December 2025 CPA Advanced Taxation Past Paper Answers

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QUESTION ONE
(a) Brightstar Enterprises Ltd., a manufacturing company has been assessed by the Revenue Authority for the year ended 31 December 2023. The assessment alleges that Brightstar Enterprises Ltd. understated sales and issued a reassessment of corporate income tax amounting to Sh.15 million. In addition, the Revenue Authority has imposed penalties and interest for late filing and payment. Separately, a VAT audit adjustment of Sh.5 million has been made on the basis that some supplier invoices claimed for input VAT were not in proper format. Brightstar Enterprises Ltd. insists that its sales records are complete and audited and that the Revenue Authority findings of understatement is incorrect. The company accepts responsibility for the late filing (attributing it to system failures), though it believes the penalties may be mitigated.
With regards to VAT, Brightstar Enterprises Ltd. maintains that the invoices in question are valid under generally accepted accounting practice, despite lacking some formal invoice formalities. Brightstar Enterprises Ltd. wishes to dispute the assessment and resolve the matter in a timely and cost-effective manner.
Required:
(i) Analyse THREE steps Brightstar Enterprises Ltd. should take under tax laws or any other related laws in Kenya to properly object the tax assessment issued. (3 marks)

(ii) Citing THREE benefits that might accrue to the company, advise the management of Brightstar Enterprises Ltd. on how to commence alternative dispute resolution (ADR) process. (3 marks)
(iii) If Brightstar Enterprises Ltd. chooses to appeal before the Tax Appeals Tribunal (TAT), explain FOUR
preconditions it must satisfy, under Kenyan tax law to make its appeal valid. (4 marks)
(b) The following are the financial statements for Lakers Ltd., a trading company that imports goods for the year ended 31 December 2024:
Lakers Ltd.
Statement of profit or loss and other comprehensive income for the year ended 31 December 2024
Sh.“000”
Sales 100,000
Cost of goods sold (60,000)
40,000
Exchange gain realised 2,000 42,000
Operating expenses (15,000)
Depreciation of plant and equipment (1,500)
Impairment loss (500)
Operating profit 25,000
Finance costs (2,000)
Profit before tax 23,000
Tax expense (6,900)
Total comprehensive income 16,100
Lakers Ltd.
Statement of financial position as at 31 December 2024
Sh.“000”
Non-current assets:
Plant and equipment 10,000
Current assets:
Inventory 30,000
Trade receivables 25,000
Cash and bank 5,000
70,000
Equity and liabilities:
Share capital 48,000
Retained earnings 5,000
Trade payables and accruals 15,000
Current tax payable 2,000
70,000

Additional information:
1. It was discovered in a customs audit in mid 2025 that certain imported goods recorded in the inventory in year 2024 were undervalued by 20% at import declaration, amounting to Sh.3,000,000 inclusive of penalties and interest.
2. Certificates of origin were missing for some imported consignment (goods from preferential trade partners) during the year 2024 and the preferential duty rates were incorrectly applied, with back duty due amounting to Sh.800,000.
3. Plant and equipment (qualifying imported machinery) attract investment allowances at 10% per annum.
4. Lakers Ltd. has a carried-forward tax loss from prior years of Sh.1,500,000.
5. Lakers Ltd. has incurred interest expense of Sh.500,000 paying bank overdraft.

Required:
(i) Prepare a statement of adjusted taxable profit for the year ended 31 December 2024 for the company, clearly showing adjustments for back duty on missing certificates of origin. (6 marks)
(ii) Explain FOUR moral or ethical issues arising from undervaluation and missing certificates of origin from the perspective of tax compliance. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) The East African Community (EAC) has implemented several harmonised tax policies to dismantle fiscal barriers and create a unified economic space.
With reference to the above statement, explain TWO tax policies within EAC that have promoted trade and economic integration across the EAC region. (4 marks)
(b) Patrick and John are partners operating a partnership business Jomani Enterprises and sharing profits and losses equally. The business operates through two independent branches; the head office branch in Nakuru and Kericho branch. The partners have received a tax assessment from the Revenue Authority with a taxable income of Sh.684,000 each for the year ended 31 December 2024. They have provided the following details to help in responding to the tax assessment:

1. The following balances were extracted from the books of the partnership on 31 December 2024:

Head office branch
Sh. Kericho branch
Sh.
Furniture and fittings at cost 56,000 48,000
Delivery vans at cost 1,280,000 2,830,000
Saloon car at cost 3,290,000 –
Inventories 340,000 670,000
Prepaid rent 80,200 40,100
Accrued electricity 20,000 30,000
Bank balances 870,000 180,000
Accounts payable 458,000 172,000
Capital 8,800,000 –
10% bank loan 1,500,000 –

2. Kericho branch sells goods transferred from head office at cost. However, it is allowed to make purchases from other suppliers and also maintain a separate bank account. During the year, no goods were transferred from the head office to the branch.
3. All goods were sold at both head office and Kericho branch at 30% above cost. All employees were entitled to a commission at the rate of 1% of the sales during the year.
4. Analysis of the bank statement during the year revealed the following:

Head office branch
Sh. Kericho branch
Sh.
Receipts: Deposits of cash collections 2,380,700 1,360,000
Royalties 280,000 –
Insurance compensation on stock 680,000 –
Payments: Rent expenses 250,000 190,000
Stationery 67,000 88,000
Software 240,000 –

Sh. Sh.
Electricity 130,000 68,000
Legal fee 120,000
Purchase of goods for resale 1,820,900 980,000
Salaries and wages 780,000 320,000
Office expenses 90,000 30,000

5. Head office salaries and wages include salary paid to each partner of Sh.20,000 per month. The bank loan had been taken on 1 July 2024.
6. The current account balances as at 31 December 2023 were as shown below:
Head office branch
Sh. Kericho branch
Sh.
Accounts payable 142,300 112,200
Inventories 85,000 120,000
Accrued rent 30,000 25,000
Prepaid electricity 49,200 22,500
7. The partners had withdrawn goods worth Sh.520,000 and Sh.430,000 for Patrick and John respectively. The partnership deed provided for 3% interest on drawings.
Required:
(i) Compute the taxable income of the partnership for the year ended 31 December 2024. (11 marks)
(ii) Compute the taxable income of each partner from the income computed in (b) (i) above for the year ended 31 December 2024. (3 marks)
(iii) Advise the partners in relation to the assessment issued by the Revenue Authority. (2 marks)
(Total: 20 marks)

QUESTION THREE
(a) Explain FOUR strategies your country could adopt to strengthen the tax system by ensuring fairness, efficiency and broad-based economic development. (8 marks)
(b) Sparkle Oil Ltd. is an oil exploration company operating in Turkwel County. The following is the statement of profit or loss of the company for the year ended 31 December 2024:

Sh.“000”
Revenue 500,000
Gain on sale of exploration assets 20,000
Royalty income 15,000
Interest income 5,000
540,000
Operating expenses (200,000)
Depreciation on exploration assets (10,000)
Decommissioning provision expenses (5,000)
Exploration and development costs (100,000)
Operating profit 225,000
Other income 10,000
Other expenses (5,000)
Net profit before tax 230,000
Additional information:
1. Exploration and development expenditure included:
• Penalties of Sh.6 million for violating environmental regulations during exploration activities.
• Cost of constructing production facilities amounting to Sh.16 million in the development phase.
• Expenses amounting to Sh.2 million spent on seismic studies but lacked e-Tims compliant invoices.
• Expenses incurred on team-building of Sh.800,000.
2. Cost of constructing production facilities, pipelines and storage tanks amounted to Sh.50 million.
3. Machinery used for exploration including drilling rigs seismic equipment and exploration vehicles was Sh.30 million.
4. Interest on loans of Sh.14 million in respect to loan obtained for financing exploration and development activities. The loan was obtained from a bank where the company’s debt to equity ratio was 1.5:1.
5. Gain on sale of exploration assets include a loss of Sh.3 million to a specific mining block whose expenditure had been ring fenced.
6. The company is considering selling a 30% stake in its Turkwel operations to a foreign investor at a net gain of Sh.180 million.
7. Royalties payment were made to the government for the right to extract oil amounting to Sh.16 million included in operating expenses.
Required:
(i) Prepare a statement of adjusted taxable profit or loss for the year ended 31 December 2024. (8 marks)
(ii) Compute corporate tax payable, if any, for the year ended 31 December 2024. (2 marks)
(iii) Explain the tax implication in relation to the following two transactions of Sparkle Oil Ltd.:
• The proposed indirect transfer of 30% stake in the Sparkle Oil Ltd. (1 mark)
• The loan obtained from a bank where the company’s debt to equity ratio was 1.5:1. (1 mark)
(Total: 20 marks)

QUESTION FOUR
(a) As a senior officer with a tax consultancy firm, you are required to conduct a tax health check for a client and you are in the process of developing the scope of the tax health check.
Outline FOUR elements that you would include in the scope of the tax health check. (4 marks)
(b) Alpha Ltd. is a Kenyan company involved in manufacturing and distribution of soft drinks. The company plans to restructure its operations due to financial constraint and market realignment. The restructuring proposal involves the following:
1. Selling one of the manufacturing plant to a competitor.
2. Transferring its distribution unit to a newly registered subsidiary, Alpha Logistics Ltd. in which Alpha Ltd. will hold 100% shareholding.
3. Selling 30% shares of Alpha Ltd. to a foreign private equity fund.
4. Writing off Sh.12 million in bad debts relating to long-term clients.
Required:
Evaluate the tax implication for each of the above proposals. (4 marks)
(c) You are a senior tax consultant at Smart Tax Consultants. Your firm has been appointed by the board of Speed Bank Ltd., a Tier II commercial bank to conduct a tax compliance review ahead of a scheduled Revenue Authority Audit for the year ended 31 December 2024:

The following data was extracted from the bank’s trial balance for the year ended 31 December 2024:

Sh.“000”
Interest income from customer loans 480,000
Interest income from treasury bonds 65,000
Interest income from interbank placements 18,000
Fees and commission income 44,000
Shopping mall lease rental income 8,400
Loss on disposal of assets 15,000
Treasury bills discount income 7,000
Loss on disposal of investment securities 4,800
Staff salaries and wages 12,400
Depreciation and amortisation 32,000
Administrative and operating expenses 9,500
Cost of a generator 1,500
Customer deposits 3,600,000
Loan impairment provision 26,000
Legal and professional fees 6,800
Contribution to Kenya Insurance Deposit Protection 2,300
External audit fees 2,400
Donations to a political party 1,200
Provision for taxation 18,000
Transfer to statutory reserves 10,000

Additional information:
1. Depreciation and amortisation include Sh.6 million loss arising from a building revaluation adjustment not previously recorded.
2. The accrued interest income from customer loans and interbank placements amounted to Sh.240,000 and Sh.650,000 respectively as at 31 December 2024. Customer deposits includes Sh.24,600,000 interest payable on deposit.
3. Loan impairment provision comprises of Sh.10 million for specific bad debts and Sh.16 million as a general provision.
4. The bank has a shopping mall which comprise of shops whose construction cost was Sh.1,600,000, gym Sh.750,000 and offices at Sh.800,000. The pavements and sewerage systems were constructed at a cost of Sh.350,000.
5. Shopping mall maintenance expenses per month amounted to Sh.200,000. The bank incurred costs of advertising of Sh.630,000, water metres Sh.190,000 and electricity deposits of Sh.560,000 before leasing.
6. Legal and professional fees consist of:
• Sh.2.4 million negotiation cost for acquisition of a subsidiary.
• Sh.2.8 million for internal restructuring.
• Sh.1.6 million for a labour related lawsuit settlement.
7. Administrative expenses include:
• Sh.6 million for acquisition of a new banking system.
• Sh.1.2 million for new system licensing.
• Sh.0.9 million in client entertainment expenses during business retreats.
• Sh.1.4 million written off in equity investment in an unquoted start up.
8. Loss on disposal of assets includes Sh.8,000,000 on disposal of assets provided by customers as security for loans.
Required:
Compute the total taxable income and corporation tax payable, (if any) by Speed Bank Ltd. for the year ended 31 December 2024. (12 marks)
(Total: 20 marks)
QUESTION FIVE
(a) The Most Favoured Nation (MFN) status is fundamental in international trade agreements and if well designed, the participating countries may derive major benefits.
Required:
Explain FOUR benefits that a granting country derives from conferring MFN status to another nation. (4 marks)
(b) Lucky Ltd. acquired a commercial property under the following terms:
1. An initial deposit of Sh.500,000 was paid at the time of purchase.
2. The balance was to be paid over 4 years through monthly installments of Sh.35,000 including Sh.12,000 per month as mortgage interest.
The company is evaluating two options for disposing of the property aiming to optimise the tax liability through timing of the sale.

Disposal options:
Option 1: Sell the property for Sh.2,400,000 after paying 30 monthly installments.
Option 2: Sell the property for Sh.3,200,000 after completing all payment and incurring additional legal fees of Sh.80,000 and agent commission of Sh.90,000.

Required:
Compute capital gains tax in both options and advise the management of Lucky Ltd. on the best option of the property disposal. (4 marks)
(c) Pritt Enterprises Ltd. is involved in supply of both taxable and exempt goods. The company commenced operations and was registered for value added tax (VAT) on 1 May 2025.
The financial transactions and other details relating to the month of May 2025 are provided as follows: May 1: Purchased stock of raw materials 15,000 units at Sh.120 per unit.
May 4: Imported 8 units of specialised machinery parts at cost, insurance and freight value at Sh.9,500 per
unit. Import duty was 20%.
May 7: Purchased 8,000 units of raw materials from a local unregistered supplier at Sh.80 per unit.
May 9: Sold 10,000 units of finished goods at Sh.150 per unit. This includes a trade discount of 5% on the gross price.
May 11: Acquired a new delivery van on hire purchase price of Sh.2,500,000 net of VAT for use in the business. The hire purchase interest was Sh.320,000.
May 13: Paid Sh.150,000 for a consultant’s report on market feasibility which covers both current and future operations. 70% of the cost relate to current operations.
May 15: Purchased manufacturing consumables for Sh.120,000.
May 16: An invoice of Sh.110,000 was paid for security services rendered in April 2025.
May 18: Supplied 35,000 units of finished goods to a non-governmental organisation (NGO) with a valid exemption certificate at a price of Sh.140 per unit.
May 21: Exported 4,500 units of finished goods to Rwanda at Sh.160 per unit.
May 24: The directors took goods worth Sh.450,000 for personal use which were not paid for. It is the company’s policy not to charge directors VAT on goods for personal use.
May 26: Purchased on cash 4,000 units of raw materials at Sh.90 per unit exclusive of VAT. The supplier offered a 2% cash discount.
May 29: Incurred and paid advertising expenses of Sh.30,000 and legal fees on debt collection of Sh.10,000.
May 31: Received a refund of Sh.25,000 from a supplier for damaged goods returned which were originally purchased on May 26.
All transactions were inclusive of VAT at the rate of 16% where applicable unless otherwise specified.
Required:
Compute the VAT paid by or refundable to Pritt Enterprises Ltd. for the month of May 2025. (12 marks)
(Total: 20 marks)
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