April 2025 CPA Advanced Taxation Past Paper Answers

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QUESTION ONE
(a) Laptec Ltd. is a multinational corporation operating in the manufacturing and distribution sector in your country. As the company grows, it faces complex tax challenges related to value added tax (VAT), excise duty and corporation tax compliance. The management of the company has engaged you as a tax consultant to develop a tax risk management strategy to be adopted by Laptec Ltd.’s tax department in the process of managing the organisation tax risks.

Required:
Analyse FIVE key components to be included in the tax risk management strategy. (5 marks)

(b) Technology in tax administration fosters a more transparent, accountable and efficient tax system as well as facilitating tax expansion benefiting both the government and taxpayers. This can be enhanced through incorporating the use of artificial intelligence commonly referred to as “AI” in tax administration.
Required:
Evaluate FIVE ways in which the use of Artificial Intelligence could be used to enhance tax administration in your country. (5 marks)

(c) Marine Shipping Line Ltd. is a Kenyan resident company that carried on the business of transporting cargo, mails and passengers in the various ports of the world. The company reported the following transactions for the year ended 31 December 2024:

Income Sh.“000”
Revenue generated from carriage of passengers from Kenya to other countries 851,580
Revenue generated from carriage of cargo and mails from Kenya to China 1,147,500
Revenue from carriage of passengers and cargo from China to Kenya 2,502,820
Rebate received for meeting destination timelines 12,220
Income from the lease of a ship

Expenditure: 362,500
1. The company started its operations on 1 April 2024 and acquired the following assets:
Sh.“000”
Ships: MV Border 340 tonnes 89,000
MV Queen 100 tonnes 28,000
MV Olympic 490 tonnes 20,000
Tools and implements 6,000
Pick up vans 16,000
Mobile cranes 10,000
2. The following expenses were incurred during the year: Sh.“000”
• Business licences and permits 40,000
• Port facilities fee 132,400
• Catering bills for passengers 237,800
• Salaries and wages 1,118,000
• Estimated default by debtors 12,000
3. Out of the revenue generated from carriage of passengers and cargo from China to Kenya, Sh.520,000,000 was in respect of passengers who embarked in Kenya as a result of transshipment.

Required:
Compute the taxable profit or loss and tax payable (if any) for Marine Shipping Line Ltd. for the year ended 31 December 2024. (10 marks)
(Total: 20 marks)

QUESTION TWO
(a) Analyse THREE tax planning avenues available to importers of goods in your country. (6 marks)
(b) Ryan and Michael are in a partnership business trading as RAM Enterprises and sharing profits and losses in the ratio of 3:2 respectively.

The following details relate to the business for the year ended 31 December 2024:

Sh.
Capital account (1 January 2024): Ryan 4,000,000
Michael 3,200,000
Sh.
Current account (31 December 2024): Ryan 600,000 (Credit)
Michael 900,000 (Credit)
Inventories as at 1 January 2024 6,203,000
Non-current assets 4,200,000
Trade receivables 1,800,000
Trade payables 642,000
Cost of sales 2,469,860
Transport costs 713,000
Interest on business loans 390,000
Drawings of goods at selling price: Ryan 2,250,000
Michael 2,400,000
Bank 373,000
General expenses 684,500
Salaries 2,722,020
Rent 3,000,000
Electricity 364,000
Depreciation 464,000
Net interest income (Mali Ltd.)
Additional information: 200,000
1. Current account balances were extracted after preparing the final accounts of the partnership for the year ended 31 December 2024.
2. Sales are made up of 200% of the share of the total profits by the partners and include value added tax (VAT) at the rate of 16%.
3. Interest on drawings was charged at 10% on the partners drawings and interest on capital was at 5% per annum.
4. Salaries include partners’ salary amounting to Sh.880,260 and Sh.760,260 to Ryan and Michael respectively. The partners salaries were included in the current account balances as at 31 December 2024.
5. Rent accrued was Sh.120,000 at year end and there was a prepayment of rent Sh.40,000 at the beginning of the year. Electricity owing as at 1 January 2024 was Sh.150,000.
6. On 2 September 2024, the business ordered for goods costing Sh.225,000 which were recorded as purchases but were never received as they were stolen while in transit. The transporter later accepted liability and paid a compensation in January 2025 of Sh.200,000. No adjustments had been made in the books in respect of the loss or claim as at 31 December 2024.
7. Non-current assets were acquired in the month of January 2024 and comprised the following:
Sh.
Computers 240,000
Office partitions 300,000
Furniture 120,000
Saloon vehicle 2,460,000
8. There were no opening balances in the current account of partners.
Required:
(i) The partnership taxable profit or loss for the year ended 31 December 2024. (10 marks)
(ii) Taxable income of each partner. (4 marks)
(Total: 20 marks)

QUESTION THREE
(a) Afri Reach Ltd. is a multinational company registered in Kenya and it has its headquarters in Nairobi. In order to take advantage of investment opportunities arising from the recent treaties within East Africa region, the company intends to open a branch in Tanzania and a subsidiary company in Rwanda (Afri Reach Rwanda).
Required:
As a tax consultant, you are required to advise the management of Afri Reach (Kenya) on the following:
(i) Taxation of the income of the branch in Tanzania and the subsidiary company in Rwanda. (4 marks)

(ii) THREE methods that the company could use to adjust the transfer prices in arriving at taxable income in Kenya. (3 marks)

(iii) THREE requirements to be met in order to qualify for double taxation relief in Kenya. (3 marks)
(b) The following information relate to Summer Ltd., a company registered for value added tax (VAT) purposes and is under tax investigation. The company has engaged you to assist in computation of their VAT payable for the month of December 2024.

December 1: Opening inventory 6,400 units each costing Sh.400.
December 5: Purchased goods on credit for Sh.584,000 and sold goods on cash basis at Sh.938,600. The suppliers also issued credit notes of Sh.48,000 and debit notes of Sh.19,200.
December 8: The company made cash purchases of Sh.1,080,000. The goods were sold in the same day on cash basis at a profit margin of 25%.
December 12: Purchased goods on credit from a VAT non-registered supplier worth Sh.420,000. The goods were sold on cash to VAT registered customer at a markup of 20%.
December 15: Sold goods valued at Sh.218,000 after removal of their VAT certificate of registration from the business premises. They also did not issue tax invoices on the goods.
December 19: Sold goods worth Sh.380,000. The customer paid a deposit of Sh.200,000 and the balance was to be received in January 2025.
December 20: Imported goods from China valued at Sh.1,000,000 (cost, insurance and freight). Import duty was at the rate of 25%.
December 23: It was established that the debt note and credit note for the month were overvalued by Sh.12,000 and Sh.8,400 respectively.
December 24: Exported goods to Uganda worth Sh.680,000. December 28: Purchased goods on cash worth Sh.890,000. December 30: Paid the following expenses:
Sh.
Salaries and wages 880,000
Electricity bill 12,000
Water bill#8211; county government 18,800
Audit fees 230,000
Rent expense (for three months each Sh.90,000) 270,000
County government sewerage services fee 32,000

Transactions are inclusive of VAT at the rate of 16% where applicable.

Required:
Ascertain the correct VAT position for Summer Ltd. for the month of December 2024. (10 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Explain the term “tax haven” as used in taxation. (2 marks)
(b) An “out of court tax dispute resolution” has proven to be a practical and efficient method of resolving tax disputes across various sectors from corporate to individual levels and recently has been the most preferred method of resolving tax disputes. However, it faces limitations in respect to tax disputes it can handle hence reducing the options available to taxpayers in the process of having their tax disputes addressed.

Required:
Summarise FOUR tax disputes which cannot be addressed through an out of court dispute resolution mechanism.
(4 marks)

(c) Beta Insurance Company Ltd. underwrites three classes of insurance namely; marine, motor vehicle and life insurance. The company operates from its own building, the major part of which is rented for commercial use.
The following details were obtained from the records of the company for the year ended 31 December 2024:

Marine Motor vehicle Life insurance Rental activity
Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Management expenses 4,460 3,500 – 15,480
Gross premium received in the year 194,640 345,500 76,690 –
Claims paid 16,420 84,440 23,450 –
Rental income received in the year – – – 154,800
Agency expenses 685 1,248 272 12,680
Allowance for credit loss 5,670 1,200 – 26,400
Reserve for unexpired risk January 2024 5,360 11,896 – –
Claims owing: 1 January 2024 10,380 5,970 – –
31 December 2024 33,960 12,660 – –
Legal expenses 1,782 648 1,230 12,789
Commission on reinsurance accepted 2,190 1,140 – –
Reserve for unexpired risk: 31 December 2024 1,680 890 – –
Telephone and postage 480 360 640 1,320
Premiums returned 845 987 849 –
Furniture and fittings 389 680 920 1,280
Interest income 336 540 – –
Commission on reinsurance ceded 8,450 4,380 – –
Premiums paid to reinsurance company 980 1,120 – –

Additional information:
1. The company had installed water pump and a generator costing Sh.120,000 and Sh.480,000 respectively in the building. It was agreed that the usage be apportioned in the ratio of 3:3:2:1 between marine, motor vehicle, life insurance and commercial rental activity respectively.
2. Internet income consisted of 30% interest from outstanding premiums while the balance was from commercial banks fixed deposit account.
3. Legal expenses for commercial rental activity comprised of drawing of 10 years lease agreement, Sh.34,000, conveyance fees Sh.284,000 and breach of tenancy agreement defence Sh.640,000.
4. Life insurance fund balance was revalued by actuary at Sh.600,000,000. As at 31 December 2024, 10% of this fund balance was recommended to be transferred for the benefit of shareholders.
Required:
Compute the taxable profit or loss of Beta Insurance Company Ltd. for the year ended 31 December 2024.
(14 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Tax practioners should evaluate whether any tax engagement is likely to pose a conflict of interest that would give rise to threat of compliance with fundamental principles.

With reference to the above statement, explain FOUR safeguards that should be put in place when instances of conflicts of interest are detected. (4 marks)

(b) Analyse FOUR reasons for the introduction of tax anti-avoidance provisions despite tax avoidance being a legal activity. (4 marks)

(c) Patrick Ouma has not been filing his income tax returns for the last three years of operation. He recently received a notice of assessment from the commissioner of taxes showing taxable income of Sh.180,000 and Sh.460,000 for the years ended 31 December 2023 and 31 December 2024 respectively.

He has provided the following details:
1. The following account balances were outstanding in the respective years:

2023 2024
Sh. Sh.
Trade debtors 862,500 970,000
Bank balance 107,000 (304,600)
Trade creditors 402,000 203,800
Cash in hand 80,000 110,000
Inventory 309,100 602,400

2. The following statement of financial position was provided for the year ended 31 December 2022:
Sh.“000” Sh.“000”
Non-current assets:
Furniture and fittings 800
Motor vehicles 6,900 7,700
Current assets:
Inventory 406
Debtors 960
Bank balance 804
Cash in hand 150 2,320
10,020
Financed by:
Capital (1 January 2022) 7,000
Net profit for the year 1,680 8,680
Non-current liabilities:
Mortgage loan 500
Current liabilities:
Creditors 840 1,340
10,020
3. The following is the summary of expenses incurred during the years:
2023 2024
Sh.“000” Sh.“000”
Rent expenses 340,000 260,000
Electricity 120,000 60,000
Motor vehicle expenses 130,000 292,000
Telephone expenses 45,000 78,000
Drawings of goods per month 10,000 18,000
Purchase of furniture and fittings – 58,000
4. The principal repayment on mortgage loan amounted to Sh.10,000 per month. Mortgage interest was charged at the rate of 12% per annum on reducing balance basis.
5. The following was agreed with the Revenue Authority:
• Capital allowance at Sh.300,000 per year.
• 60% of rent and electricity related to business while only 40% of motor vehicle and telephone expenses related to business.

Required:
(i) Using suitable computations, advise Patrick Ouma on the action to take. (8 marks)

(ii) Evaluate FOUR reliable sources of information the revenue authority could use to prove their case against Patrick Ouma. (4 marks)
(Total: 20 marks)
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