CPA11-TAXATION

Solution 1
(a) OEUL chargeable income and tax payable for the year ended 31 December 2022
Workings Shs '000’ Shs '000’
Loss before tax (260,300)
Add back: disallowable expenses and omitted taxable incomes
Returnable LPG containers 26,716,330
Refundable customs duties included in purchase cost-
withholding tax 2,790,500
Refundable customs duties included in purchase cost-VAT 5,416,600
Loss on sale of old computers 34,270
Wages paid to casual workers-not included in payroll 45,890
Depreciation on company equipment 1,176,010
Amortization of operating leases 1,287,600
Directors' sitting allowances 340,900
Training expenditure for non-citizens 344,110
Unrealized foreign exchange loss 152,200
Interest expense W3 -
38,304,410
Less: Capital allowances and non-taxable income
VAT on sale of lubricants to customers 612,816
Gain on sale of returnable containers 421,870
Interest on government treasury bills and bonds 230,500
Unrealized forex gain 649,210
Office chairs costing less than Shs 1million each-minor capex
230,300*10 2,303
Initial allowance W1 11,550
Industrial building allowance W2 22,495
wear and tear W1 5,738,589
(7,689,333)
Chargeable income 30,354,777
Less: Loss B/F (3,821,340)
Tax payable at 30% 7,960,031
Less: Tax credits
Provisional tax paid (1,000,000)
WHT paid (2,790,500)
Tax due 4,169,531

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 Working 1: Wear and Tear schedule
50% 40% 30% 20%
Details Cost I/A I II III Total
TWDV b/f 1.1.2022 504,850 - 842,500 1,347,350
Additions
LPG returnable containers 26,716,330 26,716,330 26,716,330
LPG refilling machine 210,400 - 210,400 210,400
Laptops 23,100 11,550
Disposals
Fuel delivery truck (85,983) (85,983)
Sub-total 504,850 - 27,683,247 28,188,097
W&T allowance 11,550 201,940 - 5,536,649 5,738,589
Working 2 Industrial building depreciation
Cost of constructing a fuel storage tank 892,456
Number of days used in the year of income 184
Total number of days in the year of income 365
depreciation 5%*892,456*184/365 22,495
Working 3: deductible interest expense
Determination of tax earnings before interest, tax, depreciation and amortization -
TEBITDA
Profit before tax / (Loss before tax) (260,300)
Add back disallowable expenses 38,304,410
Less allowable expenses (7,693,953)
Add back interest 1,258,700
Tax earnings before interest, tax, depreciation and amortization -TEBITDA 31,608,857
30% of TEBITDA 9,482,657
Since 30% of TEBITDA is greater than the interest expense for the year all the interest
incurred in the year is deductible
(b) Advise OEUL’s accountant on any five objectives of taxation and principles
(canons) of a good tax system
(i) Roles of taxation
 To finance Government re-current and development expenditure, i.e. paying
salaries for civil servants and funding long term projects such as construction of
schools, hospitals and roads.
 It can be used to regulate demand and supply in the economy in times of
inflation.
 It encourages development of local industries with a view to providing
employment and saving foreign exchange, by imposing high duties on competing
imports. It encourages export of goods and services by reducing or removing tax
on the export in order to make them more competitive in the world market.

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 It protects society from undesirable or harmful products and industries by
imposing high taxes on them, for instance excise duty on cigarettes and beer as
well as environmental levy on used vehicles.
 To achieve greater equality in the distribution of wealth and income, the
government may impose a progressive tax on the incomes and wealth of the
rich. The revenue raised is then used to provide social services for the benefit of
the society.
(ii) Principles (canons) of a good tax system
 Equity/Fairness
Tax should be levied fairly so that:
 The same amount of tax is paid by persons or entities that are equal in
earnings or wealth (horizontal equity)
 The contribution in tax should increase as the taxable income increases
(vertical equity). The principle behind vertical equity, which is most
applicable in income taxes, is that the burden among taxpayers should be
distributed fairly, taking into account individual income and personal
circumstances. Vertical equity is to be taxed proportionate to the income
one earns. The strongest shoulders should carry the heaviest burden
 Convenience
Under normal circumstances, a taxpayer should not undergo undue difficulty to
pay tax. Therefore, the place, medium, mode, manner and time of payment
should not be a burden to the taxpayer.
 Certainty
A good tax system is one where the taxes are well understood by both tax
payers and tax collectors. The time and reason of payment as well as the
amount to be paid by an individual should be well documented and certain or
known. The tax should be based on laws passed by parliament.
 Economical
The administrative cost of collecting taxes should be kept as low as possible to
both the collecting agent and the taxpayer. The general principle is that the cost
of collection and administration of taxes to the collecting agent should not
exceed 5% of the tax revenue. Likewise, the cost of compliance to the taxpayer
should be as low as possible and must not be seen to hinder voluntary
compliance.
 Simplicity
The type of tax and the method of assessment and collection must be simple
enough to be understood by both the taxpayers and the collectors. Complicated
taxes lead to disputes, delays, corruption, avoidance and high costs of collection
in terms of time and resources.
 Ability to Pay
The tax levied should not exceed the taxable income of a person. This is to avoid
discouraging the person’s performance or participation in the tax base.
 Diversity,
 Productivity, and

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 Elasticity
Solution 2
(a) Advise Martin on his taxable employment income for the year ended 31
December 2023, highlighting elements of income that are not taxable.
Details Workings Shs
20% of accumulated savings from NSSF 20%*270m Not taxable -
Car benefit W1 6,887,816
Reimbursement of medical bills Not taxable -
Employee share acquisition scheme 1,000*2,000 2,000,000
House maid benefit (400,000 *12) 4,800,000
Loan benefit (9%*5,230,000) 470,700
Gross salary (12,996,000 *12) W2 155,952,000
Accommodation benefit W3 22,800,000
Total employment income 192,910,516
Working 1: Car benefit
Market value of the car when first provided to the employee 52,983,200
Depreciation for 2022 at 35% (18,544,120)
Depreciated market value for 2023 34,439,080
Car benefit 20%*34,439,080*365/365)
Car benefit 6,887,816
Working 2: Gross pay
Last year's monthly net pay 6,840,000
190% of last year's monthly net pay 190%*6,840,000 12,996,000
Annual Gross pay (12,996,000*12) 155,952,000
Working 3: Accommodation benefit
Market value of rent 2,400,000*12 28,800,000
Less employee contribution
Contribution to rent 500,000*12 (6,000,000)
Adjusted market rent 22,800,000

Employment income 162,230,116

Adjusted market rent 22,800,000
Employment income including adjusted market rent 192,910,516
15% of employment income including adjusted market rent 28,936,577
15%*185,030,116
Market rent is less than and 15% of employment income including 28,936,577
market rent and therefore will be taken as the benefit

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(b) Advise Martin on the chargeable rental income in the year ended 30 June 2023
and compute the rental tax payable by Martin in this period
Rental income computation
Gross rental income 84,500,000
Allowable threshold -2,820,000
Chargeable rental income 81,680,000
Tax rate 12%
9,801,600
(c) Advise Martin on your understanding of the term employment and the
composition of employment income.
Definition of the term employment,
Employment” means:
 the position of an individual in the employment of another person;
 a directorship of a company;
 a position entitling the holder to a fixed or ascertainable remuneration; or
 the holding or acting in any public office;
Composition of employment income,
According to the Income tax Act cap 340, Employment income includes:
 Wages, salary, leave pay, payment in lieu of leave, overtime pay, fees,
commission, gratuity, bonus, allowances (entertainment, duty, utility,
welfare, housing, medical, or any other allowances)
 The value of any benefits in kind provided by/on behalf of the employer to
the employee
 Amount of private/personal expenditure discharged or reimbursed by the
employer
 Employment terminal and retirement benefits
 Insurance premiums paid by the employer for the employee and/or his
dependents
 Payments in respect of change of employment/contract terms
 Discounts in shares allotted to an employee and any gain derived on
disposal of a right or option to acquire shares under an employee share
acquisition scheme
 Note: It should be noted that all or any of the above in combination
comprise employment income

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Solution 3
(a) Determine for ALUL the
Shs Shs
Purchase Amount VAT incl VAT
Rent paid 5,000*3,700*18/118 18,500,000 2,822,034
Salaries 592,580,000 Out of VAT scope - -
Receipt of clearing support services 6,481,200 988,658
18/118*6,481,200
Accounting services rendered before 9,751,000 1,487,440.68
invoice or payment 18/118*9,751,000
Health insurance for staff Exempt 6,340,600 -
Repair and maintenance of office 1,480,000 225,762.71
premises 400*3700
5,523,894.92
Sales
Clearing and forwarding for coffee export 8,510,000 1,298,135.59
2,300*3,700*18/118
Clearing and forwarding for Oil rig 68,156,580 10,396,766.44
20%*340,782,900*18/118
Clearing from Mombasa to Uganda 3,700*(15,600-9,500) 57,720,000 8,804,746.76

License fees paid to Kenya for imported services 12,950,000 2,331,000

18/100*3,500*3700
22,830,648.79
VAT payable=output tax -input tax
22,830,648.79 - 5,523,894.92= 17,306,753.87
(b) Definition of the term exempt supply
According to the VAT act, a supply of goods or services is an exempt supply if it
is specified in the Second Schedule.
Where a supply is an exempt supply under a transfer of a business as a going
concern, both the transferor and transferee should, within 21 days of the
transfer, notify the Commissioner General in writing of the details of the transfer.
Obligations of the seller and purchaser for this transaction to be exempted from VAT
 The seller disposes of any part of a business which is capable of separate
operation for example a branch of a business
 Both the seller and the buyer must be registered as taxable persons for VAT
 The agreement of sale which should be duly executed must make it absolutely
clear that the property is a whole or part of the seller’s business which is being
sold as a going concern
 Activities of the business must continue after the business is transferred to the
buyer for at least 2 years
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 The seller sells to the buyer all of the facilities that are necessary for the
continued operation of the enterprise being sold.
 The supplier carries on or will carry on the business until the day of the supply
and the nature of the business will not change after the transaction
 The seller and buyer within 21 days of the transfer should notify the
commissioner general in writing of the details of the transfer
Solution 4
(a) Advise MUL on the customs value of items imported and the applicable taxes
payable.

Customs value = Cost & Insurance for goods transported by air

Exchange rate 3,700 3,700
$ Shs
Cost determination
Cost for kitchenware 53,800 199,060,000
Cost for bathroom ware 40,500 149,850,000
Cost for television sets 10,400 38,480,000
Cost for sockets 5,100 18,870,000
Cost for fridges 11,600 42,920,000
Cost for water heaters 23,500 86,950,000
Insurance up to the earliest partner state 2,200 8,140,000
Customs value in USD/UGX 147,100 544,270,000
Import duty rate 5%
Excise duty rate 10%
VAT rate 18%
WHT rate 6%
Import duty=import duty rate *customs value
Import duty=5%*544,270,000
Import duty 27,213,500

Excise duty=excise duty rate *(customs value + Import duty)

Excise duty =10%*(544,270,000+27,213,500)
Excise duty 57,148,350

Value Added Tax =Value Added Tax rate *(customs value +

import duty + excise duty)
Value Added Tax= 18%*(544,270,000+27,213,500+57,148,350)
Value Added Tax 113,153,733
Total tax payable 27,213,500+57,148,350+113,153,733 197,515,583

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(b) With examples, explain the meaning of Prohibited imports and exports and
Restricted imports and exports
Prohibited imports or exports are all goods the importation or exportation of
which is prohibited under the east African community customs management act
or by any written law for the time being in force in the Partner States. Examples
include
 False money and counterfeit currency notes and coins and any money not
being of the established standard in weight or fineness.
 Pornographic materials in all kinds of media, indecent or obscene printed
paintings, books, cards, lithographs or other engravings, and any other
indecent or obscene articles.
 Matches in the manufacture of which white phosphorous has been
employed.
 Any article made without proper authority with the Armorial Ensigns or
Coat of Arms of a partner state or having such Ensigns or Arms so closely
resembling them as to be calculated to deceive.
 Distilled beverages containing essential oils or chemical products, which
are injurious to health, including thijone, star arise, benzoic aldehyde,
salicyclic esters, hyssop and absinthe. Provided that nothing in this
paragraph contained shall apply to “Anise and Anisette” liquers containing
not more than 0.1 per cen- tum of oil of anise and distillates from either
pimpinella anisum or the star arise allicium verum.
 Narcotic drugs under international control.
 Hazardous wastes and their disposal as provided for under the base
conventions.
 All soaps and cosmetic products containing mercury.
 Used tyres for light Commercial vehicles and passenger cars
Restricted goods refer to all goods the importation of which is for the time being
regulated under the east African community customs management act or by any
written law for the time being in force in the Partner State. Examples include
 Postal franking machines except and in accordance with the terms of a
written permit granted by a competent authority of the Partner State
 Traps capable of killing or capturing any game animal except and in
accordance with the terms of a written permit granted by the Partner
State.
 Unwrought precious metals and precious stones.
 Arms and ammunition specified under Chapter 93 of the Customs
Nomenclature.
 Ossein and bones treated with acid.
 Other bones and horn - cores, unworked defatted, simply prepared (but
not cut to shape) degelatinized, powder and waste of these products.
 Ivory, elephant unworked or simply prepared but not cut to shape.
 Teeth, hippopotamus, unworked or simply prepared but not cut to shape.
 Horn, rhinoceros, unworked or simply prepared but not cut to shape

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  Other ivory unworked or simply prepared but not cut to shape.
 Ivory powder and waste.
 Tortoise shell, whalebone and whalebone hair, horns, antlers, hoovers,
nail, claws and beaks, unworked or simply prepared but not cut to shape,
powder and waste of these products.
 waste and scrap of ferrous cast iron;
 timber from any wood grown in the Partner States;
 fresh unprocessed fish (Nile Perch and Tilapia);
 wood charcoal.
 used automobile batteries, lead scrap, crude and refined lead and all
forms of scrap metal
(c) Supporting documents for examination for completeness, authenticity, accuracy
and correctness of information declared
 Bill of lading/airway bill;
 Insurance certificate;
 Pro-forma invoices;
 Commercial invoices;
 Certificates of origin;
 Permits for restricted goods;
 Purchase order;
 Packing list;
 Sales contract;
 Evidence of payment;

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Solution 5
(a) Condition to be met so that a transaction is not considered a disposal of assets
and hence no capital gains tax
 A transfer of an asset between spouses;
 A transfer of an asset between former spouses as part of a divorce
settlement or bona fide separation agreement;
 An involuntary disposal of an asset to the extent to which the proceeds
are reinvested in an asset of a like kind within one year of the disposal;
 The transmission of an asset to a trustee or beneficiary on the death of a
taxpayer; or
 Capital gains arising from the sale of investment interest of a registered
venture capital fund if at least fifty percent of the proceeds on sale is
reinvested within the year of income.
(b) Assuming the conditions in (a) above are not met, compute the capital gains tax
and withholding tax payable in this transaction
Shs
Capital gains tax
Consideration to be received 14,803,245,900
Less selling commission (210,541,000)
Less income tax liability (250,600,000)
Adjusted consideration 14,342,104,900

Cost base 12,902,342,500

Adjust cost base for overstated assets (128,445,600)
Adjusted cost base 12,773,896,900

Capital gain= Adjusted consideration-Adjusted cost base 1,568,208,000

Capital gains tax at 30%*1,568,208,000 470,462,000
Withholding tax
Adjusted consideration 14,342,104,900
WHT payable=WHT rate * consideration 6%
WHT payable at 6%*14,803,245,900 860,526,294
(c) Advise NUL on three circumstances under which a taxpayer is treated as having
disposed of an asset
A taxpayer is treated as having disposed of an asset when the asset has been
 Sold, exchanged, redeemed, or distributed by the taxpayer;
 Transferred by the taxpayer by way of gift; or
 Destroyed or lost.

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(d) In accordance with the income tax act, advise NUL on the criteria to be followed
in the determination of cost base of its assets
 The cost base of an asset purchased, produced, or constructed by the
taxpayer is the amount paid or incurred by the taxpayer in respect of the
asset, including incidental expenditures of a capital nature incurred in
acquiring the asset, and includes the market value at the date of
acquisition of any consideration in kind given for the asset.
 The cost base of an asset acquired in a non- arm’s length transaction is
the market value of the asset at the date of acquisition.
 The cost base of an asset acquired in a transaction where an asset is
disposed of to an associate or in a non-arm’s length transaction) is the
amount of the consideration deemed to have been received by the person
disposing of the asset.
 Where a part of an asset is disposed of, the cost base of the asset shall be
apportioned between the part of the asset retained and the part disposed
of in accordance with their respective market values at the time of
acquisition of the asset.

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