Taxation - Paper 11

PUBLIC ACCOUNTANTS EXAMINATIONS BOARD A Committee of Council of ICPAU

CPA(U) EXAMINATIONS

LEVEL TWO

TAXATION - PAPER 11

MONDAY, 2 JUNE 2014

INSTRUCTIONS TO CANDIDATES

1. Time allowed: 3 hours 15 minutes.

The first 15 minutes of this examination have been designated for reading time. You may not start to write your answer during this time.

2. Section A has one compulsory question carrying 30 marks. 3. Section B has three questions and only two questions are to be

attempted. Each question carries 20 marks.

4. Section C has three questions and only two questions are to be attempted. Each question carries 15 marks.

5. Tax rates are provided on page 8.

6. Write your answer to each question on a fresh page in your answer booklet.

7. Please read further instructions on the answer booklet, before attempting any question.

2014 Public Accountants Examinations Board

Taxation Paper 11

2 June 2014 Page 2 of 8

SECTION A This section has one compulsory question to be attempted

Question 1

United Bank Ltd, a commercial bank incorporated in Uganda, started business in January 2006. The bank is registered for all taxes and has its head office in Kampala. The bank has five branches, three of which are located in Kampala, one in Jinja and the other one in Entebbe. The bank published the following results of its operations, for the year ended 31 December 2013.

Statement of profit or loss and other comprehensive income: Note Shs million Interest income 1 87,500 Interest expense (28,200) Fees and commission income 22,900 Income from investments and foreign exchange trading 2 7,650 Impairment of loans and advances 3 (8,560) Operating expenses 4 (46,500) Profit before income tax 34,790

Notes to the financial statements:

1 Interest income: Shs million Income from loans and advances for working capital for customers businesses

30,500

Income from loans and advances for construction and purchase of houses

33,200

Income from lease financing 15,200 Income from loans and advances to finance agriculture and agro-business sectors

8,600

Total 87,500

2 Income from investments and foreign exchange trading: Shs million Income from treasury bills 850 Income from government treasury bonds 2,600 Unrealised foreign exchange gains 600 Realised foreign exchange gains 3,600 Total 7,650

3 Impairment of loans and advances: Shs million Specific impairment of loans and advances 7,600 General impairment of loans and advances 960 Total 8,560

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4 Amounts included in operating expenses: Shs million Depreciation of plant, property and equipment 3,200 Cost of billboards for signage 60 Life assurance policy for staff 370 Utilities for the managing director who resides in the banks house

16

Penalties for late submission of income tax return for the year 2012

20

10% NSSF company contribution 120 Advertising banks business in local media 130

Additional information: Shs million (a) Withholding tax paid on income from treasury bills 170 (b) Withholding tax paid on income from government

treasury bonds

520 (c) Expenses related to treasury bills and bonds 10 (d) Expenses related to agricultural lending 15 (e) Provisional taxes paid 16,500 (f) Output VAT paid on lease financing 670 (g) Input VAT claimed 360

Written down value of depreciable assets as at 1 January 2013: Shs million Class I 6,260 Class II 320 Class III - Class IV 2,530

Additions during the year: Shs

million Computers 350 Three pickup trucks for distribution of marketing items (less than 7 tonnes each)

420

Coaster bus to transport staff (seating capacity of 29 passengers)

120

Furniture 100 Cost of commercial building used for offices (first put to use on 1 January 2006)

96,000

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Required:

(a) Compute the tax payable by United Bank Ltd for the year ended 31 December 2013.

(21 marks) (b) State the due dates for payment of provisional tax and final tax for the

company. (2 marks)

(c) Explain the provisions for eligibility for initial allowance as per the Income Tax Act, Cap 340.

(7 marks) Total (30 marks)

SECTION B

Attempt two of the three questions in this section

Question 2

Mr. Mara is a managing director of a manufacturing company in Uganda having moved from Kenya. His three-year contract of employment commenced on 1 January 2013; and the following are part of his entitlement:

1 Monthly salary Shs 40 million. 2 Reimbursement of cost of passage to Uganda to take up the job Shs 10

million. 3 Monthly housekeeping allowance Shs 500,000. 4 Annual gratuity of Shs 40 million payable at the end of each year of the

contract. 5 Club membership at Kampala Club of Shs 5 million per annum. 6 Allowance for a security guard of Shs 300,000 per month. 7 Medical allowance of Shs 2 million per month over and above the

medical scheme provisions for the entire staff. 8 Loan facility offered at a rate of 10% per annum of Shs 200 million

taken effective 1 June 2013. The statutory rate as at 1 July 2012 was 12%.

9 Travel allowance for spouse Shs 4 million. 10 Residential accommodation at Kololo provided by employer where he

pays a monthly nominal rate of Shs 1,500,000. The open market rate of similar houses is Shs 10 million per month.

11 A Mitsubishi Pajero station wagon provided by employer for both duty and private use. The vehicle was acquired at Shs 150 million on 1 July 2013. Mr. Mara pays a nominal Shs 200,000 per month towards fuel.

12 Mr. Mara made a gain on disposal of a right to acquire shares under an employee share acquisition scheme of Shs 5,000,000.

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Required:

(a) Compute the tax payable by Mara for the year ended 31 December 2013.

(18 marks) (b) Explain any four factors that determine employer/ employee

relationship. (2 marks)

(Total 20 marks) Question 3

Fine Interiors Ltd. deals in the sale of home products, all of which are standard rated. The company was incorporated in Uganda and commenced business in April 2013. The company registered for all taxes including value added tax (VAT) on 1 September 2013. By the close of the year on 31 December 2013, the company recorded the following transactions:

Cash purchase transactions: Shs 000 1 April 2013 stationery 2,000 5 April 2013 furniture 12,000 10 April 2013 computers 15,000

Purchase invoice transactions: Shs 000 Payment date 10 April 2013 stock for resale 20,000 20 May 2013 14 May 2013 stock for resale 85,000 15 July 2013 16 June 2013 stock for resale 55,000 20 August 2013 20 Sept. 2013 stock for resale 105,000 25 November 2013

Monthly sales: Invoices issued Cash receipts (current sales & debtors) Shs 000 Shs 000 April 2013 15,000 - May 2013 56,000 17,000 June 2013 43,000 19,000 July 2013 64,000 25,000 August 2013 32,000 16,000 Sept 2013 33,000 12,000

Additional information:

1 VAT inclusive transactions include sales invoice values, cash receipts from current sales and debtors.

2 VAT exclusive transactions include purchase prices. 3 The company uses the first in first out (FIFO) method when selling

stock. 4 The standard gross markup is 20% on sales.

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5 The company paid wages to casual labourers amounting to Shs 2,000,000 for the month of September 2013.

Required:

(a) Compute the input VAT claim on stock and capital goods at registration. (15 marks)

(b) Compute the companys VAT liability for the month of September 2013 using the invoice basis accounting.

(5 marks) (Total 20 marks)

Question 4

(a) Zee Ltd is controlled by a foreign entity based in Ireland, which holds a 60% of shareholding in Zee Ltd. During the year ended 31 December 2013, Zee Ltd. took an additional loan from the foreign controller to the tune of Shs 500 million. The statement of comprehensive income for Zee Ltd shows interest expenses claimed of Shs 60 million.

The following additional information is also relevant: Shs 000 Outstanding loan balance from foreign controller as at 1 January 2013

125,000

Paid up capital 1 January 2013 250,000 Unpaid up capital 1 January 2013 50,000 Share premium 20,000 Accumulated profits 65,000 Revaluation reserves 12,000

Required:

Compute the allowable interest under the concept of thin capitalisation. (10 marks)

(b) State the provisions of tax on international payments in respect to a non-resident person as provided for under Section 83 of the Income Tax Act, Cap 340.


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SECTION C Attempt two of the three questions in this section

Question 5

(a) Explain what makes up the value of goods for export under the East African Community Customs Management Act.

(3 marks) (b) State the provisions under the following as per the East African

Community Customs Management Act: (i) Community tariff treatment. (2 marks) (ii) Preferential tariff treatment under COMESA, SADC. (3 marks)

(c) Under the East African Community Customs Management Act, state the circumstances under which a person may commit the offence to make or use false documents to customs.

(6 marks) (d) State the penalty upon conviction under the above offence. (1 mark)

(Total 15 marks) Question 6

(a) State the procedure under which a taxpayer may be granted an extension of time to furnish a return of income under the Income Tax Act.

(5 marks) (b) Define the term tax avoidance scheme. (1 mark)

(c) Explain the circumstances that may lead to a re-characterisation of income and deductions by the commissioner for purposes of determining liability to tax under the Income Tax Act.

(3 marks) (d) Explain the provisions of income splitting under the Income Tax Act.

(4 marks) (e) Briefly differentiate between a normal year of income

and a substituted year of income.


Question 7

(a) Explain the term capital gains and the basis of computation of capital gains tax as per the Income Tax Act.

(4 marks) (b) Identify cases where capital gains tax can be avoided.

(5 marks) (c) Define the term indirect tax and discuss pros and cons of an indirect

tax system. (6 marks)

(Total 15 marks)

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TAX RATES

Resident Individual Income Tax Rates

Monthly chargeable income Rate of tax Not exceeding Shs 2,820,000 (Shs 235,000 pm) Nil Exceeding Shs 2,820,000 (235,000 pm) but not exceeding Shs 4,020,000 (Shs 335,000 pm)

10% of the amount by which chargeable income exceeds Shs 2,820,000 (Shs 235,000 pm)

Exceeding Shs 4,020,000 (335,000 pm) but not exceeding Shs 4,920,000 (410,000 pm)

Shs 120,000 (10,000 pm) plus 20% of the amount by which chargeable income exceeds Shs 4,020,000 (335,000 pm).

Exceeding Shs 4,920,000 (410,000 pm) (a) Shs 300,000 (25,000pm) plus 30% of the amount by which chargeable income exceeds Shs 4,920,000 (410,000 pm) and

(b) Where the chargeable income of an individual exceeds Shs 120,000,000 (10,000,000 pm) an additional 10% charged on the amount by which chargeable income exceeds Shs 120,000,000 (10,000,000 pm).

Non-resident Individuals Income Tax Rates Monthly chargeable income Rate of tax Not exceeding Shs Shs 4,020,000 (335,000 pm) 10% Exceeding Shs 4,020,000 (335,000 pm) but not exceeding Shs 4,920,000 (410,000 pm)

Shs 402,000 (33,500 pm) plus 20% of the amount by which chargeable income exceeds 4,020,000 (335,000 pm).

Exceeding Shs 4,920,000 (410,000 pm) (a) Shs 582,000 (48,500 pm) plus 30% of the amount by which chargeable income exceeds Shs 4,920,000 (410,000 pm)and

(b) Where the chargeable income of an individual exceeds Shs 120,000,000 (10,000,000 pm) an additional 10% charged on the amount by which chargeable income exceeds Shs Shs 120,000,000 (10,000,000 pm).

Small Business Taxpayers Tax Rates

Gross Turnover Tax Payable Where gross turnover of a taxpayer exceeds Shs 5,000,000 but does not exceed Shs 20,000,000 per annum.

Shs 100,000.

Where gross turnover of a taxpayer exceeds Shs 20,000,000 on but does not exceed Shs 30,000,000 per annum.

Shs 250,000 plus 1% of gross turnover, whichever is the lower.

Where gross turnover of a taxpayer exceeds Shs 30,000,000 but does not exceed Shs 40,000,000 a year.

Shs 350,000 or 1% of gross turnover, whichever is the lower.

Where gross turnover of a taxpayer exceeds Shs 40,000,000 but does not exceed Shs 50,000,000 a year.

Shs 450,000 or 1% of gross turnover, whichever is the lower.

Documents

Taxation - Paper 11