TAXATION: May 2012

Thursday, 24 May 2012

WHEN CAN THE COMMISSIONER REVOKE A LICENCE?

Circumsatances under which the commissioner may revoke a licence

93. (1) The Commissioner may revoke, suspend or refuse to renew, a

licence where he is satisfied that-

(a) the licensee has been guilty of an offence under this Act;

(b) the licensee has been convicted of an offence involving

dishonesty or fraud;

arrangement or composition with or for the benefit of his

creditors;

(d) the factory, or the plant therein, is of such a nature or so

maintained that the excisable goods manufactured therein are

likely to be adversely affected;

(e) the factory is so designed, equipped or sited as to render difficult

the supervision thereof for excise purposes;

(f) the licensee has failed to comply with the provisions of section

95.

(2) Where the Commissioner revokes, suspends or refuses to renew a

licence under this section, then he shall forthwith give notice of that

fact to the licensee.

Effect of revocation of licence.

94. (1) Where a licence has been revoked or suspended or has expired, then

the licensee shall-

(a) forthwith cease to manufacture the excisable goods referred to in

the licence:

(b) forthwith pay duty on the excisable goods manufactured under

the licence;

relates except in accordance with such conditions as the

Commissioner may impose.

(2) A person who contravenes this section or any of the conditions

imposed by the Commissioner under this section shall be guilty of an

offence and liable to imprisonment for a term not exceeding three years

or to a fine not exceeding five hundred thousand shillings; or to both;

and any plant or excisable goods, or any materials, in respect of which

the offence has been committed shall be liable to forfeiture.

Provision of facilities for excise control

95. (1) The Commissioner may, for the purpose of ensuring proper excise

control, require a licensee to provide and maintain, to the satisfaction of

the Commissioner and at a rental to be approved by him, suitable

housing accommodation for the officer assigned to the du

Thursday, 17 May 2012

MODEL TEST PAPER:QUESTIONS AND ANSWERS

QUESTION ONE

(a) List and explain any three deductions that may be available against gains or profits from employment. (2 marks)

b) Mr. Hesabu has recently opened an Income Tax Consultancy office in Nairobi. He has been approached by his clients on the following matters.

(i) M/S Watu, Wote, Wao are three partners operating WWW Enterprises. In 2005, they made profits of Sh.180,000. They share profits in the ratio 3:3:4. Wao had overdrawn on his account and was charged Sh.30,000 interest. Watu and Wote received interest of Sh.25,000 each from the partnership. The interest account is included in the above profits. Mr. Wote wishes to know how much tax he would pay. He has no other source of income. (6 marks)

(ii) Live Well Foundation is a Non-Governmental Organisation formed for the purposes of addressing people’s spiritual needs. It will derive its income from donations of all kinds, charitable walks and sale of religious literature. They wish to know if they will be required to pay any tax.

(4 marks)

(iii) Mrs. Mjini is a happily married housewife residing in Kilimani Estate, Nairobi. Since her compound is big she engages in backyard gardening during her spare time and she derives a lot of satisfaction from it. She also maintains very accurate records of the performance of her garden. Details for the three years ending 31 December 2005 are as follows:

Year ended 31 December 2003 Profit Sh.20,000

Year ended 31 December 2004 Loss Sh.40,000

Year ended 31 December 2005 Profit Sh.50,000

Garden produce consumed by Mrs., Mjini’s family during the year of income 2005 was sh.60,000 (not included in the above results).

She wishes to know how much tax she should pay from this activity in 2005.( 4 marks)

(iv) New Plastic Limited, manufacturers of plastic products wishes to sponsor research into plants that may produce plastics related materials. They have set aside Sh.20,000,000 which will be awarded to the Department of Biochemistry, Ubora Science University. They wish to know if there is any tax advantage which may arise. ( 4 marks)

Required:

As Mr. Hesabu’s tax manager, write a memorandum on each of the points for his consideration.

(Total: 18 marks)

QUESTION TWO

(a) Specify the rules relating to payment of Income tax under the Pay As You earn rules. (5 marks)

(ii) What are the consequences of failure to deduct and pay tax under PAYE?

(3 marks)

b) You are provided with the following details:

1. Installing a system of ventilation in the factory.

2. Legal expenses incurred when acquiring a new building

3. Giving the factory a fresh cost of plant

4. Replacing 200 tiles on a roof damaged by wind

5. Expenditure incurred in demolishing part of a wall to make room for a recently purchased machine.

Required:

(a) From an Income Tax perspective indicate for each of the above items whether it is capital or revenue expenditure. Explain. (5 marks)

(b) Explain the role and functions of a Value Added Tax tribunal. (4 marks)

QUESTION THREE

(a) It is common in Kenya to have individuals who cannot distinguish between taxes and charges. Explain the difference between a tax and National social Security Fund deductions. (6 marks)

(b) Specify the basic rules in Income Tax with regards to payment of pension from a registered scheme to:

(i) The pensioner, (3 marks)

(ii) The widow or widower of a pensioner. (4 marks)

QUESTION FOUR

(a) Name and briefly explain items which may be included in the qualifying

expenditure for the purposes of investment deductions. (4 marks)

(b) Write short notes on the following:

(a) Industrial Building – “Hotel” (4 marks)

(b) Exempt Dividend Income. (4 marks)

(d) Memorandum of Appeal & Statement of Facts. (4 marks)

(Total:20marks)

QUESTION FIVE

Write explanatory notes on the taxes listed below and in each case indicate whether the tax complies with the main principles of a good tax system.

(a) Presumptive tax on agricultural produce. (5 marks)

(b) Cess on agricultural produce. (5 marks)

(d) Stamp duties on transfer of properties. (5 marks)

(Total: 20 marks)

ANSWERS

QUESTION ONE

(a) Deductions that may be available against gains or profits from employment are:

- Mortgage interest (owner occupied interest) paid on loan to buy or improve a residential house up to a maximum Ksh.150,000. Note that where the mortgage interest paid is less than the maximum, the actual interest paid is claimed. Where actual mortgage interest is higher than maximum only maximum allowable can be claimed

- .Actual amount contributed by an employee to a registered pension or provident fund which shall be the lower of (i) Actual contribution or Sh. 240,000 or 30% of pensionable income or set lime of sh240,000

- Contribution to a registered Home Ownership Savings Plan up to Ksh.48,000 p.a., that is Ksh.4,000 p.m.

- N.S.S.F of Kshs 200 p.m (Kshs 2,400 p.a)

- Subscriptions to professional associations such as LSK, ICPAK etc.

(b) MEMO FROM: TAX MANAGER

TO: MR. HESABU – TAX CONSULTANT AND DIRECTOR

REF: TAX CONSIDERATIONS ON POINTS RAISED BY CLIENTS

(i)	Mr. Wote’s taxable income is arrived at as follows: Partnership profits reported Add back interest to Watu and Wote (Sh.25,000 x 2) Adjusted Partnership profit Distributed as follows:			180,000 50,000 230,000
	Partner Interest on Capital Balance of profits	WATU SH.’000’ 25 54 79	WOTE SH.’000’ 25 54 79		WAD SH.’000’ - 72 72	TOTAL SH.’000’ 50 180 230
	Therefore Mr. Wote’s taxable income in equivalent to KShs. 79,000

(ii) Live Well Foundation being a Non-Governmental organization formed to address people’s spiritual needs is of a Public character and sources of its income include donations, charitable walks and sale or religious literature and where such income is entirely expended in Kenya for the same purpose, no tax liability arises.

(iii) Liability to tax on farm income to wife rests with the husband. Secondly where farming is established to be hobby farming then losses will not be offset against tax. We are told that family consumption is Sh.60,000 for the year and that she derives a lot of satisfaction from this activity. This may be an indicator to hobby farming. However if 25% or less of the farm produce is consumed then profits are taxable. For year 2005 taxable farm profit would be computed as follows:

Profit year 2005 Add: Own Consumption Less loss b/fwd (40,000 loss – 20,000 profit) Taxable farm income	Sh. 50,000 Sh. 60,000 Sh.110,000 Sh.(20,000) Sh. 90,000
Taxable farming income of Ksh.90,000 will be added to the husbands income and total assessed to tax on him.

(iv) By sponsoring research into plants to produce plastic related materials which they manufacture, New plastic Limited will be allowed to deduct the contribution against taxable income of such year of income. This reduces taxable income and tax liability. Section 15(i) (ii) (iv) states: ‘a sum paid to a university, college, research institute research mentioned in sub-paragraph (iii):’ as deductible against taxable income.

Signed

TAX MANAGER

QUESTION TWO

(a) (i)“Pay as You earn” is deductible from weekly wages, month salaries, annual salaries,bonuses, commissions, directors fees (whether the director is resident or non-resident) pensions paid to pensioners who reside in Kenya.

It is the employer’s statutory duty to deduct income tax from the pay of his employees whether or not he has been specifically told to do so by the Department.

The law requires an employer to remit the income tax deducted from his employee’s pay before the tenth day of the month following the deduction.

If the total amount of tax deducted, from all employees in any month is less than hundred shillings or when no tax has been deducted, the employer must complete the relevant portions of the top copy of a credit slip and send it direct to his Income Tax office before the tenth day of the following month.

Where total amount of tax deducted is less than Ksh.100, it should be carried forward to later months until it exceeds Ksh.100 or until December, whichever is the earlier, and then paid-in.

(ii) If any employer fails to comply with the provisions of Section 37 and with the

provisions of any rules made under Section 130 which deals with the payment over of tax deducted and the accounting for it to the commissioner, the commissioner may, by order, impose a penalty equal to twenty five per cent of the amount of tax involved , and the provisions of the Act relating to the collection and recovery of the tax shall apply to the collection and recovery of any tax payable and such penalty as if it were tax due by the employer.

1. Cost of installing a ventilation system in the factory:

This is a capital expenditure (not allowable) since such installation would occur before the building is put into use and is thus capitalized.

2. Legal expenses incurred when acquiring a new building.

This is a capital expenditure. Such expenses are capitalized and disallowable since they are not incurred in generating taxable business income.

3. Giving the factory a new fresh coat of paint.

This is revenue expense since it is basically a maintenance cost used on a factory already existing and used in generating taxable income.

4. Replacing 200 tiles on a roof damaged by wind

This is allowable expense since tiles are replaced with tiles. If tiles are replaced with other roofing materials, the cost is treated as capital in nature hence disallowable.

5. Demolition cost to accommodate a new machine

This is a capital expenditure and should be capitalized as part of the qualifying cost of the machine. It is incurred before the machine is put into use. It is disallowable expense.

(b) ROLES OF THE VAT TRIBUNAL

The role of a value added tax tribunal is that of an appeals body for the purpose of hearing and deciding on appeals where a taxpayer is dissatisfied with the ruling by the commissioner for value added tax.

The appeals Tribunal has powers of a subordinate court of the first class to summon witnesses, to take evidence upon oath or affirmation and to call for the production of books and other documents.

QUESTION THREE

(a) A tax is a compulsory contribution by persons liable to pay tax to the state to defray the expenses incurred in the common interest of all, without reference to special benefits conferred. By compulsory we mean any person who refuses to pay a tax is liable to punishment. Tax revenue is used for the benefit of all and there is no direct ‘Quid Pro Quo’ payment.

The National social Security Fund is a government fund which was established by the National social Security Fund Act 1965 for the benefit of workers. It is a compulsory savings scheme into which the employer pays a statutory contribution for every employee who is a member of this fund. The scheme is applicable to those employers having five or more employees. The average rate of contribution is 10% of a worker’s wages half of which is paid by the employer and half by the worker subject to a maximum of 2400p.a

The following benefits are provided under this scheme:

o Age benefits – paid to a member at age of sixty or when he retires from paid employment, whichever is later.

o Withdrawal Benefit – paid to a member who is at least fifty-five years of age and has not engaged in paid employment during the previous three months.

o Invalidity Benefit – Paid to a member who is permanently incapable of work because of physical or mental disability.

o Survivors Benefit – Paid to the dependants of deceased member

o Immigration Grants – Paid to a member who is permanently emigrating from Kenya.

(b) (i) Payment of pension from a registered scheme to a pensioner will be based on the following rules:

the first Ksh.300,000 received by a resident individual in a year of income in respect of pensions or retirement annuities is exempted and is not chargeable to tax.

Lump sum payment of first Ksh.600,000 is exempted from income tax upon maturity of employment.

(i) Payment to widow or widower of a pensioner will be treated as follows:

- the first Ksh.1,400,000 of such a lump sum payment will be consolidated income not chargeable to tax as income of the beneficiary.

(i) Deduction in respect of contributions of an employee in a year shall be limited to the lesser of:-

the sum of the contributions made by the employee to registered funds in the year, or thirty per cent of the employee’s pensionable income in the year, or two hundred and forty thousand shillings per year

(ii) Pension funds in respect of an employee may be transferred to another registered fund or registered individual retirement fund and not be treated as a withdrawal under Sec.3 (2) ©.

(iii) Where registered fund is wound up, any surplus funds therein shall be deemed to be the funds of the employer and shall be immediately withdrawn by the employer unless the trust deed in respect of such registered fund specifies the contrary.

Other rules:

- Funds must be registered

- contribution cannot be withdrawn before 5 years have expired neither can contributions be used as security.

QUESTION FOUR

(a) Qualifying expenditure – the cost of the asset (used for generating taxable income) which should qualify for a capital allowance/deduction

The items to be included as qualifying expenditure include:

Buying price of the asset
Any customs duty and Vat paid on the asset
Installation costs
Insurance on transit and transport costs before the asset is brought into use
Cost of demolition of a building to accommodate the asset
Any repair cost incurred before the asset is brought into use
As a rule, any incidental cost incurred before the asset is brought into use is a qualifying expenditure

(a) Industrial Building – “Hotel”

This is a hotel building or part of a hotel building which the Commissioner of Domestic Tax has certified to be an industrial building, including any building directly related to the operations of the hotel such as kitchens, staff quarters and entertainment and sporting facilities.

(b) Exempt dividend income

Dividends from outside Kenya

Dividends received by a company which owns 12½% or more of the voting power of the paying company.

Dividends received by an exempt person, e.g registered pension and provident funds

Dividends received by an insurance company from its life insurance fund

Is an individual person who has a permanent home in Kenya and was not present in Kenya for any period during the year of income under consideration; or he has no permanent home in Kenya and was not present in Kenya for a period or periods amounting in aggregate to 183 days or more during the year of income under consideration; or he has no permanent home in Kenya and was present in Kenya for any period during the year under consideration and in each of the two preceding years for periods not averaging more than 122 days for the three years.

(d) Memorandum of Appeal & Statement of Facts

These are the most important documents (Memorandum of appeal and statements of facts) which must be submitted to the clerk of the Local Committee. Memorandum of appeal is a document stating the grounds/reasons for the appeal. The original and 9 other copies for the members of the Local Committee. A statement of facts, on the other hand, is a document which gives a sequence of events on the assessment before appeal to the local committee, i.e. dates assessment was issued and objected to, confirmed, etc.

QUESTION FIVE

(a) Presumptive Tax on Agricultural Produce

· This tax was levied on the value of gross sales of specified agricultural produce. Introduced in 1989 was charged at rate of 5% and collected by the authorized agents specified in the 19^th sechdule of the Act. These agents are required to remit this tax to the commissioner in 30 days of making such deductions.

· This tax is charged under the provisions of Section 17 (a) of the Income tax Act and based on the presumption that farmers who grow certain crops or produce derive gains and profits chargeable to tax under Section 3 (2) (a).

· The rate was later reduced to 2% which was final tax in the case of individual farmers only.

· The tax complies with principles of a good tax in that gains to farmers are also brought to taxation in line with canon of equality/equity or fairness.

· It is convenient and economical since it is collected by authorized agents appointed by Government and that it is based on gross sales made. It is certain since it is collectable at points of sales of agricultural produce affected.

(b) Cess on Agricultural Produce

Is a levy imposed by Rural local authorities on traders of the main commodities found in such local authority such as Agricultural produce, building materials, e.g. Sand, Stones, Quarry chips. The purpose of the levy is to maintain roads and essential facilities provided by such local authority.

Trade licences fees are charged in accordance with provisions of Trading Licenses Act (Cap 497). These are licenses on annual basis to grant the permission to conduct professional work for a gain. This charge ensures that the right persons get the authorization to conduct professional work and protects such professionals from non-qualified persons who may wish to join the trade. It is convenient and economical since the licenses will normally be issued by the local authority concerned as a Government body. It may not be productive given few number of professionals require such permit per year but satisfies principle of equity or fairness as professionals desiring to practice are also brought into the tax net.

(d) Stamp Duties on Transfer of Premises

Stamp duties are charges by Government in respect of some documents which are specified in the Stamp Duties Act. Stamp duties are charged in Kenya in accordance with the provision of Stamp Duties Act Cap 480. Instruments must be stamped where property transfers are effected. Conveyance or transfer duty is charged on every instrument or court order in respect of the transfer of any property as a result of sale. Stamp duty on transfers of premises is equitable/fair since the property owners contribute tax, it is convenient since it is only applicable upon such transfer.

Wednesday, 16 May 2012

QUESTIONS AND ANSWERS

QUESTION ONE

a) i) Define the term ‘tax planning’ (2 marks)

ii) Briefly explain two instances in which a business may apply the concept of tax planning

(4 marks)

(b) The Kenya Revenue Authority (KRA) is geared towards a function-based organization rather than one structured along the types of taxes. This is evidenced by the integration of VAT, Income Tax and Excise departments into the Domestic Department.

Asses the likely benefits and drawbacks to KRA arising from this integration. (4 marks).

c) Highlight the benefits of an effective tax policy to a developing country.

(4 marks)

d) With reference to section 132(7) of the Income Tax Act (Cap.470), list six types of transactions for which personal identification number (PIN) is required.

(6 marks)

QUESTION TWO

Write brief notes on the following

(a) Withholding VAT agents (4 marks)

(b) Compensating tax (4 marks)

(d) Fringe benefit tax (4 marks)

(e) Exempt interest income (4 marks)

(Total: 20 marks)

QUESTION THREE

a) Write brief notes on the following:

i) Tax-free employment benefits (6 marks)

ii) Set off of import duty (4 marks)

b) Local supplies of goods and services to an Export Processing Zone (EPZ) are zero rated under the VAT Act (Cap 476)

Explain the two alternative methods of zero rating such supplies. (6 marks)

c) With reference to the Income Tax Act (Cap.470) explain how a Kenyan branch of a foreign company is taxed (4 marks)

QUESTION FOUR

Section 24 (1) of the Income Tax Act (Cap 470) requires companies to adequately distribute their profits as divided within twelve months after the end of the accounting period.

Outline the circumstances under which a company may apply for exemption from the shortfall distribution requirements. (4 marks)

b) The following information relates to Vuma Limited for the year ended 31 December 2004:

The company’s operating profit before tax amounted to Ksh.2,000,000 excluding Ksh.400,000 from investment activities

The company intends to distribute Ksh.200,000 as dividend for the year ended 31 December 2004.

The corporate tax rate is 30%

Required:

Compute the short fall tax payable by Vuma Limited for the year ended 31 December 2004. (4 marks)

c) Write short notes on the following:

i) Exemption of individuals from paying instalment tax (4 marks)

ii) Double taxation relief (4 marks)

iii) Refund of overpaid tax (4marks)

(Total: 20 marks)

QUESITON FIVE

Explain briefly the key provision of Section 125 of the Income Tax Act (Cap. 470) relating to the official secrecy binding all employees of the Income Tax Department. (4 marks)

(b) Explain the term “thin capitalization.” (4 marks)

(4 marks)

(d) Explain briefly the meaning of “goods subject to customs control” under the Customs and Excise Act (Cap. 472) (4 marks)

(e) Explain the requirements of an application for refund of VAT paid in respect of Bad debts. (4 marks)

(Total: 20 marks)

QUESTION ONE

a) i) Tax planning

Ø The arrangement of affairs of tax payer in such a way as to minimize tax liability at the lowest cost without contradicting any tax laws and regulations. It involves determining in advance the tax effect of any proposed business action and decision.

Ø It requires a deep understanding of tax legislations and decided case law of taxation. The aims of tax planning are to

i. Achieve the most advantageous financial position from business transactions measured in terms of direct tax savings and improved cash inflows.

ii. Ease tax administration (internally) in terms of methods of accounting for tax, records to be maintained and tax reports to be prepared.

iii. Achieve the highest level of compliance with the tax laws.

ii) The planning areas in business decision may include

Ø Lease a buy decisions – do we lease assets and pay lease charges (allowable) or buy assets and enjoy capital allowances

Ø Financing decisions: - do we use debt capital (interest charges are allowable) or equity capital (dividends not allowable)

Ø Firm of business ownership – do we operate as a partnership, sole proprietorship or a limited company.

Ø Trading decisions – do we produce and sell locally or export (exports are zero rated for VAT purposes)

(a) Benefits as a result of integration of the Departments into Domestic Taxes Departments

· The integration has eliminated duplicated of functions, leading to resource savings that can be applied to other critical areas such as automation.

· It has led to enhanced taxpayer compliance and risk assessment given that taxpayers are monitored for all taxes and there is more sharing of information.

· There is better relationship with the clients as they are no longer subjected to separate audits from income Tax and Vat officers. This is due to better co-ordinated approach to tax audits and taxpayers education.

· The management is able to monitor the effectiveness of tax audit and other programmes in totality as opposed to the previous situation where one programme was being performed across different departments.

· Integration has reduced the likely incidence of corruption as a taxpayer is now likely to be audited by a team, not an individual officer from a department.

· Information sharing is possible.

(10 marks)

Drawbacks from integration.

· Lack of clear responsibilities

i. Previously, it was possible to place responsibilities for attaining targets on various commissioners be it for customs and excise VAT, Income Tax etc. Variations were easier to spot. Not possible now since all these are integrated into one.

ii. Tax payers do not clearly know who to report to at KRA i.e. whether they fall under Large Taxpayer Unit or otherwise. No clear guidelines.

(10 marks)

(b) Benefits of effective tax policy to a developing country.

Increased rate of savings and capital accumulation.
Mobilising of economic surpluses i.e. excess of current output over essential consumption for accelerating economic growth.
Indirect taxes are utilised to:

-Promote development by checking conspicuous consumption.

- Mobilise resources for the public sector

- Increase the savings ratio

· A suitable tax policy directs resources from:

- Private to public sector

- Consumption goods industries to investment goods industries.

- Import goods to export goods.

a) Transaction of for which PIN is required.

The 13^th Schedule of Income Tax Act indicates the following transactions with various institutions

· Registration of titles and stamping of transactions by commissioner of lands

· Registration of motor vehicles transfer by registrar of motor vehicles.

· Underwriting of policies by insurance companies

· Trade licensing by Ministry of Commerce

· Application for VAT registration

· New registration of business and companies

· Importation and exportation of goods, customs clearance and forwarding under customs and excise

· Payment of deposit for power connection by KPLC

· Approval of plans by and payment of water deposits to local authorities

QUESTION TWO

(a) Withholding VAT agents

VAT is tax paid by end users or consumers.
The participants in the production and distribution chain are only to collect VAT on behalf of the tax authorities.
VAT is a multi-stage tax where withholding tax agents collect VAT at each stage.
The withholding tax agents who account for VAT at each stage include; suppliers, manufactures, wholesalers and retailers
VAT payable= output tax –input tax withheld at each stage.

Compensating tax

Introduced in 1993

Additional tax affecting companies

Arises when the dividends paid and tax refunds exceed dividends received and tax paid in the year.

i.e. Compensating tax

Dividend paid x

+ Tax refunds Minus Dividend received x

minus taxes paid

Where t = Corporate tax rate

The computation of the compensating tax should be reflected in the self assessment return.

The commissioner may require a person to give security to:

Ensure due compliance by the person with the provisions of CAP. 472
Protection of customs and excise revenue on imported goods
Cover any transaction entered into by the person within a specified period.

(d) Fringe Benefit Tax

It is tax paid by the employer on fringe benefits granted to the employee.
Fringe benefits are loans granted by the employer to the employees at an interest rate that is lower than the prescribed interest rate.
For loans granted after 11^th June 1998 employers are required to pay fringe benefit tax at the resident corporate tax rate, on the difference between market interest rate and the rate paid by the employees.
Prescribed low interest rate for January to June 20006 is 8%.
Prescribed market interest rate for April to June 2006 is 8%.

(e) Exempt interest income

Interest received from outside Kenya.
Interest income of a registered retirement scheme or fund.
Interest income arising from contribution to home ownership savings plan (Hosp) after ten years of saving.
Interest arising from government stocks/bonds and Nairobi city council stocks held by non-residents.
Interest from savings in post office savings bank.

QUESTION THREE

Tax free (exempt) employment benefits

Fringe benefits
Benefits in kind not exceeding Ksh.36,000 p.a (3,000p.m)
Education fees paid by employer for employee and his dependents if such fees are taxed on the employer.
Medical benefits if scheme is non-discriminative.
Passages/translocation costs for non-citizen expatriates.
Contribution by employer for employees to registered and unregistered pension and provident funds.

Import duty is refundable or set off if:

- Imported goods are returned to the seller

- Duty was paid in error (overpaid)

- Where goods are destroyed/ damaged while under customs control ware

- Where goods are destroyed or lost through accident

- Where imports are used in production of exports or other specified duty exempt goods

- Duty was paid by privileged persons as institutions such as WB, UN, Armed forces etc

b) Methods of zero rating supplies to EPZ

1) Supplies of taxable goods and services to EPZ businesses could be made without charging VAT provided that the suppliers maintain records of

Proof of payment made for on acquisition of such goods and services.
A certificate signed by the buyer (EPZ business) that the goods were received.
A copy of the invoice showing the supply of goods or services to the EPZ business.

2) Treating EPZ as a territory outside Kenya.

Local suppliers to EPZ businesses are treated as exporters and exports are zero rated.
They charge V.A.T at zero rate ( zero output VAT) on such supplies but they have to complete the usual export entry forms and maintain copies thereof duly certified by a proper office of customes at their business premises.
The copies would be examined by VAT officers during routine audit examination.

c) Taxation of a Kenyan branch of a foreign company (Section 18 of Cap 470)

· The branch is considered as a non-resident and taxed at 37.5% corporate tax rate

· Expenses of interest, royalties and management or professional fees paid to head office are not allowable expenses.

· Sales abroad (exports) by the branch of items manufactured locally are deemed to have arisen in Kenya hence taxable in Kenya

· Expenditure incurred by the branch outside Kenya is only allowable/deductible to the extent the CDT may consider.

QUESTION FOUR

a) Shortfall distribution tax

· A tax imposed on companies which have not met the commissioner’s requirements as to distribution of dividends.

· Companies are required to distribute at least 40% of their operating profit after tax and 100% of other incomes.

· A short fall distribution arises if the actual distribution is below the minimum distribution.

· Shortfall tax = 30% (Minimum distribution – Actual distribution)

· Exemptions from shortfall distribution tax

· Where the company is facing liquidity problems.

· Where the company has commitments to purchase fixed assets

· Where the company has commitments to repay loans

· Where shareholders do not owe the company any amounts.

b) Vuma Ltd

Shortfall distribution tax

The investment income is not taxable since it is only available for distribution to shareholders. Its only operating income which is taxable. The mandatory distribution is 40% (60% retention)

Operating income	2,000,000
Less tax @ 30%	600,000
Distributable profits	1,400,000
Less 60% statutory retention	(840,000)
Statutory distribution (40%)	560,000
Add investment income(assumed qualifying)	400,000
Total available for distribution	960,000
Less amount distributed	(200,000)
Short fall distribution	760,000
Short fall distribution tax = 5% x 760,000 =	38,000

c) Exemption from paying instalment tax

Non-employment income is less than 1/3 of total income (employment + non-employment)

Tax liability for year of income does not exceed Ksh.40,000.

The source of income is only employment income which is taxed under PAYE

Where total tax liability for the year is expected to be nil or negative (refund)

ii) Double Taxation relief

This avoids double taxation of employment income earned by Kenyan citizens from outside Kenya

If a Kenyan citizen earns employment income from Kenya and from foreign country the foreign employment income would be taxed in foreign country and in Kenya. To avoid this double taxation Section 41, 42 and 43 of Cap 470 grants double taxation relief where:

1.The tax payer must prove that the tax was deducted in the foreign country on foreign employment income.

2.The tax payer must claim the double taxation relief within 6 years of paying such tax liability in foreign country.

3.The double taxation relief shall be the lower of

a).Tax paid on foreign employment income in the foreign country

b)Tax paid on foreign employment income in Kenya.

W.e.f. 1/1/2002 a resident person with foreign employment income shall be granted double taxation relief whether or not Kenya has a DTA with the foreign country. Currently, Kenya has a DTA with Zambia, UK, Germany, South Africa, Canada etc.

iii) Refund of over-paid tax

- According to Section 105 of Cap 470, refund of overpaid tax shall occur as follows

Where the CIT is satisfied that a person paid, in respect of a year of income tax in excess of amount payable, the CIT shall refund the amount of excess together with any interest

When tax is due and payable by a tax payer who is expecting a refund, any amount refundable shall be applied towards the satisfaction of the tax due and payable

A claim for repayments/refund shall be made within seven years after expiry of the year of income to which the claim relates.

QUESTION FIVE

125.(1) An officer and any other person employed in carrying out the provisions of this Act shall regard and deal with all documents and information relating to the income of a person and all confidential instructions in respect of the administration of the Income Tax Department which may come into his possession or to his knowledge in the course of his duties as secret.

(1A) An officer appointed under section 13 of the Kenya Revenue

Authority Act for purposes of this Act shall, on appointment, make and subscribe

before a magistrate or commissioner for oaths, a declaration in the prescribed

form.

(2) No officer and no other person employed in carrying out the provisions of this Act, shall be required to produce in court a document, or to communicate to a court information, which has come into his possession or to his knowledge in the performance of his duties under this Act except as may be necessary for the purpose of carrying into effect the provisions of this Act or in order to bring or assist in the course of a prosecution for an offence committed in relation to tax.

(3) Nothing in this section shall prevent -

(a) an officer or person from revealing a document or information relating to the income of a person or confidential instructions in respect of the administration of the Income Tax Department to another officer or person so employed in the course of his duties, or to a person authorized in that behalf by the Minister in relation to a person resident in Kenya, or to a court or person for the purposes of this Act;

(b) an officer from revealing a document or information solely for revenue or statistical process to a person in the service of the Government in a revenue or statistical department where that document or information is needed for the purpose of the official duties of that last mentioned person and where last mentioned

person has made a subscribed declaration of secrecy in relation to information coming to his knowledge in the course of his official duties;

(c) an officer from revealing a document or information to the Controller and Auditor General, or to an authorized member of his Department, where that document or information is needed for the performance of his official duties.

(d) An officer from providing to the Board established under the Higher Education Loans Board Act, the name and address of any person granted an education loan or his employer, where such information is required for the performance of the Board’s official duties in recovery of the education loans.

(b) “Thin capitalization”

- This refers to the extent of mix of debt and equity capitalized. Debt is defined to include

- Long term loans

- Debentures and bonds

- Short term loans

- Bank overdraft

- Creditors

- Overdrawn current accounts

- Other amounts used t o 3rd parties

- Withholding tax on dividends is only 5%

- Capital gains are tax exempt

- Floatation costs are tax allowable

- Stock brokerage services are VAT exempt

- Venture capital firms enjoy a 10 year tax holiday

- Income from collective investment schemes is tax exempt

(d) Goods are subject to customs control if measures are taken by commissioner of customs and Excise to ensure compliance with provisions of cap 472. Examples of such goods are

- Goods on which duty (import or excise duty) has not been paid

- Goods subject to seizure

- Restricted exports

- Goods lending exportation stored in a customs area under permission of proper officer

- Goods on board an aircraft to be used or used within Kenya

(e) Refund of VAT for Bad debts

- The refund is made if

● No payment for supplies has been received and 3 yeas have elapsed

● The claim must be made within 5 years of making application

- The following documents must accompany the refund claim application

● Copy of tax invoice issued upon supply

● Declaration that the seller and buyers are independent parties

● Evidence that every effort has been made to recover the amount owed

● Document evidence by liquidator that the