respectively.
5. Cash purchases amounted to Sh.2,400,000. All sales and purchases are inclusive of value added tax (VAT)
at the rate of 16%.
6. The business issued credit notes of Sh.34,800 for goods returned by credit customers and received discount
from suppliers of Sh.52,000.

Required:
(i) Prepare a statement showing the correct adjusted taxable income and tax payable (if any) for the year ended
31 December 2022. (10 marks)

(ii) Advise the director on the action to take on the demand notice. (3 marks)

(c) The Revenue Authority of your country intends to introduce a tax on digital assets in the next government budget.
During public participation forums, most citizens rejected the proposed digital tax since they were not conversant
with digital assets.

Citing an example, explain what “digital assets” entail. (3 marks)

(Total: 20 marks)

QUESTION FOUR
(a) Assume that your country has continued to face challenges in addressing tax deficits. Over the past few years, the
revenue from taxation has not fully met the country’s development needs.

Required:
As a tax expert, advise the revenue authority in your country on FIVE possible reasons for the shortfall in tax
collection. (10 marks)

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(b) KK Realtors are in the real estate business. They rent out two prime highrise buildings, one a residential apartment

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and the other an office block. They are registered for the monthly residential rental obligation as well as filing for

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value added tax (VAT).

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Details of their transactions for the month of December 2022 are provided below:

Incomes: Sh.“000”
Rent: Apartment 1,248,450
Office block 7,244,200
Expenses:
Garbage collection 75,864
Sewerage 92,800
Repairs and maintenance (outsourced to local company) 144,420
Housing agents fee (5% of income) ?
Security firm (eight day and eight night guards) 464,000
Insurance 580,000
Interest on bank loan 139,200
Caretakers’ salaries 92,800
Webhosting (by South Africa-based company) 67,280
Audit and assurance fee 1,334,000
Telephone and electricity 52,952
Other staff salaries 992,496
Architect’s fee (based in France) 184,730

The following additional information is provided:

1. With the exception of housing agents fee, webhosting and architect’s fee, a quarter of the expenses relate
to the residential business while the rest relate to the office block.
2. Housing agents fee accrues based on the amount paid for income collected from each property.
3. Webhosting and architects fee could not be directly attributed to either the residential apartment or office
block.
4. Tenants of the office block are agents for withholding value added tax (VAT) and withholding rental
income.
5. The figures provided are quoted inclusive of VAT where applicable.
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 Required:
(i) Calculate the tax payable under the VAT and income tax obligations by KK Realtors for the month of
December 2022. (7 marks)

(ii) Show the withholding tax collected under the obligations in (b)(i) above, if any, as well as the net rent
income received by KK Realtors, as cash. (3 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Explain THREE reasons why investment allowances as tax incentives have not achieved the intended objectives in
your country. (3 marks)

(b) Tax risks are broadly classified into specific and generic categories.

Analyse TWO types of risks in each category. (4 marks)

(c) Johnson Shauri has not been maintaining proper books of accounts since the inception of his business in year 2019.
The following balances were obtained from the available business records for the four year period ended
31 December 2022:
31 December 31 December 31 December 31 December
2019 2020 2021 2022
Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Leasehold property 11,760 11,760 11,760 11,760
Motor vehicles 5,040 4,720 9,360 10,760
Furniture 864 864 864 864
Bank overdraft 1,288 1,400 1,210 1,115
Loss on sale of investment - 100 - -
Accounts receivable 432 504 408 600

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Mortgage loan 2,080 1,840 1,620 1,500

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Inventory 620 572 482 520

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Computers 620 720 840 720

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Bank account 240 268 272 286

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Personal clothes and effects 60 80 100 120

The following additional information was obtained:

1. Drawings of goods and provision for taxation for the year 2019 were Sh.600,000 and Sh.360,000 respectively and
has been accumulating at a rate of 10% annually.
2. Capital allowances were agreed at a total of Sh.920,000 for each of the four years.
3. Donations to a political party in the year 2020 amounted to Sh.142,000.
4. Gifts from relatives for the year 2021 were Sh.840,000.
5. Contingent liability in respect of a pending court case in the year 2022 was Sh.1,000,000.
6. Rent paid on behalf of a close friend was Sh.605,000 in the year 2022.
7. Living expenses were estimated at Sh.800,000 in the year 2019 and had been increasing at the rate of 15%
cumulatively each year.

Required:
(i) Compute the taxable income or loss of Johnson Shauri for the three-year period ended 31 December 2020, 2021
and 2022. (10 marks)

(ii) Summarise THREE specific actions that a tax practitioner could undertake upon discovery of an irregularity in the
client’s business. (3 marks)
(Total: 20 marks)
…………………………….…………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED TAXATION
TUESDAY: 25 April 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.
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 32,333 288,001 - 388,000 25%
Excess over - 32,333 Excess over - 388,000 30%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual value Prescribed benefit rates of motor vehicles
(25% per year provided by employer
on equal (i) Saloons, Hatch Backs and Estates
instalments) Monthly Annual

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Capital expenditure incurred on: rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200

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• Hotel building 1201 - 1500 cc 4,200 50,400

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50% in the first year of use 25%

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• Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600

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• Hospital buildings 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
• Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
• Educational/hostels building 10% per year on straight line basis Over - 3000 cc 14,400 172,800
• Commercial building 10% per year on straight line basis
(b) Machinery: (ii) Pick-ups, Panel Vans
• Machinery used for manufacture 50% in the first year of use 25% (unconverted)
• Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
• Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
• Motor vehicles and heavy earth 25% per year on straight line basis
moving equipment
• Computer software, calculators, 25% per year on straight line basis
copiers and duplicating machines
• Furniture and fittings 10% per year on straight line basis
• Telecommunication equipment 10% per year on straight line basis
• Film equipment by a local producer 25% per year on straight line basis
• Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
• Other machinery 10% per year on straight line basis
(c) Purchase/acquisition of right to use 10% per year on straight line basis (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual rates

Services (Sh.) (Sh.)
(i) Electricity (Communal or from a 1,500 18,000
generator)
(ii) Water (Communal or from a 500 6,000
borehole)
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

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 QUESTION ONE
(a) Analyse FOUR roles of an arbiter in a tax alternative dispute resolution (ADR) process. (4 marks)

(b) Sema and Tena are partners running a small hardware business in your town. They are facing a tax audit by the
Revenue Authority for failure to maintain complete records. They have approached you to assist them in
ascertaining the taxable profit or loss for the year ended 31 December 2022.

The following information has been provided to you:

1. The partnership deed provides that:

• Profits and losses will be shared in the ratio of 2:1 for Sema and Tena respectively.
• Each partner will be entitled to a monthly salary of Sh.90,000 and a bonus to be agreed from time
to time.
• Partners would be allowed to withdraw up to Sh.250,000 in cash with no interest. Any excess
cash withdrawals would be subject to interest at the rate of 12% per annum.
• No interest is charged on withdrawal of goods by partners.
2. On 1 September 2022, the partners admitted Vuna and the profit and loss sharing ratio was revised to equal
basis for the three partners. Vuna was entitled to interest on capital like the other partners at the rate of
10% per annum. She was not entitiled to any salary or bonus for the year ended 31 December 2022.
3. Extract of account balances were as follows:
31 December 2022 31 December 2021
Sh. Sh.
Accrued bonus due to partners 1,000,000 900,000
Inventory 350,000 260,000
Accounts payable 3,000,000 2,600,000
Prepaid advertising 210,000 440,000
Outstanding electricity bill 26,000 20,000
Accounts receivable 3,900,000 2,700,000

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Accrued salaries and wages (excluding partners salaries) 510,000 230,000

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Accumulated depreciation 700,000 440,000

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Capital: Sema 720,000 720,000

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Tena 480,000 480,000

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Vuna (Admitted 1 September 2022) 540,000 -
4. Extracts of cash payments during the year were as follows: Sh.
Paid to suppliers of goods for resale 9,000,000
Bonus paid to partners shared equally 1,300,000
Cash withdrawn: Sema 300,000
Tena 350,000
Loan interest 48,000
Advertising 250,000
Salaries and wages (including partners salaries) 4,390,000
Motor vehicle expenses 340,000
Electricity 90,000
Computer software 70,000
Purchase of office equipment 62,000
Employee welfare costs 300,000

5. Receipts channeled through the bank account were as follows: Sh.

Proceeds from sale of computers 55,000
Royalty income (net of withholding tax) 380,000
Credit sales 15,600,000
6. Cash purchases and cash sales amounted to Sh.900,000 and Sh.2,400,000 respectively and were value
added tax (VAT) inclusive.
7. The partners had withdrawn goods for personal use as follows: Sh.
Sema 210,000
Tena 70,000
No entries were made in the books to record these withdrawals.
8. Hardware goods valued at Sh.60,000 were destroyed in a flood in July 2022. The insurance company
agreed to pay Sh.40,000 as compensation but by 31 December 2022, the amount had not been received.
9. Assume that revenues and expenses accrued evenly throughout the year, unless otherwise specified.

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 Required:
(i) Prepare a statement of taxable profit or loss of the partnership for the year ended 31 December 2022.
(11 marks)

(ii) A schedule showing allocation of the profit or loss to the partners for the year ended 31 December 2022.
(5 marks)
(Total: 20 marks)

QUESTION TWO
(a) During the period between 1 July 2015 and 30 June 2020, Chris Alexo earned income of Sh.18,000,000 which he
did not declare to the revenue authority. The tax thereon amounted to Sh.6,000,000 with penalties and interest of
Sh.1,500,000 and Sh.600,000 respectively. In the year 2021, Chris Alexo applied for relief under the voluntary tax
disclosure programme (VTDP) and the approval was done in August the same year. He thereafter paid Sh.3,000,000
to offset the tax due. During the year ended 31 December 2022, Chris Alexo settled Sh.1,500,000 of the principal
tax but accrued further penalties of Sh.250,000 and interest of Sh.100,000. He estimates that he can only pay
Sh.1,000,000 during the year 2023. This will result into additional penalties and interest of Sh.100,000 and
Sh.60,000 respectively.

Required:
Compute the tax, penalties and interest (if any) for the relevant years to be waived or paid by Chris Alexo under the
VTDP. (8 marks)

(b) Rick Lenon, a citizen of United Kingdom was recruited in London by Faux PLC, an international non-governmental
organisation (NGO) with its head office in Nairobi, Kenya. Its activities are carried on in the Eastern Africa and
Horn of Africa region through field stations, except in Kenya where the head office is based.

The following details relate to his earnings in Kenya Shillings for the year ended 31 December 2022:

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1. His basic salary for the year aggregated to Sh.12,000,000.

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2. He was provided with air tickets valued at Sh.360,000 to visit his family.

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3. Owing to the environment in the field stations, hardship allowance of Sh.1,200,000 was paid.

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4. His movement to and from the field stations outside Kenya was facilitated by Faux PLC in form of air
tickets that costed Sh.4,800,000 in the year.
5. During the year, he was away in the foreign field stations for more than 156 days.
6. In an arrangement where Faux PLC has with a five-star hotel in Kenya, he consumed meals valued at
Sh.270,000 which were paid for by the employer.
7. Assume that he was an “other-than-resident” employee for the year 2022.

Required:
Determine taxable income and tax liability (if any) in Kenya for Rick Lenon for the year ended 31 December 2022.
(6 marks)
(c) The national treasury in your country recently issued a draft national tax policy for public participation and
discussion.

Required:
(i) Explain THREE objectives of a national tax policy. (3 marks)

(ii) Describe THREE practical challenges that a national tax policy is aimed at addressing. (3 marks)
(Total: 20 marks)

QUESTION THREE
(a) The tax laws and regulations in most developing countries have been changing in recent years. This rapid change
in legislation may expose tax payers to the risk of non-compliance.

Required:
(i) Explain the term “tax health checks”. (2 marks)

(ii) Describe FOUR reasons why businesses should conduct regular tax health checks. (4 marks)

(b) Saika Ltd. is a company engaged in real estate development. The company constructed eight, two-bedroomed
residential houses for sale and three commercial buildings in different locations in the country.
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 The company has presented the following information relating to the properties development as at 31 December
2022:

Residential houses:
1. Cost of acquisition of land where the houses were constructed was Sh.10,000,000. The company had
incurred the following costs in relation to land acquisition; stamp duty Sh.1,800,000, brokerage fees
Sh.800,000 and legal fees to facilitate the purchase Sh.360,000.
2. The following costs were incurred on construction:
• Material cost for each house was Sh.4,350,000 inclusive of value added tax (VAT) at a rate of
16%.
• Architectural and surveying fee was Sh.1,624,000 inclusive of VAT. The company paid
Sh.50,000 for each house to the county government for approval of the construction.
• Professional fees for engineers amounted to Sh.3,480,000 inclusive of VAT.
• Labour cost was Sh.400,000 for each house per month. It took the company nine months to
complete the construction.
• The construction was financed by Ujenzi Housing Bank with a loan of Sh.80,000,000 at an interest
rate of 12% per annum. The loan was to be repaid at year end when all houses were sold. Only
70% of the loan was used on the houses. The balance was used to finance construction of the
commercial buildings.
• Drainage system and sewerage line cost Sh.960,000 for all houses.
• The company leased equipment for construction at a total lease charge of Sh.2,000,000.
3. Other costs incurred included:
• Cost of landscaping the entire land where the houses were constructed Sh.300,000.
• Legal fees of Sh.180,000 to settle disputes in relation to the title deed of the land.
4. All the houses were sold by 31 December 2022 at a selling price of Sh.12,500,000 per house. The following
costs were incurred in selling the houses:
• Legal fees Sh.120,000 per house.

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• Valuation fee for all houses Sh.1,200,000

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• Advertising to find a buyer Sh.1,000,000 for all houses.

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Commercial buildings:

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• The commercial buildings were constructed at a total cost of Sh.30,000,000 each. This included shops at
Sh.2,200,000, gym and steam bath Sh.1,450,000 and a swimming pool for the tenants at Sh.2,400,000.
• The commercial buildings were leased on 1 October 2022 at a monthly rent of Sh.1,200,000 each. Key
money received on signing the lease agreement amounted to Sh.1,000,000 per building.
• The tenants were required to pay a monthly premium charge for extra services provided of Sh.200,000 per
house.
• Maintenance expenses per month amounted to Sh.300,000.
• The company incurred advertising costs of Sh.400,000 of which Sh.120,000 was incurred before leasing
the buildings.
• Installation of CCTV cameras cost. Sh.180,000 on each building and insurance for the whole year
amounted to Sh.480,000 for all the buildings.

Required:
Compute the total taxable income and tax payable (if any) by Saika Ltd. for the year ended 31 December 2022.
(14 marks)
(Total: 20 marks)
QUESTION FOUR
(a) As a professional tax practitioner undertaking tax advisory for the small and micro enterprises (SME) sector, explain
FOUR aspects of compliance with the tax code in your country that constitute the major pain points for the SME
sector. (4 marks)

(b) Tusaidiane SACCO is a deposit taking cooperative society. The SACCO has a clear separation of its back-office
activities (BOSA) and its front-office activities (FOSA).

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 Details of their operations for the year ended 31 December 2022 are as follows:

Sh.“000”
Interest income: BOSA (from members) 1,300,000
FOSA 820,000
Commission received from Visa Card (FOSA) 80,000
Rental income (net of allowable expenses) 30,000
Dividends from Cooperative Bank (net) 78,375
Foreign exchange gains realised 16,000
Capital gains 9,000
Other operating income 23,000
Administration and governance expenses 79,000
Salaries and wages 168,000
Interest on deposits: BOSA 420,000
FOSA 280,000
Sales and marketing costs 53,800
Insurance expense 25,000
Allowance for doubtful debts 300,000
Asset impairment 226,000
Repairs and maintenance 8,000
Computers and printers 25,500
Software 12,800
Furniture and fittings 9,700
Audit and accounting fee 5,600
Motor vehicle running expenses 1,300
Rent and rates 84
Interest on loans (BOSA and FOSA) 12,540

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Additional information:

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1. The foreign exchange gains realised and other operating income were earned equally between the BOSA

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and FOSA business.

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2. Expenses accrued in the ratio of 3:2 between BOSA and FOSA businesses respectively unless indicated

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otherwise.
3. Not included in the information provided is the purchase cost of a Toyota Van for Sh.2,000,000 to be used
for the SACCO’s marketing sensitisation campaigns.

Required:
The taxable income or loss (if any) and the tax payable for Tusaidiane SACCO for the year ended 31 December
2022. (8 marks)
(c) Venture Miners Ltd. are petroleum contractors. They have been granted by your government three licenses for the
A, B and C contract areas in the Oil Basin. Details of their drilling and sale of petroleum for the year ended
31 December 2022 are as follows:
Sh.“000”
Sales : A 2,000,000
: B 2,500,000
Disposal of interest (gross) 54% of A 5,400,000
Development expenditure : A 280,000
: B 320,000
: C 190,000
Cost of disposal of interest 1,200,000
Exploration expenditure : A 210,000
: B 175,000
: C 100,000
Loose tools : A 90,000
: B 76,000
Decommissioning expenditure : A 80,500
: C 33,200
Decommissioning refund from account: B 66,300
Machinery for exploration operations : A 154,900
: B 208,400
: C 110,100
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 Additional information:
1. The C contract area is mostly under exploration and has not yet reached the commercial levels of
production.
2. The Company’s Directors hold the company’s governance and supervisory meetings outside the country.
3. The loose tools and machinery for exploration were brought in new during the year.

Required:
Determine the taxable income or loss and tax payable (if any) for Venture Miners Ltd. for the year ended
31 December 2022. (8 marks)
(Total: 20 marks)

QUESTION FIVE
(a) The Revenue Authority of your country has been undertaking tax reforms in a bid to improve tax collection and tax
compliance. To this end, the Authority has formulated a three-year corporate plan that runs from the year 2021/2022
– 2023/2024. So far, most of the corporate plan priorities remain elusive and hence the Revenue Authority has not
been able to achieve most of its strategic objectives.

Required:
Analyse FOUR reasons that may have contributed to the Revenue Authority being unable to achieve the strategic
objectives. (4 marks)

(b) The following transactions related to Miki Traders Ltd. for the month of December 2022:

1. Sales and purchases transactions: Within the country Outside the country
Sh. Sh.
Sales 4,200,000 1,800,000
Purchases 2,280,000 3,000,000
Sales returns 360,000 -

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Purchase returns 186,000 -

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Understatements: Sales 540,000

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: Purchases 288,000 -

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2. Purchase of capital items:

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Office furniture and fittings 84,000
Delivery truck on hire purchase 3,600,000 (cash price Sh.3,000,000)
3. Expenses:
Medical fees 180,000
Sewerage service by government 6,000
Casual labour 480,000
Office rent 240,000
Hire of taxis for staff 28,800
Customer satisfaction survey by a management consultant 165,000
Renovation of existing buildings 780,000
Penalties for late payment of VAT 18,000
4. Imported goods were stated at Cost Insurance and Freight (CIF) value and were subject to customs duty at
a rate of 25% on their entry into the country.
5. Miki Traders donated goods worth Sh.150,000 and cash for Sh.120,000 to a children’s home. The goods
were not included in the above sales.
6. Transactions are stated as VAT inclusive at a rate of 16% where applicable.

Required:
(i) Compute the VAT payable or refundable by Miki Traders Ltd. for the month of December 2022.
(7 marks)

(ii) Comment on the VAT payable/refundable. (1 mark)

(c) Malezi Trust was formed in the year 2021 for the benefit of Alex Malezi’s two children, Mona and Nora. The
following information was provided to you by the trustees in respect of the trust’s income and expenses for the year
ended 31 December 2022:

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 1. The trustee reported a trading profit of Sh.160,000,000 for the year. This was after deducting the following
expenses:
• Printing and stationery Sh.1,000,000.
• Legal fees of Sh.6,000,000 out of which Sh.1,200,000 was in respect of defending one of the
trustee involved in an illegal business deal.
• Tax consultancy fees Sh.2,400,000.
• Purchase and installation of accounting software Sh.2,000,000.
• Trustees salary as per the trust agreement Sh.10,000,000.
• Loan repayment (interest Sh.1,100,000) Sh.8,000,000.
• Lease charges were Sh.3,000,000 out of which Sh.600,000 was in respect of drafting 10 year lease
agreement.
• Preliminary expenses in respect of the trust formation Sh.3,400,000.
2. The trading profit was before taking into account the following capital expenditure:
Asset Date of first use Amount (Sh.)
Warehouse 1 April 2022 3,500,000
Delivery truck 5 March 2022 1,750,000
Saloon vehicle 1 January 2022 3,800,000
Sports pavilion 1 September 2022 1,200,000
3. The trustees received gross rental income from commercial properties of Sh.120,000,000 and gross interest
income from fixed deposits of Sh.20,000,000. Fee paid to investment managers in charge of the rental
properties and fixed deposits amounted to Sh.12,000,000.
4. Additional information:
• Each beneficiary is entitled to ¼ share of the net distributable income.
• Fixed annuity to each beneficiary was Sh.10,000,000 (gross).
• The trustees made Sh.6,000,000 to Mona and Sh.3,000,000 to Nora as discretionary payments as
per the agreement.

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Required:

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(i) Compute the income tax payable on the trust income for the year ended 31 December 2022. (6 marks)

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(ii) Compute the amount due to each beneficiary for the year ended 31 December 2022. (2 marks)

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(Total: 20 marks)
…………………………….…………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED TAXATION
TUESDAY: 6 December 2022. 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 2021.

Assume that the following rates of tax applied throughout the year of income 2021:
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 32,333 288,001 - 388,000 25%
Excess over - 32,333 Excess over - 388,000 30%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual value Prescribed benefit rates of motor vehicles
(per year on provided by employer

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reducing (i) Saloons, Hatch Backs and Estates

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balance) Monthly Annual

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Capital expenditure incurred on: rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200
• Hotel building 50% in the first year of use 25% 1201 - 1500 cc 4,200 50,400
• Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600
• Hospital building 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
• Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
• Educational/hostels building 10% per year on reducing balance Over - 3000 cc 14,400 172,800
• Commercial building 10% per year on reducing balance
(b) Machinery: (ii) Pick-ups, Panel Vans
• Machinery used for manufacture 50% in the first year of use 25% (unconverted)
• Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
• Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
• Motor vehicles and heavy earth 25% per year on reducing balance
moving equipment
• Computer software, calculators, 25% per year on reducing balance
copiers and duplicating machines
• Furniture and fittings 10% per year on reducing balance
• Telecommunication equipment 10% per year on reducing balance
• Film equipment by a local producer 25% per year on reducing balance
• Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
• Other machinery 10% per year on reducing balance
(c) Purchase/acquisition of right to use 10% per year on reducing balance (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual rates

Services (Sh.) (Sh.)
(i) Electricity (Communal or from a generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

For Solutions/Answers WhatsApp: 0724 962 477

 QUESTION ONE
(a) The tax law envisages various approaches and levels of resolving tax disputes, including the administrative decisions,
quasi-judicial process involving tax appeals tribunal (TAT), formal judicial process involving the High Court or
appeal to the Court of Appeal and alternative dispute resolution. Some of the relevant laws include the Tax
Procedures Act, Tax Appeals Tribunal Act and other relevant tax laws.

Required:
With reference to the above statement and quoting relevant tax provisions, explain the application of each of the
following in tax disputes settlement:

(i) Tax appeals tribunal. (3 marks)

(ii) High Court. (3 marks)

(iii) Court of Appeal. (3 marks)

(iv) Out of Court settlement. (3 marks)

(b) Consider the following hypothetical case:

Axe Ltd., incorporated in your Country, signed a service agreement to provide marketing and liaison services to the
related non-resident entities located in the United Kingdom (UK). Under the agreement, Axe Ltd. was to be
compensated off cost plus mark-up basis. The related non-resident entities executed separate agreements with
distributors of their products who they invoiced directly. The revenue authority imposed value added tax (VAT) on
the above marketing services provided by Axe Ltd.

On the other hand, Axe Ltd. argued that the marketing support services enhanced brand awareness of the products
sold by the non-resident entities in your country. On this basis, the services were exported, hence zero-rated.

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The above case has been bought before the tax tribunal.

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Required:

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Discuss TWO factors that the Tribunal might consider in ruling in favour of Axe Ltd. (4 marks)

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(c) Explain TWO ethical principles governing the services provided by tax practitioners. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) Mawingu Ltd. is a foreign subsidiary company operating a fleet of passenger and cargo aircrafts in Country A.
The flights are between Country A and other countries. The operating results for the year ended 31 December 2021
are as follows:

Sh.“000”
Income from cargo freight: Country A/Country B 567,720
Income from passengers’ freight: Country A/Country C 765,000
Income from passengers’ freight: Country C/Country A 1,001,880
Income from cargo loaded into aircraft on other routes 630,000
Salaries and other costs 1,530,000
Depreciation 288,000
General allowance for credit loss 72,000
Capital expenditure (cost Sh.2,000,000,000) 1,750,000
Compensation costs for stolen baggage 23,600

Additional information:
1. Salaries and other costs include: Sh.“000”
• Purchase of twin engines 117,000
• Use of airport facilities 32,400
• Hotel bills for passengers 37,800
• Accommodation for airline crew 9,000
• Gift to airport staff 10,800
2. Investment allowances were agreed with the Revenue Authority at 85% of depreciation charged in the
account.
3. Assume a corporation tax rate of 30%.

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 Required:
(i) Compute adjusted taxable profit or loss of Mawingu Ltd. for the year ended 31 December 2021. (8 marks)

(ii) Compute tax payable (or refundable) for Mawingu Ltd. (2 marks)

(b) ZamZam Company Ltd. purchased a property whose cash price was Sh.1,264,000 under the following terms:
1. The deposit paid for the purchase of the property was Sh.400,000.
2. The balance of the purchase price was to be paid over a 3-year period at a monthly instalment of Sh.40,000
inclusive of Sh.16,000 per month as mortgage interest.

Required:
Assuming the property was sold as follows:

Option I: For Sh.2,000,000 after payment of twenty-four instalments.

Option II: For Sh.2,680,000 after full payment of all the instalments, cost of valuation Sh.54,000 and legal fees
Sh.72,000.

Calculate capital gains tax under each option. (6 marks)

(c) Darubini Ltd. is under tax investigation by the Revenue Authority, accused of obstructing/hindering the investigation
officer in the exercise of his function.

Highlight FOUR aspects that may constitute obstruction in the above case. (4 marks)
(Total: 20 marks)

QUESTION THREE
(a) A, B and C have been trading in a small size partnership sharing profits and losses in the ratio of 2:2:1 respectively.
C retired from the partnership on 31 August 2021 while A and B agreed to continue with the business charging

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interest on capital at the rate of 15% per annum as in the previous period when C was still in the partnership.

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Due to the changes in the partnership, goodwill was valued at Sh.1,200,000 and was to be written off immediately.

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The following trial balance was extracted as at 31 December 2021:

Sh. Sh.
Capital account: A 1,680,000
B 1,400,000
C 840,000
Current account: A 67,200
B 56,000
C 44,800
Drawings: A 78,400
B 67,200
C 56,000
Inventory (1 January 2021) 252,000
Purchases and sales 4,200,000 7,720,000
Discount received 124,000
Bad debts recovered – general 193,200
Salaries and wages 722,400
Legal and professional fees 1,904,000
Rent and rates 168,000
Insurance 70,000
Sundry expenses 50,400
Trade receivables and payables 308,000 224,000
Allowance for doubtful debts 11,200
Land at cost 2,800,000
Delivery lorry 896,000
Depreciation 448,000
Cash at bank 676,000
Dividends: Sasa Co-operative Society _________ 336,000
12,696,400 12,696,400

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 Additional information:
1. Sales and purchases were inclusive of value added tax (VAT) at the rate of 16%. Cash sales amounted to
Sh.358,400 (VAT inclusive) and were excluded from the above accounts.
2. The following assets were acquired by the business immediately after retirement of C.
Sh.
Computers 150,000
Saloon car 3,120,000
3. Legal and professional fees include:
Sh.
Stamp duty 168,000
Negotiating a bank overdraft 158,200
Recovery of bad debts 245,000
Signing a 99 year lease agreement 228,400
Purchase of A’s private residence 350,000
Preparation of employment contract 82,000

4. Interest on drawings was charged at the rate of 10% per annum.

5. Inventory at year end was valued at Sh.364,000 and the partnership had consistently undervalued inventory
at each year end by 20%.
6. Salary and wages include partners’ salary of Sh.420,000 shared by the partners according to the profit and
loss sharing ratio.
7. Allowance for doubtful debts was to be increased to Sh.24,800 at year end. Bad debts written off amounted
to Sh.40,000 of which Sh.8,000 relates to general bad debts.
8. Prepaid insurance at the beginning of the year amounted to Sh.8,000 while insurance owing at year end
amounted to Sh13,000.
9. Accrued sundry expenses as at 1 January 2021 and 31 December 2021 amounted to Sh.10,000 and Sh.2,000
respectively.
10. C was paid all his dues on 15 September 2021. The profits and losses were to be shared equally after C’s

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retirement.

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11. Unless otherwise stated, assume that all revenues and expenses accrued evenly throughout the year.

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Required:
(i) Prepare a statement of adjusted taxable profit or loss for the partnership for the year ended 31 December
2021. (10 marks)

(ii) Determine the taxable income for each partner. (6 marks)

(b) The Commissioner is empowered to cancel or terminate the license of any person acting as a tax agent at any time.
Summarise FOUR circumstances under which this may be possible. (4 marks)
(Total: 20 marks)

QUESTION FOUR
(a) The African Growth and Opportunity Act (AGOA) is a United States Trade Act enacted in year 2000 as a legislation
that significantly enhances market access to the United States for qualifying Sub-Sahara African countries.

Analyse THREE conditions that the above countries must meet in order to qualify and be eligible for AGOA
consideration. (6 marks

(b) Mijengo Contractors Ltd. is a resident firm engaged in the property development business. As at 1 January 2021, the
firm secured two construction contracts namely X and Y which are to be completed within a period of two years.
The information relating to the contracts is as flows:

Contract X Contract Y
Sh. Sh.
Gross Contract Price 22,500,000 20,900,000
Direct costs incurred in the year 2021:
Materials 2,500,000 1,800,000
Direct labour 2,000,000 3,600,000
Consultancy fee 300,000 260,000
Subcontracting fee 1,420,000 2,030,000
Other direct costs 34,500 45,500
CA34S1 Page 4
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 Additional information:
1. Contract X’s material cost includes material costing Sh.240,000 that remained at the site as at 31 December
2021, while under contract Y, material costing Sh300,000 was sold during the year.
2. The company estimates that costs to be incurred to complete the contract work will be 150% of the contract
costs incurred in the current year for both contracts.
3. The company computes taxable revenue on the basis of the percentage of completion method for the two
contracts.
4. Analysis of general and administrative expenses for the year is as follows:
Sh.
Office salaries 850,000
Renewal of construction license 186,600
Pension contributions 236,000
Billboard cost and billboard erection cost 202,000
Purchase of computers and software (of which software cost 210,000
amounted to Sh.30,000)
Depreciation 29,500
Subscriptions due to contractors association 35,680
Interest on overdue loan 22,000
Legal fee on defense against claim of breach of contract 80,000
Rent for the office premises 614,000
Utilities 245,600

5. Other income received by the company included: Sh.

Interest income from Upland Bank 348,800 (Gross)
Dividend income from Lima Co-operative Society 360,000 (Gross)

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Royalties income (net of tax) 695,000

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Required:

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(i) Compute the total taxable income for Mijengo Contractors Ltd. for the year ended 31 December 2021.
(12 marks)

(ii) Compute the tax payable (if any) by Mijengo Contractors Ltd. (2 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Zamon UK is a multinational corporation in UK with a wholly owned subsidiary, Zamon XL based in your country.
In the year ended 31 December 2021, Zamon XL produced 50,000 kilograms of coffee from its farm at a cost of
Sh.200 per kilogram exclusively meant for export to Zamon UK at a predetermined price of Sh.300 per kilogram
although the market price was Sh.600 per kilogram.
Zamon UK sold all the coffee in the UK market at Sh.1,200 per kilogram.

Additional information:
1. Tax rates are as follows:

UK Your country
Income tax 21% 30%
Import duty 10% -
Withholding tax - 10%

2. The subsidiary repatriates all profits as dividends.

Required:
Compute the total tax lost by the Revenue Authority as a result of this transfer pricing arrangement. (5 marks)

(b) Comparability analysis in transfer pricing arrangements involves comparison of the conditions in a controlled
transaction with the conditions that would have been made had the parties been independent and undertaking a
comparable transaction under comparable circumstances.

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 Required:
Evaluate THREE comparability factors that could be identified in commercial and financial relations between
related parties in determining the arm’s length price under transfer pricing. (6 marks)

(c) Popote Ltd. is a manufacturer of vatable goods and the company is fully registered for value added tax (VAT)
purposes. The company had the following transactions for the year ended 31 December 2021 which included VAT
at the rate of 16% where applicable.

Sh.“000”
Sales at standard rate 10,680
Sales at zero rate 2,400
Delivery van purchased 3,600
Exempt sales 4,800
Purchases at standard rate 7,200
Purchases at zero rate 1,800
Rent for factory building 1,200
Audit and accountancy 720
Printing and stationery 960

Additional information:
1. Sales at standard rate include 20% which is in respect of export sales to another country.
2. Purchases at a standard rate include imported vatable raw materials of Sh.1,500,000 exclusive of duty at
25%.
3. The company confirmed that the value of goods purchased at standard rate and sold in the same state
amounted to Sh.2,000,000 in the course of the year.
4. Bad debts recovered previously written off amounted to Sh.240,000.

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Required:

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Compute the following for Popote Ltd. for the year ended 31 December 2021:

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(i) Input tax claimable. (6 marks)

(ii) Output tax. (1 mark)

(iii) VAT payable or refundable. (2 marks)

(Total: 20 marks)
..............................................................................................................

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 CPA ADVANCED LEVEL

ADVANCED TAXATION
TUESDAY: 2 August 2022. 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 2021.

Assume that the following rates of tax applied throughout the year of income 2021:
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 32,333 288,001 - 388,000 25%
Excess over - 32,333 Excess over - 388,000 30%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual value Prescribed benefit rates of motor vehicles
(per year on provided by employer

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reducing (i) Saloons, Hatch Backs and Estates

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balance) Monthly Annual

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Capital expenditure incurred on: rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200
• Hotel building 50% in the first year of use 25% 1201 - 1500 cc 4,200 50,400
• Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600
• Hospital buildings 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
• Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
• Educational/hostels building 10% per year on reducing balance Over - 3000 cc 14,400 172,800
• Commercial building 10% per year on reducing balance
(b) Machinery: (ii) Pick-ups, Panel Vans
• Machinery used for manufacture 50% in the first year of use 25% (unconverted)
• Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
• Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
• Motor vehicles and heavy earth 25% per year on reducing balance
moving equipment
• Computer software, calculators, 25% per year on reducing balance
copiers and duplicating machines
• Furniture and fittings 10% per year on reducing balance
• Telecommunication equipment 10% per year on reducing balance
• Film equipment by a local producer 25% per year on reducing balance
• Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
• Other machinery 10% per year on reducing balance
(c) Purchase/acquisition of right to use 10% per year on reducing balance (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual rates

Services (Sh.) (Sh.)
(i) Electricity (Communal or from a generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800

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 QUESTION ONE
(a) With reference to the services provided by tax practitioners, explain the difference between “tax health checks” and
“tax audits”, clearly isolating the salient features of each. (6 marks)

(b) In one of the recent tax cases decided by the Tax Appeals Tribunal, the Tribunal allowed an application for extension
to file an appeal out of time.

A summary of the case facts was as follows:

1. The taxpayer missed on the statutory deadline for filing the Notice of Appeal and Memorandum of Appeal
due to factors beyond their control.
2. The revenue authority countered that the objection decision was issued in time via the email provided on
the iTax platform and that they were not under any obligation to follow up with the taxpayer on the receipt
of the email.
3. In a rejoinder, the taxpayer stated that they were unaware and did not find any email and further that they
were unaware of the existence of the Objection Decision until later when applying for a tax compliance
certificate.

Required:
Based on the above case and introducing any other relevant facts, discuss four factors that the Tax Appeals
Tribunal might have considered in arriving at its decision above. (8 marks)

(c) Tax treaties represent an important aspect of the international tax rules of many countries. Experts estimate
that over 3,000 bilateral income tax treaties are currently in effect, and the number is growing.

Required:
With reference to the above statement, describe three objectives of international tax treaties. (6 marks)
(Total: 20 marks)

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QUESTION TWO

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(a) Bale Ltd., a small scale retailer operates two sales outlets, one at the head office and the other at the branch. For the

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year ended 31 December 2021, the following results of the head office and the branch were presented to you:

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Head office Branch
Sh. Sh.
Gross profit 12,200,000 7,000,000
Gain on shares sold 30,000 -
Insurance recovery 30,000 9,000
Gain on sale of land and building - 600,000
Interest income: Lex Bank 180,000 -
Bonus shares 120,000 -
Interest income: Beta Microfinance 200,000 -
Total gross income 12,760,000 7,609,000
Expenses:
Staff salaries 240,000 90,000
Maintenance expenses 80,000 58,000
Preliminaries expenses 100,000 30,000
Retrenchment costs 2,500,000 1,300,000
Rent, rates and insurance paid 410,000 110,000
Goodwill written off 20,000 -
Legal and accountancy fees 330,000 120,000
Depreciation 180,000 70,000
Interest on overdue tax 80,000 -
Subscription to golf club for directors 105,000 109,000
Donations 100,000 70,000
General administrative expenses 360,000 140,000
Purchase of a lorry 3,200,000 -
Loss of stock 200,000 500,000
Loan interest 360,000 -
Directors’ remuneration 1,500,000 830,000
Pension contribution 685,000 155,000
Total expenses (10,450,000) (3,582,000)
Net profit 2,310,000 4,027,000

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 Additional information:
1. Goods worth Sh.600,000 were transferred from the head office to the branch at 10% below the normal
selling price.
2. 70% of insurance recovery was in respect of stocks destroyed by fire, the balance was on compensation on
capital items.
3. Staff salaries include provision for leave accruals equal to a third of the total salaries for head office and the
branch.
4. The interest income recorded in the books of Bale Ltd. was gross although Bale Ltd. received net of
withholding tax.
5. Bonus shares were from a company where Bale Ltd. has 30% control.
6. Rent, rates and insurance paid for the branch: At the beginning of the year, rent accrued amounted to
Sh.24,000 and as at 31 December 2021 rent prepaid was Sh.42,000. These had not been adjusted for in the
accounts.
7. The lorry purchased was imported and duty paid was Sh.130,000. This was omitted from the cost of the
lorry.
8. Retrenchment cost analysis.
Head office Branch
Sh. Sh.
Provision for staff gratuity 800,000 500,000
Pension payments 1,700,000 800,000
2,500,000 1,300,000
9. Loss of stock: Fire razed down a warehouse where goods are stored before they are transported to the head
office and branch. VAT at 16% was included in the stocks destroyed by fire.
10. 20% of loan interest relates to a loan obtained to finance purchase of shares.

Required:
(i) Compute the combined adjusted taxable profit or loss for the year ended 31 December 2021. (10 marks)

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(ii) Compute the tax payable (or refundable) for the year ended 31 December 2021 based on your results in (a)

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(i) above. (2 marks)

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(b) (i) A tax agent is an important stakeholder in the Alternative Dispute Resolution (ADR) process.

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Analyse the roles of a tax agent in relation to the ADR process. (4 marks)

(ii) Explain the circumstances under which the Commissioner may cancel the license of a tax agent.
(4 marks)
(Total: 20 marks)
QUESTION THREE
(a) The following information relates to Pete Masa who works in both Kenya and in the United Kingdom.
• During the year of income 2021, he earned £30,000 from employment, PAYE deducted was £4,200.
• His employment income in Kenya was Sh.1,960,000 (PAYE deducted Sh.384,000) in the year.
• The employer provided accommodation to his family which lives in Kenya. The house is fully furnished at
a cost of Sh.340,000.
• He also received consultancy fees of Sh.720,000 and net royalties of Sh.95,000.

Note: Assume the average exchange rate during the year was £1 = Sh.120.

Required:
Calculate tax payable by Pete Masa for the year of income 2021. Assume Kenya and United Kingdom have signed
a double taxation agreement. (6 marks)

(b) Explain four measures that a tax revenue authority might adopt to reduce tax gaps or revenue leakages in taxation of
the digital economy. (4 marks)

(c) Explain the tax implications of the following:

(i) Where two or more entities enter into a joint venture agreement or partnership. (4 marks)

(ii) Where shareholders are wholly or partly paid in cash for forfeiting their shares in a cessation of
business. (2 marks)
(d) Explain four possible tax implications of transferring or selling a subsidiary to another subsidiary where both belong
to the same parent company. (4 marks)
(Total: 20 marks)
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 QUESTION FOUR
(a) Riziki Insurance Company Ltd. was incorporated in the year 2019. The company deals with different classes of
insurance. The following trial balance was extracted from the books of account as at 31 December 2021:

Sh. Sh.
Property, plant and equipment 10,200,000
Provision for depreciation 805,000
Investment in government securities 1,200,000
Gross premiums received from direct clients:
Motor vehicle 3,000,000
Fire 2,500,000
Gross premiums received from agents:
Motor vehicle 2,000,000
Fire 1,200,000
Commission on reinsurance accepted:
Motor vehicle 600,000
Fire 200,000
Commission on reinsurance ceded:
Motor vehicle 700,000
Fire 300,000
Sundry receivables 750,000
Bank balance 90,000
Directors’ fees 495,000
Reinsurance premiums paid: Motor vehicle 400,000
Fire 150,000
Unearned premiums as at 1 January 2021:
Motor vehicle 4,800,000

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Fire 2,500,000

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Claims outstanding as at 1 January 2021:

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Motor vehicle 1,100,000

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Fire 840,000

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Claims paid:
Motor vehicle 2,770,000
Fire 2,110,000
Legal costs on claims:
Motor vehicle 280,000
Fire 130,000
Sundry expenses on motor vehicle claims 220,000
Provision for bad and doubtful debts:
Motor vehicle 370,000
Fire 320,000
Management expenses:
Motor vehicle 450,000
Fire 380,000
Investment income 4,150,500
Premiums returned: Motor vehicle 800,000
Fire 700,000
Profit and loss account _________ 329,500
23,420,000 23,420,000
Additional information:
1. Claims intimated and outstanding as at 31 December 2021 amounted to Sh.750,000 for motor vehicle
insurance and Sh.480,000 for fire insurance.
2. Unearned premium is maintained at 80% and 50% of the net premiums received for motor vehicle and fire
insurance respectively.
3. Investment allowances have been agreed with the Commissioner at Sh.1,200,000 for the year ended
31 December 2021.
4. Investment income analysis: Sh.
• Interest received from Government securities 2,040,000 net
• Interest received from local banks 760,500 net
• Dividend received from a Ugandan company 450,000 gross
• Dividend received from a local company 900,000 net
5. Fees paid to investment managers amounted to Sh.750,000 for the year ended 31 December 2021.

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 Required:
(i) Taxable income or loss for Riziki Insurance Company for the year ended 31 December 2021. (8 marks)

(ii) Compute the tax payable, if any. (2 marks)

(b) Zawadi Associates provides consultancy services to various clients whose terms of contract allow clients to pay for
the services either before or after the provision of the service. The following information is provided regarding the
firm’s transactions for the months of October, November and December in year 2021.

Nature of service Value of Service provision date Payment date

service
Audit services to XL Supermarkets 700,000 25 October 2021 5 November 2021
Training services to Kyle Securities 240,000 3 November 2021 Not yet paid
Accountancy services: Watoto 600,000 5 December 2021 20 November 2021
Children’s Home
Debt collection services to Zuwela 820,000 9 November 2021 30 November 2021
Computers
Strategic Plan development: Bazo 2,150,000 10 November 2021 Not yet paid
(Rwanda) Ltd.
Management consultancy: Sylok 1,440,000 13 November 2021 40% paid on 13 November
Investments 2021
Internal controls reviewed: Lema Ltd. 960,000 18 November 2021 10% paid on 7 October 2021
Financial consultancy to W Ltd. 1,200,000 20 November 2021 1 December 2021

Additional information:
1. Sylok Investments was declared bankrupt on 30 November 2021.
2. On 5 November 2021, Zawadi Associates renewed its national industrial training license for Sh.30,000 and

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paid for legal fees Sh.360,000 to follow up on clients who were not paying as per the agreed date.

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3. Electricity bill paid on 10 November 2021 was Sh.270,000 out of which Sh.100,000 was payment for

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outstanding bill for October 2021 and Sh.20,000 was in respect of additional deposits as demanded by the

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power company.

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4. Fuel consumed for partners’ vehicles amounted to Sh.90,000 during the month of November 2021.
5. Computers purchased for business use cost Sh.240,000 in November 2021.
6. Zawadi Associates paid rent for the month of November 2021 amounting to Sh.180,000 on 5 November
2021.
7. Transactions have been stated inclusive of VAT at the rate of 16% where applicable, unless otherwise stated.

Required:
(i) Compute the VAT payable by (or refundable to) Zawadi Associates for the month of November 2021.
(7 marks)

(ii) Zawadi Associates is planning to engage a firm of financial management consultants from South Africa to
facilitate online training on financial management assignments.

Advise Zawadi Associates on the tax point in respect of such services. (3 marks)
(Total: 20 marks)

QUESTION FIVE
(a) A recent publication from a leading international advisory group opines that, of all forms of tax incentives, tax
holidays are the most popular among developing countries.

Required:
Discuss four limitations of tax holidays in developing countries. (4 marks)

(b) In the recent months, the Revenue Authority reports have indicated achievement of tax collection targets.

Required:
Explore the factors that might have led to this achievement. (4 marks)

(c) John Malih has been trading as a sole proprietor for the past 4 years. The revenue authority suspects that the business
has been involved in tax fraud since it commenced operations.

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 The firm has submitted the following records since its operations from 1 January 2018 to 31 December 2021:

1 January 31 December 31 December 31 December 31 December

2018 2018 2019 2020 2021
Sh. “000” Sh. “000” Sh. “000” Sh. “000” Sh. “000”
Business premises 144,000 160,000 172,000 152,000 160,000
Plant and machinery 68,000 72,000 87,000 82,000 92,000
Motor vehicles (commercial) 22,000 24,000 24,000 26,000 24,000
Inventory 9,000 11,200 16,200 22,000 14,800
Trade receivables 7,690 8,630 8,600 7,800 8,200
Private residence 16,400 32,400 32,400 32,400 32,400
Trade payables 14,900 19,200 20,400 18,100 15,200
Bank loan 22,400 21,800 19,400 7,900 18,900
Loan from a friend 1,580 1,320 1,180 1,690 1,020
Mortgage loan 7,800 7,800 7,800 7,800 7,800
Cash 7,400 9,600 7,800 8,260 8,840

Additional information:
1. During the year ended 31 December 2021, a motor vehicle was disposed of for Sh.2,600,000 (cost was
Sh.2,000,000).
2. Interest on mortgage was at a rate of 15% per annum on reducing balance basis. The maximum mortgage
interest allowed is Sh.300,000 per annum.
3. His personal expenses for each of the four years were as follows:
Year Sh.
2021 340,000
2020 178,000
2019 296,000
2018 162,400

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4. Ignore capital allowances.

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Required:

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2021. (12 marks)
(Total: 20 marks)
..............................................................................................................

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 CPA ADVANCED LEVEL
PILOT PAPER

ADVANCED TAXATION
December 2021. 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.
RATES OF TAX (Including wife’s employment, self-employment and professional income rates of tax).
Year of income 2020.
Assume that the following rates of tax applied throughout the year of income 2020:
Monthly taxable pay Annual taxable pay Rate of tax
(Sh.) (Sh.) % in each Sh.
1 - 24,000 1 - 288,000 10%
24,001 - 40,667 288,001 - 488,000 15%
40,668 - 57,334 488,001 - 688,000 20%
Excess over - 57,334 Excess over - 688,000 25%
Personal relief Sh.2,400 per month (Sh.28,800 per annum).
Investment allowance: Rate of investment allowance Residual Prescribed benefit rates of motor vehicles
value provided by employer

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(per year on (i) Saloons, Hatch Backs and Estates

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reducing Monthly Annual

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Capital expenditure incurred on: balance) rates rates

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(Sh.) (Sh.)

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(a) Buildings: Up to 1200 cc 3,600 43,200
 Hotel building 50% in the first year of use 25% 1201 - 1500 cc 4,200 50,400
 Building used for manufacture 50% in the first year of use 25% 1501 - 1750 cc 5,800 69,600
 Hospital buildings 50% in the first year of use 25% 1751 - 2000 cc 7,200 86,400
 Petroleum or gas storage facilities 50% in the first year of use 25% 2001 - 3000 cc 8,600 103,200
 Educational/hostels building 10% per year on reducing balance Over - 3000 cc 14,400 172,800
 Commercial building 10% per year on reducing balance
(b) Machinery: (ii) Pick-ups, Panel Vans
 Machinery used for manufacture 50% in the first year of use 25% (unconverted)
 Hospital equipment 50% in the first year of use 25% Up to - 1750 cc 3,600 43,200
 Ships or aircraft 50% in the first year of use 25% Over - 1750 cc 4,200 50,400
 Motor vehicles and heavy earth 25% per year on reducing balance
moving equipment
 Computer software, calculators, 25% per year on reducing balance
copiers and duplicating machines
 Furniture and fittings 10% per year on reducing balance
 Telecommunication equipment 10% per year on reducing balance
 Film equipment by a local producer 25% per year on reducing balance
 Machinery used to undertake 50% in the first year of use 25%
operations under prospecting rights
and exploration under mining rights
 Other machinery 10% per year on reducing balance
(c) Purchase/acquisition of right to use 10% per year on reducing balance (iii) Land Rovers/Cruisers 7,200 86,400
fibre optic cable by telecommunication
operation
(d) Farm works 50% in the first year of use 25%

Commissioner’s prescribed benefit rates: Monthly rates Annual

Services (Sh.) rates
(Sh.)
(i) Electricity (Communal or from a generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
Agriculture employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800
CA34S1 Page 1
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 QUESTION ONE
(a) Explain the meaning of “alternative dispute resolution”. (2 marks)

(b) All tax disputes can be resolved through alternative dispute resolution (ADR) with some exceptions.

With reference to the above statement, describe the exceptions. (6 marks)

(c) Omari Hassan has approached you as the tax expert, to advise him on which of the following two job offers to
accept. Hassan has received two offers of employment both of which require him to report for duty next year on
1 January 2022.

He has provided you with the following information

Job offer A: Maua Growers Ltd.

Terms of employment:
1. A basic salary of Sh.1,680,000 per annum.
2. Free housing for him and his family within the farm, with free water and electricity. The water is from a
borehole sunk in the farm. The electricity is also generated within the farm.
3. Free supply of the farm produce subject to a maximum value of Sh.50,000 per month.
4. Reimbursement of medical expenses incurred on self and family subject to a maximum of Sh.125,000 per
month. The reimbursement policy only applies to the senior managers.
5. Payment of his children’s school fees amounting to Sh.180,000 per annum by the employer. The employer
will not expense it in his books of account.
6. His annual subscription fee to the sports club amounting to Sh.50,000 would be paid for by the employer.
7. He would be required to register as a member of the Institute of Certified Public Accountants. The employer
would pay the annual subscription fee of Sh.18,000.

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Job offer B: Kilwa Dishes Ltd.

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Terms of employment:

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1. A basic salary of Sh.2,160,000 per annum.

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2. Free housing and meals but only for self.
3. Monthly entertainment allowance of Sh.15,000.
4. Payment by the employer of his medical expenses subject to a maximum of Sh.800,000 per annum.
The medical scheme covers all hotel employees.
5. Payment by the employer of his life assurance premiums amounting to Sh.5,000 per month.
6. Reimbursement by the employer of his annual subscriptions for the Journal of Certified Public Accountants
amounting to Sh.2,500 per annum.
7. A one week fully paid holiday package worth Sh.150,000 for his wife and children to visit him and reside
at the hotel once per year. The package would also include visits by the family to neighbouring tourist
attractions.

Omari Hassan has further provided the following additional information:

 His annual average medical expenses are as follows:

Sh.
Self 150,000
Wife and children 300,000
Total average medical expenses 450,000
 His consumption of the farm produce under job offer A would average about Sh.300,000 per annum.

Hint: Your evaluation should include both taxable and non-taxable benefits. Use year 2020 tax rates.

Required:
Evaluate the two job offers and advise Omari Hassan on which offer to accept based on expected net annual income.
(12 marks)
(Total: 20 marks)

CA34S1 Page 2
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 QUESTION TWO
(a) Under Section 24 of the Income Tax Act, a company is required to adhere to the rules under the shortfall distribution.
If a company is unable to pay the required amount, it has to make a representation to the tax department.

In relation to the above provision, explain four factors that must be included in its representation. (4 marks)

(b) Explain the meaning of thin capitalisation in relation to an entity. (3 marks)

(c) The management of Bituls Ltd. has received a notice from the Commissioner for Domestic Taxes stating that the
company is subject to the income tax rules on thin capitalization. The management intends to object to the
Commissioner’s directive and have approached you for advice.

An extract of the company’s statement of financial performance revealed the following:

Sh.“000”
Goodwill 43,500
Land 220,000
Plant and machinery 310,100
Office equipment 146,250
Inventory 88,890
Accounts receivable 97,890
Bank balance 29,210
Ordinary share capital 445,000
Share premium 53,000
Profit and loss (42,300)
10% loan 1,650,000

Supporting your answer with suitable computations, advise the management of Bituls Ltd.:

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(i) On the possible outcome of its objection. (4 marks)

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(ii) The interest tax shield due to Bituls Ltd. based on your advice in (c) (i) above. (2 marks)

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(d) (i) Explain the taxable incomes of a life assurance company. (3 marks)

(ii) The following information relates to Beta Life Assurance Company Limited for the year ended
31 December 2020:

The fund balance was valued by an actuary at Sh.220 million as at 31 December 2020. 40% of this fund
balance was recommended to be transferred for the benefits of shareholders.
Sh.“million”
Received during the year 120
Outstanding as at: 1 January 60
31 December 40
Management expenses and commissions paid during the year amounted to Sh.40 million and Sh.6 million
respectively.

The company had no other income during the year.

Required:
Taxable income of Beta Life Assurance Company Limited for the year ended 31 December 2020. (4 marks)
(Total: 20 marks)

QUESTION THREE
(a) (i) Explain how a company operating in Kenya but with its headquarters in another country may avoid taxation
through transfer pricing. (5 marks)

(ii) A few countries and regions in the world have established themselves as tax havens. Briefly summarise
three benefits that might accrue to an investor in a tax haven. (3 marks)

(b) Mary and Khadija are in a partnership trading as Mahadi enterprises: They share profits and losses in the ratio of 3:2
for Mary and Khadija respectively.
CA34S1 Page 3
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 The partners presented the following statement of profit and loss of the partnership for the year ended 31 December
2020.
Sh.
Sales 8,400,000
Closing stock 1,176,000
Rental income 522,480
Dividend received (net) 54,240
Foreign exchange gain 54,960
Interest income (net) 120,000
Discount received 84,000
10,411,680
Opening stock 960,000
Purchases 4,080,000
Salaries and wages 1,440,000
Insurance 288,000
Travelling expenses 187,200
Salaries and wages: Mary 720,000
Khadija 480,000
Rent rates 558,000
Interest expense 1,872,000
Goodwill written off 120,000
Medical expenses for partners 240,480
Legal expenses 144,240
Bank charges 91,680
Stamp duty 180,000
Loss on sale of equipment 19,200
VAT paid 39,120

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Purchase of furniture 57,600

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Depreciation 48,000

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(11,525,520)

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Net loss (1,113,840)

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Additional information:
1. On 1 April 2020 Abby was admitted as a partner. She contributed Sh.960,000 as her share of capital and
goodwill. The profit and loss sharing ratio was revised to 2:2:1 for Mary, Khadija and Abby respectively
with effect from 1 April 2020. Abby was not entitled to a salary for the year ended 31 December 2020.
2. Interest expenses comprised:
Sh.
Interest on capital: Mary 432,000
Khadija 480,000
Abby 48,000
Interest on loan 672,000
Fridge benefit tax 240,000
1,872,000
3. All transactions relating to equipment and furniture occurred after 1 April 2020.

4. All other revenues and expenses accrued evenly throughout the year.

Required:
(i) Determine the adjusted profit or loss of the partnership for the year ended 31 December 2020.
(8 marks)
(ii) Allocate the profit or loss computed in (b) (i) above to the partners. (4 marks)
(Total: 20 marks)

CA34S1 Page 4
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 QUESTION FOUR
(a) BSI Fly High Ltd. presented the following trading results for the year ended 31 December 2020:

Statement of comprehensive income for the year ended 31 December 2020

Sh.“million” Sh.“million”
Turnover 70,743
Direct cost 44,376
Fleet ownership 9,102 (53,478)
Gross profit 17,265
Other incomes
Interest income (net) 372
Fair value gains/losses on fuel derivatives 6,140
Shares of results of associated company 77
Gain/loss on hedged exchange differences:
On borrowings 1,280
Gain on hedged fuel contacts 398 8,267
Total income 25,532
Less: Expenses
Overheads 15,426
Finance cost 1,485
Realised losses on fuel derivatives 3,771
Other losses/gains 501
Deferred taxation on cash flow hedges 503 (21,686)
Total profits/loss 3,846

Additional information:
1. Turnover includes Sh.“million”
Passenger revenue 62,838

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Freight and mail 5,434

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Handling 1,312

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Others 1,159

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70,743

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2. Analysis of operating expenditure:
 Direct cost 9,292
Aircraft fuel and oil 8,530
Aircraft landing, handling and navigation 14,555
Passenger services 4,445
Commissions on sales 3,246
Aircraft passenger and cargo insurance 366
Crew route expenses 1,742
Central reservation system (net) and frequent flier programme 1,805
Others 395
44,376
 Fleet ownership costs
Hire of aircraft and engines 5,920
Depreciation on air craft and engines 3,094
Depreciation on rotables and other equipment 262
Amortisation of refurbishment costs -
Air craft purchases subsidy (174)
9,102
Overheads
Administration 10,175
Employee costs 348
Legal and professional fees 73
Director’s remuneration 11
Audit fees 1,492
12,099
Establishment
General maintenance and supplies 1,163
Depreciation of buildings vehicle and other equipment 860
Amortisation of intangible assets and prepaid operating lease 364
2,387
CA34S1 Page 5
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 Sh.“million”
Selling
Advertising and publicity 665
Bad debts expense 275
940
Total overheads 15,426

Required:
(i) Compute adjusted taxable income for the year ended 31 December 2020. (10 marks)

(ii) Tax payable, if any for the year. (2 marks)

(b) (i) In Kenya, tax agents are individuals or companies that prepare taxes on behalf of the tax payers, they also
offers professional assistance to people or companies that do not want to prepare taxes on their own.

In light of the above statement, explain circumstances under which a tax agent’s license may be canceled.
(4 marks)

(ii) Bandari Realtors’ Ltd. provided the following information relating to the sale of their properties in the year
2020.
1. Sale proceeds were Sh.2,000,000 and the incidental costs were; Legal fees - Sh.100,000;
Advertisement - Sh.50,000; Agent’s commission - Sh.200,000 and Valuation fees - Sh.150,000.
2. Cost of acquisition/construction was Sh.1,500,000 and the other relevant/ incidental costs were as
follows: Legal cost on acquisition - Sh.60,000; Valuation - Sh.70,000; Costs to change the roof of
property - Sh.130,000; Legal cost to defend title Sh.50,000; investment allowance had been
allowed totaling Sh.450,000 over the years.

Required:

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Compute the capital gains tax. (4 marks)

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(Total: 20 marks)

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QUESTION FIVE

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(a) Explain the challenges in implementing special economic zones (SEZs). (8 marks)

(b) Customs audit is the process of verifying that the business is in compliance with the customs legislation through the
examination of books and records of a business to prevent commercial fraud.

In relation to the above statement, explain the objectives of a customs audit. (4 marks)

(c) In case of back duty the tax department will reject the accounts presented to them and will advise the taxpayer to
provide another set of accounts prepared by a reputable firm of auditors. Where presentation of accounts is not
possible, the taxpayer’s income could be computed through capital statements.

Required:
Explain other circumstances under which capital statements are applicable in computation of income. (4 marks)

(d) Outline the documents which must accompany a claim for VAT refund under Section 24 (Bad Debts). (4 marks)
(Total: 20 marks)

………………………………………………………………………….

CA34S1 Page 6
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