QUESTION AND ANSWER

FOR

JUNE 2018

TAXATION

PAPERS
 TAXATION PROGRAMME EXAMINATIONS
______________________________
CERTIFICATE LEVEL
________________________

C1: BUSINESS MANAGEMENT

_______________________
MONDAY 11 JUNE 2018
__________________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each. You
MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

2
Attempt all the FIVE (5) questions
QUESTION ONE
(a) In current business environment, medium-sized organisations are increasingly facing
competition and environmental change. This inevitably makes such organizations
adopt matrix organizational structures.
Required:
Discuss briefly six (6) benefits that would accrue to the organization for adopting the
Matrix Organization Structures. (12 marks)
(b) Managers assume the role of leaders in organizations and may adopt Authoritarian,
democratic or laissez – faire styles of managerial leadership.
Required:
(i) Define the term ‘leadership’ (2 marks)
(ii) Explain briefly the following managerial leadership
Styles:

1. The authoritarian / autocratic style (2 marks)

2. The democratic style. (2 marks)

3. The laissez – faire style. (2 marks)

[Total: 20 Marks]
QUESTION TWO
(a) The corporate code of ethics (ethical code) guides workers to exhibit ethical behavior
in business organizations.
Required:
(i) Describe Corporate Code of Ethics and outline any three (3) principles of
ethical code of ethics. (5 marks)
(ii) Outline any five (5) values that would promote ethical behavior among
workers in business organisations. (5 marks)
(b) Partnership forms of business organizations are common among Law and Auditing
firms and are established, among other reasons, to pool resources such as skills,
experiences, knowledge, finances and assets.
Required:
Explain any five (5) advantages and five (5) disadvantages of Partnerships as forms of
business organizations. (10 marks)
[Total: 20 Marks]

3
QUESTION THREE

(a) State five (5) characteristics that distinguish a public limited company from a sole
trader. (10 marks)
(b) Explain how the social and demographic factors may affect demand of a product.
(10 marks)

[Total: 20 marks]
QUESTION FOUR

(a) Briefly explain any five (5) reasons why communication is important to business
organisations. (10 marks)

(b) Discuss the five (5) leadership styles according to Blake and Mouton managerial grid
(10 marks)

[Total: 20 marks]
QUESTION FIVE
The marketing Function in business organizations is tasked with responsibility of conducting
marketing research aimed at reducing barriers that may hinder the implementation of
marketing plans.

(a) (i) Describe the concept of marketing mix (2 marks)

(ii) Outline the steps you would take in conducting Market research (8 marks)

(b) Explain any five (5) barriers that hinder the implementation of marketing plans.
(10 marks)
[Total: 20 Marks]

END OF PAPER

4
C1- BUSINESS MANAGEMENT SOLUTIONS
SOLUTION ONE
Matrix structures use cross-functional communication links and elements of supervision in
order that complex operations involving a number of functions may be properly co-ordinated.
A common approach is to superimpose a customer-focused managerial structure that cuts
across the normal vertical functional management hierarchy.
The benefits or advantages that may accrue to the organizations that adopts matrix
organization structures include:

(i) Improves Flexibility: - Matrix structures are flexible: project teams can be put
together, amended and disbanded as required.

(ii) Efficient use of resources:- Matrix structure makes good management of

resources which includes human resources.

(iii) Boosts team work:- Matrix structure improves team spirit among workers

(iv) Improves workplace communication:- Matrix structures improves

communication among employees and management.

(v) Employee empowerment:- matrix structures builds employee empowerment in

the staff involved in projects supervision/leadership

(vi) Information flow:- Matrix structure promotes interdisciplinary information flow

within organisational structures

(vii) Project integration:- Matrix structure is a sure way to integrate project

objectives in an organization.

B (i) Leadership Definition;

Leadership may be defined as getting others to follow or getting people to do things willingly or
the use of authority in decision-making. It is related to motivation, interpersonal behaviour and
the process of communication. It may also be referred to as a relationship through which one
person influences the behaviour or actions of other people To people outside the organization
the manager might not necessarily be seen in a leadership role. The emphasis of Leadership is
on interpersonal behaviour in a broader context. It is often associated with the willingness and
enthusiastic behaviour of Leadership which does not necessarily take place within the hierarchical
structure of the organization

5
 The style of managerial leadership is usually exercise within the confines of an organization
towards subordinate staff and may take the following formats:
(i) The authoritarian /autocratic style:
This style is where the focus of power is concentrated on the manager and all interactions within
the group move towards the manager. The manager alone exercises decision-making and
authority for determining policy, procedures for achieving goal, work tasks and relationships,
control of rewards or punishments
(ii) The democratic style:
In this style of leadership power and/or authority is more with the group/team and there is
greater interaction within the group. That is, the leadership functions are shared with members
of the group and the manager is more part of a team. The group members have a greater say
in decision-making, determination of policy, implementation of systems and procedures
(iii) A laissez-faire style:
This is the type of leadership where the manager observes that members (or subordinates) of
the group are working well on their own and he/she consciously makes a decision to pass the
power/authority to members (subordinates) and gives them freedom of action to do as they think
best, and does not to interfere, but is readily available if help is needed. Members or subordinates
are left to face decisions that rightly belong with the manager

SOLUTION TWO

a) (i) Corporate Code of ethics or ethics code may be defined as a written set of guidelines
issued by an organisation to its workers and management to help them conduct their
actions or business in accordance with its values and ethical standards. For instance A
code of ethics for accountants has been issued by the International Federation of
Accountants (IFAC), which represents all the major accountancy bodies around the
world.

Principles of the code include:

 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behaviour

6
 (ii) Values that would promote ethical behaviour in business organisations
 Openness
For example, employees must be open with their managers if an accounting error is
found. Trying to cover it up could not be considered ethical.
 Trust
For example, employees must trust that their managers, because of their knowledge
and experience, give good guidance and direction.
 Honesty
This does not need much expansion, but it is important that honesty with colleagues,
suppliers and customers is encouraged.
 Respect
This will encourage the proper treatment of stakeholders and reduce the chance that
they are treated unethically.
 Empowerment
Employees should be empowered to ‘do the right thing’ and to refuse to behave in
away they know to be contrary to the organisation’s ethical code.
 Accountability
Accountability means that people do not try to avoid issues or obligations. If you are
given something to do, you should try to do it to the best of your ability

b) Advantages of Partnerships
Forming partnerships has several advantages that include the following:
i) A Partnership is easy to set up, as it does not involve long costly procedures.
ii) Division of labour is possible, as there are many people involved with various skills
and experiences.
iii) More people are involved in the business so more capital can be raised.
iv) Expenses and management of the business are shared.
v) The individuality of each partner is not totally lost, as partners maintain many of
the personal advantages of the sole proprietorship.
vi) There is greater continuity in a partnership than in sole proprietorship. In case of
death or resignation, the remaining partners can form a new partnership.
vii) Decision-making is consultative leading to improved quality of decisions.
viii) A partnership is not required to publish its accounts annually. It is secrecy

7
 Disadvantages of Partnerships
Partnerships have several disadvantages as include;
i) Decisions may be delayed by disagreements among partners.
ii) Partners have unlimited liability and are therefore personally liable for the debts of the
partnership. Personal assets are at risk.
iii) Lack of capital may limit expansion as it depends on partners for raising capital.
iv) When one partner dies or leaves, a new partnership is required, which may be time
consuming or awkward.

SOLUTION THREE

(a) Five characteristics that distinguishes a public limited company from a sole
trader:

(i) A public limited company is formed and owned by more than two people, unlike
a sole trader which is owned by one.

(ii) A public limited company can sell its shares to the general public through the
stock exchange market.

(iii) A public limited company has separate legal entity unlike a sole trader who
does not have. Separate legal entity means that in the shareholders or owners
are separate from the affairs of the company, this is because in law a company
is considered to be a person with its own rights.

(iv) Shareholders/ owners of a public limited company have limited liability unlike
sole trader who has unlimited liability. Shareholders have limited liability
because in the event where a company fails to honour its financial obligations,
creditors cannot reposes shareholders private properties.

(v) Public limited company raises large amounts of capital by selling shares and
borrowing unlike sole trader who raise small amount of capital.

(vi) There is continuity of business even if one shareholder dies, unlike sole traders
whose businesses mostly discontinue once the owner dies.

(b) Changes in the social and demographic factors may affect demand of a product
to either increase or decrease. The following are the factors that may cause
demand to increase or decrease:

Religion and cultural beliefs

Religion has a strong influence on what the followers must consume, how the products
must be packed and advertised. Without following the cultural beliefs the product may
not be accepted by the target market.

8
 Lifestyle
Demand of certain goods is dependent on the lifestyle of a particular social class.
Therefore, certain good’s demand is influenced by lifestyle.

Age distribution
Certain products are specifically consumed according to age group. The increase in
the population for a certain age group may increase the demand for a group. For
instance in the clothing industry certain fashions are targeted at youths who comprise
the largest percentage of the population.

Education levels
The educated population mostly comprises of the middle class in an economy. This
means that they are able to access most of the basic needs and therefore the demand
for basic needs such as food, shelter usually increases.

Sex
Their certain products that are produced specifically for female or male, also consider
who has more influence in making household buying decision. For female are highly
influenced by fashion and would like to buy novelty goods. (10 marks)

SOLUTION FOUR

(a) Importance of communication in business organisation

(i) Communication enables the business organisation to inform the public of the
goods and services being offered through advertising.

(ii) Communication makes it possible for the instructions to be issued out by

superiors to perform tasks either through written or verbal.

(iii) Communication enable ideas to be shared among workers at different levels of

hierarchy and business decisions are made.

(iv) Communication enables the company to receive complaints from customers and
use the information to improve on goods and services.

(v) Communication enables the business to enter new markets both local and
international markets.

(vi) Communication makes it possible for the organisation to be in contact with

stakeholders such as suppliers, banks etc

(b)
(i) 1.1 Impoverished: This point shows that the manager little concern for both
workers and production, he/she is lazy.

(ii) 1.9 Country Club: The manager is employee oriented which means he/she
pays more attention to employees than production or task.

9
 (iii) 9.1 Task: The manager is more concerned with tasks to be performed than
relationships with employees.
(iv) 5.5 Middle of the road: The manager is at the middle where he/she shows
equal concern for production and employees.
(v) 9.9 Team Management: This is the ideal leadership style where the manager
shows high concern for production and employees.

SOLUTION FIVE

Marketing mix elements is crucial tool to help understand what the customers want as they
affect the consumer decisions to buy or not. They are price, product, promotion, place.

a) The market research process he can use

i. Define the problem and research objectives.
ii. Develop the research plan for data collection.
iii. Data collection and analysis.
iv. Interpreting and reporting the findings.

b) The barriers that hinder the implementation of marketing plans are:

i. Management culture this is when them seem not to care about marketing plans
ii. Political intervention from government legislation
iii. Lack of leadership skills and absence of appropriate mix of leadership skills and
knowledge
iv. Barriers from competitors who may make it hard by simply getting into your way
and hinder implementation
v. Organisation structure , that is bureaucratic bottlenecks ,like infighting for turf
vi. Distributors and resource suppliers delays in delivery of your inputs
vii. Few or experiencing a dwindling customer base

END OF SOLUTIONS

10
 TAXATION PROGRAMME EXAMINATIONS
_______________________

CERTIFICATE LEVEL
________________________

C2: ECONOMICS & FINANCIAL MATHEMATICS

_______________________
TUESDAY 12 JUNE 2018
_________________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each. You
MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer booklet

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Formulae are provided in a separate booklet.

10. Graph paper (if required) is provided at the end of the answer booklet.

11
Attempt all FIVE (5) questions
QUESTION ONE
(a) Use a diagram to explain how the consumption of merit goods like education can
generate positive externalities for society. (5 marks)

(b) Consider this statement from a politician during a public debate: “Banks do not create
money because this is the responsibility of the Bank of Zambia”. Do you agree or
disagree. Explain your answer. (3 marks)

(c) Explain any three (3) traditional methods used by the Bank of Zambia to control
money supply. (12 marks)
[Total: 20 Marks]

QUESTION TWO

(a) The World Trade Organisation (WTO) seeks to promote greater economic growth,
increased consumer choices, reduced costs of production, and good
governance, among other things.

Explain how the WTO can achieve each of the four (4) aims mentioned above.
(8 marks)
(b) Cost, Insurance and Freight (CIF) is an incoterm used when the mode of transporting
goods is by sea and by inland motorways.

Describe any TWO (2) responsibilities for the buyer and any TWO (2)
responsibilities for the seller under CIF.)
(4 marks)

(c) Discuss any two (2) arguments for and any two (2) arguments against the use of
progressive taxation in a developing country like Zambia. (8 marks)
[Total: 20 Marks]

12
QUESTION THREE

(a) PJ Limited is a manufacturing company involved in undertaking high risk projects. The
company is considering investing in a project which requires an initial outlay of
K50,000.00 according to the company’s cash flow projections over the next four year
period, the following net cash flows are expected:

Year 0 1 2 3 4
Net Cash Flow (ZMK) (50,000) 18,000 25,000 20,000 10,000

(i) Calculate the net present value assuming a 15% cost of capital. (3 marks)
(ii) Calculate the net present value assuming a 20% cost of capital. (3 marks)

(iii) Calculate the internal rate of return (IRR) of the above project using the
results from (i) and (ii). (4 marks)
(iv) If the company requires a minimum rate of return of 17%, recommend
whether or not the project is worthwhile. (2 marks)
(b) Define the following:
(i) Floater (2 marks)
(ii) Coupon Rate (2 marks)

(c) A corporation decides to issue 20-year bond in the amount of K 100,000,000.

Under the contract, interest payments will be made at the rate of 10%
semi- annually. The bonds are priced to yield 5% semi-annually to maturity
Required:
What is the issue price of the bond? (4 marks)
[Total: 20 Marks]

13
QUESTION FOUR

(a) In conducting a simple regression model for the number of customers and the
area of advertising sign used to attract customers, the following data were
obtained for six produce stands.

Area of advert sign 0.37 0.3 0.3 0.25 0.3 0.28

Number of
customers 240 150 182 95 210 125

Calculate the least-squares regression line for these data. (9 marks)

(b) At Chipata College of Accounts in Chipata district, 25% of the lecturers are females.
35% of the Lecturers are on Part-time. A Lecturer is chosen at random, what is the
probability that the Lecturer is:

(i) Male (2 marks)

(ii) Male and Part-time (3 marks)
(iii) Female or Part-time (2 marks)

(c) The average number of claims per hour made to a certain insurance company
is 1.2. What is the probability that in any given hour either two or three
claims will be received? (4 marks)
[Total: 20 Marks]

QUESTION FIVE

(a) Define the following terms:

(i) Yield to Maturity (2 marks)
(ii) Price Value of a Basis Point (PVBP) (2 marks)

(b) A 10% bond with face value amount K1,000 matures 4 years after issue.
Construct the amortization schedule for the bond over its term for the semi-
annual rate of 8%. (12 marks)

(c) Find the present value of K100, 000.00 in perpetuity if the interest rate is 12% per
annum. (4 marks)
[Total: 20 Marks]

END OF PAPER

14
 C2 -ECONOMICS & FINANCIAL MATHEMATICS SOLUTIONS

SOLUTION ONE

(a) Merit goods are products which consumers may undervalue but which the government
believes are desirable for consumers as they exhibit positive externalities. Consumers
undervalue them because the net private benefit to them is not fully recognised at the
time of consumption and it is unlikely that this external benefit will be taken into
account when the consumer evaluates its worth. In the case of education as an
example of a merit good, pupils and students cannot possibly know the specific private
benefit to them of getting an education which results in the consumer under-
consuming.

The graph below shows how the failure to recognise the external benefit of consuming
a merit good leads to the inefficient free market outcome. The private benefit is less
than the social benefit.

b) Disagree. When a bank makes a loan, it increases deposits, and money supply
increases by the amount of the loan because money supply includes checkable
deposits. This is different from minting coins or printing notes which is the sole
responsibility of the Bank of Zambia.

15
 c) The traditional methods used by the Bank of Zambia to control money supply are:

 Open Market Operations (OMO): This is the buying and selling of government
securities by the Bank of Zambia. Buying government securities creates extra bank
reserves and loans, thereby expanding the money supply. Selling government
securities reduces bank reserves and loans, thereby contracting the money supply.
 Discount rate Policy: This is the rate at which banks borrow from the Bank of
Zambia. Lowering the discount rate makes it easier for banks to borrow from the Bank
of Zambia and expands money supply. Raising the discount rate discourages banks
from borrowing reserves from the Bank of Zambia and contracts the money supply.
 Reserve requirements: This is the money that every deposit taking institution must
deposit with the Bank of Zambia to meet its legal requirements. Required reserve ratio
and the size of the money multiplier are inversely related. Thus, if the Bank of Zambia
decreases the required reserve ratio, the money multiplier and money supply increase.
If the Bank of Zambia increases the required reserve ratio, the money multiplier and
money supply decrease.

SOLUTION TWO

(a) The World Trade Organisation (WTO) is the only global international organisation
dealing with the rules of trade between nations. Among other things, it seeks to:

(i) Achieve higher living standards, full employment and sustainable development.
The organisation does so by advocating substantial reduction of tariffs and other
obstacles to trade. Trade can be a catalyst for greater efficiency and productivity
because companies have access to a wider range of high-quality, affordable inputs.
They also have access to technology and know-how they could not obtain in a
closed economy as open economies tend to grow faster and more steadily than
closed economies.

(ii) Lower trade barriers through negotiation and operates under the principle of non-
discrimination. The result is reduced costs of production (because imports used in
production are cheaper), reduced prices of finished goods and services, more
choice and ultimately a lower cost of living.

16
 (iii) Help increase productivity and to cut costs even more because of important
principles enshrined in the WTO system designed to make life simpler and clearer.
It involves transparency (clear information about policies, rules and regulations);
increased certainty about trading conditions (commitments to lower trade barriers
and to increase other countries’ access to one’s markets are legally binding);
simplification and standardisation of customs procedure, removal of red tape,
centralised databases of information, and other measures to simplify trade.

(iv) To help governments take a more balanced view of trade policy. They are better-
placed to defend themselves against lobbying from narrow interest groups by
focusing on trade-offs that are made in the interests of everyone in the economy.
Transparency; greater harmony between countries on other aspects of trade
facilitation; clearer criteria for regulations dealing with the safety and standards of
products, and non-discrimination also help by reducing the scope for arbitrary
decision-making and opportunities for corruption.

(b) The following are the responsibilities of the buyer:

 To collect the goods at the port of destination
 To bear all the costs and risks and damage to the goods once they are off-
loaded
 To arrange and pay and insurance from the port of destination to their final
destination in the importer’s country
 To accept delivery and goods when the appropriate documents e.g. Bill of
lading, invoices that have been presented.

The following are the responsibilities of the seller:

 To arrange and pay for freight charges
 To deliver the goods on board the vessel at the port of shipment
 To arrange and pay for insurance charges while goods are in transit
 To pay loading and unloading costs
 To provide buyer with the appropriate transport document
 To provide buyer with an invoice for the full value of the goods and related
costs.

17
(c) Arguments in favour of progressive taxes
 They follow the ability of the individual to pay. Therefore, higher income individuals
are more able to afford to give up more of their income in tax than the lower
income earners.

 They enable a government to redistribute wealth. Progressive taxes are hence a

tool that can help foster equity in income distribution as well as increase the
consumption levels of society because poorer individuals can spend more of their
incomes due to the higher marginal propensity to consume.

 Progressive taxes are a counter-balance to indirect taxes that tend to be regressive.

In this case they make the tax system fairer and balanced.

Arguments against progressive taxes

 It is usually the poorer societies that have the need to use progressive taxes. The
more developed ones do not have so much use for such taxes.

 Higher taxes on extra corporate profits might discourage investment. In this case
entrepreneurs may be deterred from creating new companies because the
potential return of doing so would not be worth the risks of such an undertaking.

 Progressive taxes might spur tax avoidance and evasion behaviour because
individuals and firms that are subject to higher taxes stand to gain more by
transferring their wealth to other lower tax regions. In practice, however, such
behaviour exists whether taxes are high or low but to a less extent.

 If progressive taxes are too harsh on high income earners or on the wealthy, they
may deter initiative and could lead to brain drain where skilled workers opt to go
and work outside the country or where investment shifts to other countries.

18
SOLUTION THREE
a)
i. At 15%

NPV1  180001.15  250001.15  200001.15  100001.10  50000

1 2 3 4

 15652  18904  13150  5718  50000  3424

ii. At 20%

NPV 2  180001.20  250001.20  200001.20  100001.20  50000

1 2 3 4

 15000  17361 11574  4823  50000  1242

iii.

IRR 
r1  NPV2   r2  NPV1   0.15  1242  0.20  3424  0.186690955
.
NPV 2  NPV1  1242  3424
Therefore, the internal rate of return is approximately 18.7%

iv) The project is worthwhile because IRR is greater than 17%.

b).
i) A Floater is a Bond or other debt whose coupon rate changes with market
conditions
ii) Coupon Rate is the rate at which the bond pays interest on its face value
at the regular time intervals until the redemption date.

c. F  C  100000000, r  0.05 , i  0.025 and n  40

Fair Pr ice  P  F  r 
 
 1  1  i  n 

C
 1  i 
n
 i
1  1.02540  100,000,000
 100,000,0000.05 
 0.025  1.02540
 125,513,875.30  37,243,062.37
 162,756,937.70

19
SOLUTION FOUR

a) Let X  Area of advertisin g sign and Y  Number of Customers

X Y XY 𝑋2
0.37 240 88.8 0.1369
0.30 150 45 0.09

0.30 182 54.6 0.09

0.25 95 23.75 0.0625

0.30 210 63 0.09

0.28 125 35 0.0784

 X  1.8 Y  1002  XY  310.15  X 2

 0.5478

Now

S XX   X 2

 X  2

 0.5478 
1.82  0.5478  0.54  0.0078
n 6

S XY   XY 
 X Y  310.15  1.81002  310.15  300.60  9.55
n 6
Therefore,
S XY 9.55
   1224.36
S XX 0.0078
and
1002  1.8 
 Y X   1224.36   167  367.31  200.31
6  6 
Hence, the least –squares regression line is
y    x  200.31  1224.36x

20
b) i) P(F) = 0.25

P(M) = 1-P(F) = 1- 0.25 = 0.75

ii) If P(PT) = 0.35 than P(FT) = 1-P(PT) = 0.65 hence
P(M and PT) using the AND LAW IS:
= P(M) x P(PT) = 0.75 x 0.65 = 0.2625
iii) P(F or PT) = P(F) + (PT) - P(F x PT) as they are not mutually exclusive.
= 0.25 + 0.35 - (0.25 x 0.35)
= 0.5125

e  x
c) Poisson - distribution with   1.2 . Thus, P X  x  
x!

P X  2 or X  3  P X  2  P X  3
e 1.2 1.2 2 e 1.2 1.2 3
 
2! 3!
 0.216859832 0.086743933
 0.3036

SOLUTION FIVE
a)
i. Yield to maturity (YTM) is the interest rate that will make the present value
of a bond’s cash flows equal to market price plus accrued interest.
ii. The Price Value of a Basis Point(PVBP) is a measure used to describe how a
basis point change in yield affects the price of a bond.
Alternatively, it is the measure of absolute value of the change in price of
a bond for a one basis point changes in yield.

b) F  C  1000 , r  0.05 , i  0.04 and n  8

21
 P  F  r
 
 1  1  i  n 

C
 1  i 
n
 i
1  1.048  1000
 10000.05 
 0.04  1.04
8

 336.64  730.69
 1067.33

Bond Amortization Table

Payment Outstanding Periodic Payment of Principal

Interest @
Number Principal Payment 4% Repaid
0 1067.33
1 1060.02 50 42.69 7.31
2 1052.42 50 42.40 7.60
3 1044.52 50 42.10 7.90
4 1036.30 50 41.78 8.22
5 1027.75 50 41.45 8.54
c) PV = a/r =
6 1018.86 50 41.11 8.89 100000/0.12

=K
7 1009.61 50 40.75 9.25
833,333.33
8 0 1050 40.38 1009.62

END OF SOLUTIONS

22
 TAXATION PROGRAMME EXAMINATIONS
_______________________
CERTIFICATE LEVEL
________________________

C3: ACCOUNTANCY FOR TAX PRACTITIONERS

_______________________
MONDAY 11 JUNE 2018
_______________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination
paper carefully so that you understand what to do in each question.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each.
You MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the
front of the answer booklet. Your name must NOT appear anywhere on your
answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken
as an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

23
Attempt all FIVE (5) questions

QUESTION ONE

(a) Danny, Kenny and Teddy are the owners of Arcma, a partnership business that sells
Building supplies in the construction sector. You are the accountant of Harp and
Company, the accounting firm that prepares the final accounts for Arcma.

 The financial year end is 31 March.

 The partners maintain a double entry accounting system consisting of a main

ledger, payables ledger and receivables ledger.

 Arcma is registered for VAT.

 The trial balance for the year ended 31 March 2018 is given below:

Arcma Trial balance as at 31 March 2018

Dr Cr
K K
Administration expenses 37 424
Bank 70 918
Capital account – 1 April 2017 – Danny 50 000
Capital account – 1 April 2017 – Kenny 50 000
Capital account – 1 April 2017 – Teddy 50 000
Cash 5 000
Closing inventory – statement of financial position 137 900
Closing inventory – profit and loss account 137 900
Current account – Danny 40 000
Current account – Kenny 60 000
Current account – Teddy 60 000
Equipment at cost 70 000
Equipment accumulated depreciation 25 152
Opening inventory 140 400
Purchases 865 000
Payables ledger control account 140 700
Rent 30 000
Sales 1 171 400
Receivable ledger control account 82 142
Suspense account 18 400
VAT 14 700
Wages ___22 668 ________
Total 1 639 852 1 639 852

On investigation of the balance on the suspense account you discover errors that need
to be corrected. There are also year-end adjustments to be made:

(i) Some equipment was scrapped during the year:

K
Original cost 4 000
NBV at time of disposal 2 048
proceeds NIL

24
 (ii) Depreciation needs to be provided for equipment at 20% using the reducing
balance method. No depreciation is provided in the year of disposal.

(iii) A vehicle costing K17,000 was purchased on 31 March 2018. The correct entry
was made to the bank, but no other entries were made. No depreciation
needed to be provided for the year ended 31 March 2018.

(iv) The figures from the columns of the sales day book for 15 March have been
totaled correctly as:

K
Sales column 4 000
VAT column 700
Total column 4 700

The amounts have been posted as follows:

K K
Debit sales ledger control account 4,700
Credit VAT 700
Sales 4 700

(v) An amount for the purchase of goods of K1 512 net of VAT has been debited
to the opening inventory account.

Required:

(a) Prepare journal entries to account for items (i) to (v).

NOTE: Dates and narratives are not required. (6 marks)

(b) Prepare Income statement for the partnership for the year ended 31
March 2018. (6 marks)

(b) On 30 November 2017, Danny retired from the partnership. You have been presented
with the following information about the partnership agreement:

 Partner’s annual salaries.

Danny K60 000 (40 000 for the period to 30 November 2017
Kenny K60 000
Teddy K60 000

 Interest on capital accounts is 3% per annum on the balances at the

beginning of the year.

 Profit share, effective until 30 November 2017.

Danny 40%
Kenny 30%
Teddy 30%
 Profit share, effective from 1 December 2017

Kenny 50%
Teddy 50%

25
 Assume that profits accrue evenly during the year.

Required:

Prepare the appropriation account for the partnership for the year ended 31
March 2018.
(8 marks)
[Total: 20 Marks]
QUESTION TWO

You are the accountant for Gedams. You have been presented with a list of balances for
the year ended 31 May 2017:
K
Inventory at 1 June 2016 4 800
Motor vehicles at cost 71 400
Computer at cost 7 200
Fixtures and fittings at cost 38 400
Provision for depreciation 1 June 2016:
Motor vehicles 36 420
Computer 1 800
Fixtures and fittings 7 680
Wages 49 200
Telephone 2 700
Electricity 3 600
Advertising 1 200
Stationery 1 800
Motor expenses 5 100
Miscellaneous expenses 900
Insurance 3 000
Sales 259 200
Purchases 114 600
Receivables 21 600
Allowance for irrecoverable debts 1 June 2016 600
Bank (debit balance) 3 900
Petty cash 300
Payables 9 540
VAT (credit balance) 2 880
Capital 75 000
Drawings 63 420

You are provided with the following information:

(i) Depreciation charge has not yet been accounted for:

 Motor vehicles are to be depreciated at 30% on the reducing balance basis.
 The computer is being depreciated at 25% on the straight line basis.
 The fixtures and fitting are being depreciated at 20% on the straight line basis.
(ii) There is an accrual for electricity of K1,200.
(iii) There is K900 of prepaid insurance.
(iv) The provision for doubtful debts is to be 4% of the year end receivables.

26
(v) K300 of Advertising costs have been included in the stationery account.
(vi) The closing inventory has been values at K6,300.

Required:
Prepare the final accounts for Gedams for the year ended 31 May 2017.
[Total: 20 Marks]

QUESTION THREE

The following information relates to the draft financial statements of Mulolo.

Summarized Statements of Financial position as at 30 September 2017

2017 2016
K K
Assets:
Non-current assets:
Property, plant and equipment (Note 1) 97 800 72 300
Financial assets: equity investment (Note 2) _13 500 21 000
111 300 93 300
Current assets:
Inventory 30 600 21 600
Trade receivables 10 500 11 100
Bank ___-___ _4 200
_41 100 36 900
Total assets 152 400 130 200

Equity:
Equity shares of K1 each (Note 3) 42 000 24 000
Share premium (Note 3) - 6 000
Revaluation reserves (Notes 3) 6 000 10 800
Retained earnings 39 000 30 300
87 000 71 100

Non-current liabilities:
Finance lease obligations 21 000 20 700
Deferred tax 3 900 2 700

Current liabilities:
Tax 3 000 3 600
Bank overdraft 8 700 -
Provision for product warranties (Note 4) 4 800 12 000
Financial lease obligation 14 400 6 300
Trade payables 9 600 13 800
Total equity and liabilities 152 400 130 200

27
 Summarized Income Statement for the year ended 30 September 2017
2017 2016
K K
Revenue 175 500 123 000
Cost of sales 139 500 90 000
Gross profit 36 000 33 000
Operating expense (26 100) (13 500)
Investment income (note 2) 3 300 2 100
Finance costs (1 500) (1 200)
Profit before tax 11 700 20 400
Income tax expenses (3 000) (5 400)
Profit for the year __8 700 15 000

Notes
The following additional information is available:

1. Property, plant and equipment:

Accumulated Carrying
Cost depreciation amount
K K K
At 30 September 2016 100 800 (28 500) 72 300
New finance lease additions 20 100 20 100
Purchase of new plant 24 900 24 900
Disposal of property (15 000) 3 000 (12 000)
Depreciation for the year _______ (7 500) (7 500)
At 30 September 2017 130 800 33 000 97 800

The property disposed of was sold for K24 300.

2. Investments/ investment income

During the year an investment that had a carrying amount of K9,000 was sold for K10,200.
No investments were purchased during the year.

Investment income consists of:

Year to 30 September 2017 2016

Dividends received 600 750

Profit on sale of investment 1 200 -
Increase in fair value 1 500 1 350
3 300 2 100

3. On April 2017 there was a bonus issue of share that was funded from the share premium
and some of the revaluation reserve. This was followed on 30 April 2017 by an issue of
share for cash at par.

4. The movement in the product warranty provision has been included in the cost of sales.
Required:

Prepare a statement of cash flows for Mulolo for the year ended 30 September 2017 in
accordance with IAS 7 statement of cash flows, using the indirect method.
[Total: 20 Marks]

28
QUESTION FOUR

Doreen sells Jewellery through stores in the whole country. Over the last three years the
business has experienced declining profitability and is wondering if this is related to the sector
as a whole. She has recently subscribed to an agency that produces average ratios across
many businesses. Below are the ratios that have been provided by the agency for Doreen’s
business sector based on a year ended 30 June 2017 and the equivalent ratios for Doreen.

Doreen Sector
Average
Gross profit margin 25% 35%
Net asset (total assets less current liabilities) turnover 1.6 times 1.4 times
Return on capital employed (ROCE) 12.1% 16.8%
Operating profit margin 7.5% 12%
Current ratio 1.55:1 1.25:1
Average inventory turnover 4.5 3 times
Trade payables payment days 45 days 64 days
Debt to equity 30% 38%

The financial statements of Doreen for the year, ended 30 September 2017 are:

Statement of Profit or Loss

K K
Revenue 112 000
Opening inventory 24 900
Purchases 87 800
Closing inventory (20 400)
Cost of sales (84 000)
Gross profit 28 000
Operating costs (19 600)
Finance costs _(1 600)
Profit before tax 6 800
Income tax expense (2 000)
Profit for the year _4 800

Statement of financial position

Assets: K
Non-current assets:
Property and shop fittings 51 200
Deferred development expenditure 10 000
61 200

Current assets:
Inventory 20 400
Bank _2 000
22 400
Total assets 83 600

29
 Equity and Liabilities K
Equity:
Equity share of K1 each 30 000
Revaluation reserve 6 000
Retained earnings 17 200
53 200

Non-current liabilities:
10% loan notes 16 000
Current liabilities:
Trade payables 10 800
Current tax payable 3 600
14 400
Total equity and liabilities 83 600

Note:

The deferred development expenditure relates to an investment in a process to manufacture

artificial precious gems for future sales by Doreen in the jewellery market.

Required:

(a) Assess the financial and operating performance of Doreen in comparison to its sector
averages.
(12 marks)

(b) Explain four possible limitations on the usefulness of the above comparison.
(8 marks)
[Total: 20 Marks]

QUESTION FIVE

On 31 December 2017, the bank column of C Mwango’s cash book showed a debit balance of
K150 000. The month bank statement written up to 31 December 2017 showed a credit
balance of K295 000.

On checking the cash book with the bank statement it was discovered that the following
transactions had not been entered in the cash book.

 Dividend of K24 000 had been paid directly to the bank.

 A credit transfer – ZRA VAT refund of K26 000 had been collected by the bank.
 Bank charges of K3 000
 A direct debit of K7 000 for club subscription had been paid by the bank.
 A standing order of K20 000 for C. Mwango’s loan repayment had been paid by the bank.
 C. Mwango’s deposit account balance of K140 000 was transferred into his bank current
account.

30
A further check revealed the following:

 Two cheques drawn in favour of T Chikonde K25 000 and F Chanda K29 000, had been
entered in the cash book but had not been presented for payment.

 Cash and cheques amounting to K69 000 had been paid into the bank on 31 December
2017 but were not credited by the bank until 2 January 2018.

Required:

(a) Starting with debit balance of K150 000 update the cash book (bank column) and
then balance the bank account. (8 marks)

(b) Prepare the bank reconciliation statement as at 31 December 2017. (4 marks)

(c) C. Mwango has been told that Assets, liabilities, incomes and expenses are
elements of financial statements and need to be recognized in the books.

Required:

State the recognition criteria of each of the elements stated above. (8 marks)
[Total: 20 Marks]

END OF PAPER

31
C3 ACCOUNTANCY FOR TAX PRACTITIONERS SOLUTIONS

SOLUTION ONE

(a) Journal entries Dr Cr

K K
i. Accumulated depreciation (4 000 – 2 048) 1 952
Disposal(loss) 2 048
Equipment at cost 4 000

ii. Depreciation expense 8 560

Accumulate depreciation 8560

iii. Vehicles at cost 17 000

Suspense 17 000

iv.
Sales (4 700 – 4 000) 700

v. Purchases 1 512
Opening inventory 1512
*70 000 – 25 152 = 44 848 – 2 048 disposal = 42 800.
:. 42 800 x 20% =8 560

(b) Arcma’s Income statement for the year ended 31 March 2018

K K
Sales (1 171 400 – 700) 1 170 700
Less: cost of sales
Opening inventory (140 400 – 1 512) 138 888
Purchase (865 000 + 1 512) 866 512
Less closing inventory (137 900) (867 500)
Gross profit 303 200
Less: expenses
Administration expense 37 424
Rent 30 000
Wages 22 668
Loss on disposal 2 048
Depreciation expense __8 560
100 700
Net profit 202 500

32
(c) Arcma’s Appropriation account for the year ended 31 March 2018

1 April 2017 to 30 1 December 2017

November 2017 to 31 March 2018
K K
Net profit 135 000 67 500
Salaries:
Danny (40 000) -
Kenny (40 000) (20 000)
Teddy (40 000) (20 000)
Interest on capital:
Danny (1 000) -
Kenny (1 000) (500)
Teddy (1 000) (500)
12 000 26 500

Share of profit: Danny 40% (4 800) -

Kenny 30% (3 600) 50% (13 250)
Teddy 30% (3 600) 50% (13 250)
____-______ ______-_____

SOLUTION TWO
Income statement Account for the year ended 31 May 2017
K K
Sales 259 200
Less: Cost of sales
Opening inventory 4 800
Purchases 114 600
119 400
Less: closing inventory _(6 300)
(113 100)
Gross profit 146 100
Less: expenses
Wages 49 200
Telephone 2 700
Electricity (3 600 + 1 200) 4 800
Advertising (1 200 + 300) 1 500
Stationery (1 800 – 300) 1 500
Motor expenses 5 100
Miscellaneous expenses 900
Insurance (3 000 – 900) 2 100
Depreciation:
Motor vehicles 10 494
Computer 1 800
Fixtures and fitting 7 680
Bad debts __264
(88 034)
Net profit _58 062

33
 Statement of Financial position as at 31 May 2017

Cost Accumulated NBV

Non-current assets: K K K
Motor vehicles 71 400 46 914 24 486
Computer 7 200 3 600 3 600
Fixtures and fittings 38 400 15 360 23 040
117 000 65 874 51 126

Current assets:
Inventory 6 300
Receivable 21 600
Less: provision for doubtful debts (864)
20 736
Prepayments 900
Bank 3 900
Petty cash __300
32 136
83 262

Financed by:
Capital 75 000
Net profit 58 062
133 062
Less: Drawings 63 420
69 642

Current liabilities:
Payables 9 540
Accruals 1 200
VAT 2 880
13 620
83 262

34
SOLUTION THREE

(a) Statement of cash flows for eh year ended 30 September 20X1

K K
Cash flows from operating activities:
Profit before tax 11 700
Adjustments for:
Depreciation 7 500
Profit on sale of property (12 300)
Investment income (3 300)
Interest expenses 1 500
5 100
Increase in inventories (9 000)
Decrease in receivables 600
Decease in payables (4 200)
Decease in warranty provision (12 000 – 4 800) (7 200)
Cash used in operations (14 700)
Interest paid (1 500)
Income tax paid (W2) (2 400)
Net cash used in operating activities (18 600)
Cash flow from investing activities:
Sales of property 24 300
Purchase of plant (24 900)
Sales of investment 10 200
Dividend paid 600
Net cash from investing activities 10 200
Cash flows from financing activities:
Issue of share capital (W1) 7 200
Payments under finance losses (W2) (11 700)
Net cash from financing activities (4 500)
Decrease in cash and equivalents (12 900)
Cash and cash equivalent b/f __4 200
Cash and cash equivalent c/f (8 700)

Workings
1. Equity: Share Share Revaluation Retained
capital premium surplus earnings
K K K K
B/d 24 000 6 000 10 800 30 300
Bonus issue 10 800 (6 000) (4 800) -
SPLOCI - - 8 700
Issued for cash 7 200 ___-__ __-__ ___-__
c/d 42 000 __-___ 6 000 39 000

2. Liabilities:: FINANCE LEASES INCOME TAX

K K
b/d 27 000 * 6 300 * *
Additions 20 100
SPLCI 3 000
Paid (B) (11 700) (2 400)
35 400 (6 900)
* Non-current and current
** Deferred and current
35
SOLUTION FOUR

(a) Analysis of financial and operating performance of Doreen compared to sector

average.

Profitability:

Doreen has a ROCE significantly lower at 12.1% than the sector average of 16.8%.
This is mainly due to the lower than average gross profit margin and consequent low
operating profit margin. The operating expenses are actually lower (17.5%) as a
percentage of revenue than the sector average of 23% (35% - 12%) so the problem
lies between revenue and cost of sales. Inventory turnover is quite okay (4.5 times
compared to a sector average of 3 times), but Doreen’s mark up of 33.3% (25 ÷ 75 x
100) is significantly below the sector average of 54% (35 ÷ 65) x 100). Doreen is
maintaining turnover by keeping prices down.

The net asset turnout is slightly higher than the sector average. This is due to the
buoyant turnover, as the ratio will have been depressed by the revaluation of property
and the capitalization of the development expenditure, which increased the asset base.
It is to be hoped that the development expenditure will generate the expected
revenue. If it had been necessary to expense it for the year ended 30 September
2017 Doreen would have reported a loss before tax of K3 200. *

Liquidity:

Doreen has a current ratio of 1.55:1 compared to the sector average of 1.25:1. Both
appear low, but satisfactory. Inventory can be turnover into immediate cash and this
is particularly true for Doreen with it’s high inventory turnover level. The lower than
average payables days (45 compared to 64) and the absence of an overdraft suggest
Doreen is not suffering liquidity problems.

Gearing:

Doreen’s debt to equity ratio is 30% well below the sector average of 38% and the
interest rate on the loan notes is below the ROCE of 12.1%, meaning that the
borrowings are earning a good return for the business. The interest cover of 5.25
times (8 400/1 600) is satisfactory. Doreen is not having any problems in servicing
it’s loan and is unlikely to give lenders problems.

Conclusion:

There are no going concern worries for Doreen, but it does have issues with low
profitability. It appears to be selling high volume of cheap items rather than more
valuable pieces on which there would be significantly higher profit margins. This may
or may not be the most advantageous strategy in the period of recession.

(b) The following factors may limit the usefulness of comparison based on business sector
averages:

1. The companies included in the average may have used different accounting
policies. Some may be applying the revaluation basis on their assets and some
may not. This will affect asset turnover and ROCE.

36
 2. Some companies in the average may have used some form of creative accounting.
Such as sale and leaseback transaction which will have boosted profit for the year
and ROCE.

3. The average may include a wide variety of entities with different trading methods
and risk profiles. Very high end jewelries may operate on an invoice rather than
cost basis and will have receivables included in their current assets.

4. Different ways of calculating ratios for example ROCE and gearing. It is up to the
organisation carrying out the comparison to ensure that a standard definition is
used, and they may or may not do this.

5. Unless an inflation adjustment is made, ratios compared over a period of time will
not be comparable.

SOLUTION FIVE

(a) Update Cash book

2017 K 2017 K
Dec 31 Balance b/d 150 000 Dec Bank charges 3 000
Dividends 24 000 Club subscription 7 000
ZRA-VAT refund 26 000 Loan repayment 20 000
Deposit Account 140 000 Balance c/d 310 000
340 000 340 000

(b) Bank reconciliation statement as at 31 December 2017

K
Balance per cash book 310 000
Add: Unpresented cheques (250 000 + 29 000) _54 000
364 000
Less: Banking’s not entered on statement _69 000
Balance per bank statement 295 000

(c) An asset is recognized in the statement of financial position when it is probable that
the future economic benefits will flow to the entity and the cost can be measured
reliably.

A liability is recognized in the statement of financial position when it is probable that

an outflow of resources embodying economic benefits will result from the settlement
of a present obligation and the settlement amount can be measured reliably.

Income is recognized in the income statement when increase in future economic

benefits related to an increase in an asset or decrease of a liability has arisen and can
be measured reliably.

Expenses are recognized when a decrease in future economic benefit related to a

decrease in an asset or an increase of a liability has arisen that can be measured
reliably.

END OF SOLUTIONS

37
 TAXATION PROGRAMME EXAMINATIONS
_______________________

CERTIFICATE LEVEL
________________________

C4: DIRECT TAXES

_______________________
WEDNESDAY 13 JUNE 2018
_______________________

TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each. You
MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A taxation table is provided on pages 2 and 3 of this paper.

38
 Income Tax

Standard personal income tax rates

Income band Taxable Rate

amount
K1 to K39,600 first K39,600 0%
K39,601 to 49,200 next K9,600 25%
K49,201 to K74,400 next K25,200 30%
Over K74,400 37.5%

Income from farming for individuals

K1 to K39,600 first K39,600 0%
Over K39,600 10%

Company Income Tax rates

On income from manufacturing and other 35%

On income from farming 10%
On income from mineral processing 30%
On income from mining operations 30%

Capital Allowances

Implements, plant and machinery and commercial vehicles:

Standard wear and tear allowance 25%

Wear and tear allowance if used in manufacturing 50%

and leasing

Wear and tear allowance if used in farming and 100%

agro-processing
Non- commercial vehicles
Wear and Tear Allowance 20%

Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%

Low Cost Housing (Cost up to K20,000)

Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%

39
 Farm Works Allowance 100%
Farm Improvement Allowance 100%

Presumptive Taxes

Turnover Tax

Monthly turnover Turnover Tax per month

K1to K4,200 3% of monthly turnover above K3,000
K4,200.01to K8,300 K225 per month+3% of monthly turnover above K4,200
K8,300.01 to K12,500 K400 per month+3% of monthly turnover above K8,300
K12,500.01 to K16,500 K575 per month+3% of monthly turnover above
K12,500
K16,500.01 to K20,800 K800 per month+3% of monthly turnover above
K16,500
Above K20,800 K1,025 per month+3% monthly of turnover above
K20,800

Annual turnover Turnover Tax per annum

K1to K50,400 3% of annual turnover above K36,000
K50,400.01to K99,600 K2,700 per annum+3% of annual turnover above
K50,400
K99,600.01 to K150,000 K4,800 per annum +3% of annual turnover above
K99,600
K150,000.01 to K198,000 K6,900 per annum+3% of annual turnover above
K150,000
K198,000.01 to K249,600 K9,600 per annum+3% of annual turnover above
K198,000
Above K249,600 K12,300 per annum +3% of annual of turnover above
K249,600

Presumptive Taxes for Transporters

Seating capacity Tax per annum Tax per day

K K
Less than 12 passengers and taxis 900 2.40
From 12 to 17 passengers 1,800 4.95
From 18 to 21 passengers 3,600 9.90
From 22 to 35 passengers 5,400 15.00
From 36 to 49 passengers 7,200 19.50
From 50 to 63 passengers 9,000 24.60
From 64 passengers and over 10,800 29.55

Property Transfer Tax

Rate of Tax on Realised Value of Land, Land and Buildings and shares 5%
Rate of tax on the realized value on the transfer of intellectual property 5%
Rate of Tax on Realised Value on a transfer or sale of a mining right 10%

40
Attempt all FIVE (5) questions

QUESTION ONE

(a) Taxes in Zambia are administered by the Zambia Revenue Authority (ZRA) whose Chief
Executive Officer is the Commissioner General. ZRA was established by an Act of
Parliament taking over the responsibility from the Departments of Taxes Customs and
Excise.

Required:

(i) Explain the procedure for appointing an individual to the position of

Commissioner General of ZRA. (2 marks)

(ii) Explain the functions of the operating divisions of Zambia Revenue

Authority. (4 marks)

(iii) Explain other sources of revenue for the central government apart from
taxation. (4 marks)

(b) Nzummah Ngalande, a sole trader, has been in business for many years preparing
accounts to 31 December each year. His annual turnover has always averaged
K980,000. For the year to 31 December 2018, he estimated the tax adjusted business
profits to be K585,000. Provisional income tax was computed and paid on the
appropriate due dates throughout the tax year 2018.

The actual taxable business profits for the year ended 31 December 2018 was
calculated as K620,000.

Required:

(i) Explain the types of persons liable to pay provisional income tax. (3 marks)

(ii) Calculate the provisional income tax paid by Ngalande for the tax year 2018,
showing the due dates and the amount paid on each due date. (4 marks)

(iii) Calculate the final amount of income tax payable after giving relief for tax
already paid. (3 marks)
[Total: 20 Marks]

41
 QUESTION TWO
Jonasi Kaka started his business on 1 October 2017 and will prepare the first accounts to 31st
December 2018. He estimates that for the period ended 31 December 2018, the summarised
statement of profit or loss will be as follows:
K K
Sales 1,230,000
Less: Allowable cost of sales 620,000
Gross Profit 610,000
Less: Expenses
- Allowable expenses 220,000
- Disallowable expenses 90,000
310,000
Net profit 300,000

Expenditure in non-current assets from 1 October 2017 to 31 December 2018 will be as

follows:
Date Details Cost/ (Proceeds)
K
2 October 2017 Purchased Office Equipment 14,600
10 October 2017 Purchased Motor car 62,800
20 December 2017 Sold Motor car (bought 10 October 2017) (48,000)
4 February 2018 Purchased Computers 12,700
20 July 2018 Purchased General machinery 16,500
30 November 2018 Purchased motor van 92,000
It has been agreed with the Commissioner General that Mr. Kaka has private use in the car of
50%.
Required
(a) Calculate the capital allowances for the tax years affected. (8 marks)
(b) Explain the basis rules applicable to Mr. Kaka’s first accounting period. (3 marks)
(c) Calculate the final adjusted taxable profit for the tax years affected. (9 marks)
[Total: 20 Marks]

42
QUESTION THREE
Chipangano limited is a small scale manufacturing company. The company has been in
business for many years making up accounts to 31 December each year. The company’s
statement of profit or loss statement for the year ended 31 December 2018 was as follows:
K K
Sales 3,320,000
Less: Cost of sales 1,640,000
Gross trading profit 1,680,000
Add: Rent received (gross) (Note 6) 90,000
Profit on sale of plant 12,000
Royalties received (Gross) 16,000
1,798,000
Less: Expenses
Depreciation 88,000
Bad debts (Note 1) 24,000
Entertainment (Note 2) 9,600
Loss on sale of machinery 29,900
Repairs and renewals (Note 3) 132,000
Legal fees (Note 4) 27,000
Donations and subscriptions (Note 5) 6,400
Wages and salaries 574,000
Property expenses (Note 6) 18,300
Advertising (Note 7) 7,400
Telephone and Electricity (Note 8) 136,000
General Expenses (Note 9) 112,000
1,164,600
Profit before taxation 633,400
Provision for taxation (Note 11) (152,800)
Profit after taxation 480,600
The following notes are available:
Note 1: Bad Debts K
Increase in specific provision 24,000
Decrease in general provision (16,000)
Former employee’s loans written off 9,800
Trade debts written off 13,200
Trade debts previous written off now recovered (7,000)
24,000

Note 2: Entertainment K
Entertaining suppliers 3,400
Entertaining customers 2,200
Staff Christmas party 4,000
9,600

Note 3 :Repairs and renewals K

Repainting show room 2,900
Repairs to company cars 44,100
Extension to stock room 85,000
132,000

43
Note 4: Legal fees K
Recovery of trade debts 11,000
Registering of title deeds for newly acquired land 16,000
27,000

Note 5: Donations and Subscription K

Donation to approved public benefit organisation 1,400
Donation to LLP a political party 2,600
Professional subscription for staff 2,400
6,400
Note 6: Property Expenses
These expenses relate to the buildings owned by the company which are all rented out to
private companies. The rental income received from these properties is shown in the above
statement of profit or loss.

Note 7: Advertising
In order to increase sales, advertising was carried out in the local radio stations.
Note 8: Telephone and Electricity K
Telephone and electricity for manufacturing premises 124,400
Private telephone and electricity for the general manager 11,600
136,000
Note 9: General Expenses K
Water expenses for factory 14,600
Water expenses for general manager residence 7,200
Canteen expenses for members of staff 36,000
Postage and stationery 4,800
Ground rates for factory 8,400
Other miscellaneous expenses (all allowable) 41,000
112,000
Note 10: Capital Allowances
Capital allowances on implements, plant and machinery and buildings for the tax year 2018
have been agreed at K69,000.
Note 11: Provision for taxation
This represents the amount of provisional income tax paid by the company for the tax year
2018.

44
Required:
(a) Explain the tax treatment of the following expenses when determining the taxable
business profit:
(i) Repairs and renewals (4 marks)
(ii) Entertainment expenses (3 marks)

(b) Calculate the tax adjusted business profit for the year ended 2018. (9 marks)
(c) Calculate the company income tax payable for the tax year 2018. (4 marks)
[Total: 20 Marks]

QUESTION FOUR
(a) Explain the types of persons who are not liable to turnover tax. (6 marks)
(b) Send Town retired from formal employment on 31 December 2017, and wishes to
start his own business. He intends to enter into the following transactions during the
tax year 2018:
1. Buy a 50 hectares piece of land in Rufunsa which was offered to him by his
friend, Mr. B. Chola, for K32,000. The government valuations department
valued this piece of land at K50,000.
2. Sell his 10 hectares land situated in Kafue for K24,000. The original cost of the
land when bought five years ago was K8,000. The market value of a 10 hectare
piece of land in that area is now K30,000.
3. He has two residential properties in Lusaka (One in Rhodes Park and the other
in Kabwata South). He is intending to dispose off the Kabwata South property
in April 2018 as it gets water logged. He estimates the open market value at
K500, 000 but is prepared to be paid K350,000 by a property buyer.
4. Offer half of the 40 hectares in Kapiri rural to his son who is now in formal
employment and the other half of the land to be offered to his nephew (a
businessman). The offer to both his son and nephew is a nominal amount of
K12,000 each to cover for this land rates he has incurred over the six years
period he has owned the land. The market value of the total land is K60,000.
The original cost was K11,000 when bought six years ago.
5. Sell his five tonne motor van for K70,000. The open market value of the motor
van is at K63,000. The selling costs are estimated to be K5,700.
6. Sell his 2,000 shares held in Ndalama PLC (a public limited company) listed on
LuSE for K25.0 per share which is the open market value of the shares. The

45
 nominal value of the shares is K1.0 each. These shares were acquired in 2016
at a cost of K10.0 per share.
Required:
(i) Explain the categories of chargeable property for the purposes of property
transfer tax. (5 marks)
(ii) Calculate the property transfer tax payable on each of the above transactions and
the total property transfer tax payable. (8 marks)
(iii) State the due date for payment of property transfer tax (1 mark)
[Total: 20 Marks]

QUESTION FIVE

Malo Anga resigned from his position as a Procurement Manager of YOYO Ltd on 30 September
2018. His annual basic salary had been K280, 000. In addition he was entitled to the following
annual allowances:
K
Medical allowance 6,000
Entertainment allowance 15,000
Sitting allowance 1,800
Uniform allowance 4,500
Housing allowance 12,000
School children allowance per child 4,800

Malo has three children, who are still young and school going. The company paid him bonus
of K6, 800 for his hard work and leave pay of K13, 800.
On 1 August 2018 the company decided to provide Malo with accommodation in a company
owned house and the company paid all the auxiliary services connected to the living
accommodation amounting to K3, 270 per month.
In addition to the above, Malo’s other income received in the tax year 2018 was:
K
Treasury bills interest 5,400
Management consultancy fees 12,325
Royalties 25,500
Bank Deposit interest 2,400
Dividends from Zambian companies listed on the LuSE 3,100

All of these figures represent the actual amounts received. Withholding tax had been
deducted at source at the appropriate tax rates.
During the tax year 2018, Malo made the following payment
K
Income tax paid under Pay As You Earn 70,600
Subscription to the Institute of purchasing and supply 8,400
NAPSA 5,300
School fees for children 11,000
Donation to a local approved public benefit organisation 9,350
Contribution towards the purchase cost of the uniform 1,000

46
Required:

(a) Explain the tax treatment of subscriptions paid by an employee

(2 marks)
(b) Calculate the total amount of Income Tax payable by Malo for the tax year 2018
(18 marks)

END OF PAPER

47
C4: DIRECT TAXES SOLUTIONS

SOLUION ONE

(a) Tax administration

(i) The procedure followed when appointing a person to the position of the
position of Commissioner General, is as follows:

- The Republican President makes consultations in respect of persons who

are professionally qualified and knowledgeable in the administration of
Taxation.

- Based on the results form that consultation, the Republican President then
appoints a suitable individual to the position of Commissioner General of
the Zambia Revenue Authority.

(ii) The operating divisions of ZRA and their functions:

The Domestic Taxes Division

This division is responsible for the administration of Income Tax, Property

transfer tax and Mineral Royalty Tax and domestic Value Added Tax. In as far
as VAT is concerned, the division grants registration for VAT purposes to
eligible traders so that they are able to charge VAT on their taxable supplies
and pay that VAT to ZRA The Division is headed by the Commissioner –
Domestic taxes.

The Customs Services Division

This is the division that has been set up to deal with Customs duties and import
VAT. It is headed by the Commissioner Customs Services. And it is also
responsible for promoting international trade.

(iii) The other sources of revenue for the central government are as follows:

- Privatization of state owned enterprise to private sector

- Borrowing from international and local financial Institutions such as
International Monetary Fund (IMF) and other financial institutions
- Issuing government securities such as treasury bills and government
bonds
- Donor funding where specific projects are funded by donors e.g.
construction of health facilities.

(2 Nzummah Ngalande
(i) The following persons are liable to pay provisional income tax:

- Any person whose business annual turnover is more than K800,000

- Any person whose income does not constitute only of income subjected
to pay as you earn

48
 - Any person whose taxable income is more than the tax free amount of
K39,600
(ii) Ngalande
Provisional income tax paid for the tax year 2018
K
Estimated taxable profit 585,000

Computation
First K39,600 @ 0% 0
Next K9,600 @ 25% 2,400
Next K25,200 @30% 7,560
Balance K510, 600 @37.5% 191,475
Total provisional tax paid for year 201,435

Provisional tax per quarter: K201,435 /4 = K50,359

Due Date Amount
K
31 March 2018 50,359
30 June 2018 50,359
30 September 2018 50,359
31 December 2018 50,358

(iii) Ngalande
Computation of final income tax payable for tax year2018
K
Taxable business profits 620,000
Computation
First K39,600 @ 0% 0
Next K9,600 @ 25% 2,400
Next K25,200 @30% 7,560
Balance K545,600 @ 37.5% 204,600
Total tax liability 214,560
Less provisional tax paid (201,435)
Income tax payable 13,125

SOLUTION TWO

(a) Capital allowances for the tax years 2017 and 2018
Cost/ITV Capital allowances

2017 K K
Office Equipment
Cost 14,600
W&T @25% (3,650) 3,650
ITV c/f 10,950

Motor car
Cost 62,800
Disposal proceeds (48,000)
Balancing allowance 14,800 @50% 7,400
Total capital allowances 11,050

49
 2018
Office Equipment
ITV b/f 10,950
W&T @ 25% (3,650) 3,650
ITV c/f 7,300

Computers
Cost 12,700
W&T @25% (3,175) 3,175
ITV c/f 9,525

General machinery
Cost 16,500
W&T @ 25% (4,125) 4,125
ITV c/f 12,375

Motor van
Cost 92,000
W&T @ 25% (23,000) 23,000
ITV c/f 69,000
Total capital allowances 33,950

(b) The first accounting period is longer than 12 months, therefore, this period will be split
into two notional accounting periods with the first period consisting of less than 12
months and the last accounting period consisting of exactly 12 months.

The first period will consist of three months (from 1 October 2017 to 31 December 2017)
and the second period will consist of 12 months (from 1 January 2018 to 31 December
2018).

The basis of assessment for both periods is the current year basis which is the tax year
2017 and 2018 respectively.

(c) Adjusted business profit for the tax years 2017 and 2018
K
Net profit for period 300,000
Add: Disallowable expenses 90,000
Profit (Pre C.A) 390,000

Tax year 2017 – 3/15 X K390,000 78,000

Tax year 2018 – 12/15 X K390,000 312,000

2017 2018
K K
Profit (Pre C.A) 78,000 312,000
Less: C.A (11,050) (33,950)
Final adjusted profit 66,950 278,050

50
SOLUTION THREE

(a) The tax treatment of the expenses is as follows:

(i) Repairs and renewals
If repairs expenditure is incurred on assets recently acquired to remedy
normal wear and tear in order to maintain the earning capacity of the asset,
the expenditure is treated as revenue and, therefore, allowed for tax
purposes.

If the repairs and renewals expenditure is incurred on the newly acquired

assets which require substantial expenditure to be incurred to put them in a
usable state, the expenditure is treated as capital and, therefore, disallowed
for tax purposes.

(ii) Entertainment expenses

Entertainment expenses incurred in entertaining third parties like suppliers
and customers are disallowed for tax purposes.

Entertainment expenditure incurred in entertaining employees is an allowable

expense for tax purposes.

(b) Chipangano Ltd adjusted taxable business profit for the tax year 2018
K K
Net profit before tax 633,400
Add:
Depreciation 88,000
Loan to former employee written off 9,800
Entertaining suppliers 3,400
Entertaining customers 2,200
Loss on sale of machinery 29,900
Extension to stock room 85,000
Title deeds for newly acquired land 16,000
Donation to political party 2,600
Property expenses 18,300
Canteen expenses 36,000
291,200
924,600
Less:
Rent received 90,000
Profit on sale of plant 12,000
Royalties 16,000
Decrease in general provision 16,000
Capital allowances 69,000
(203,000)
Adjusted business profit 721,600

51
(c) Chipangano Ltd
Income tax payable for the tax year 2018
K
Business profits 721,600
Add:
Royalties 16,000
Total taxable income 737,600

Income tax @ 35% (737,600 x 35%) 258,160

Less:
Provisional income tax paid (152,800)
WHTon Royalties: K16,000 x 15% (2,400)
Income tax payable 102,960

SOLUTION FOUR

(a) Persons who are not liable to turnover tax are:

(i) Any person carrying on business where the annual turnover is over K800,000.
(ii) Any individual or partnership carrying on the business of public service
vehicle for the carriage of persons
(iii) Any partnership carrying on business irrespective of whether the annual
turnover is over K800,000 or not
(iv) Income of partners arising from the partnership since the partnership
producing that profit is excluded from turnover tax.
(v) Any person whose business earnings are subjected to withholding tax were
the withholding tax is the final tax.
(vi) Any business registered for voluntarily registered for value added tax.
(vii) Any person who is involved in mining operations as provided under the mines
and minerals Development Act.

(b) Property transfer tax for Send Town

(i) Categories of chargeable property includes:
i. Any land in Zambia (including any building on that land)
ii. Any building, structure, or other improvements thereon
iii. Any share issued by a company in Zambia that is not listed on the
Lusaka Stock Exchange (LuSE);
iv. Any mining right or an interest in a mining right in Zambia
v. Any Intellectual property in Zambia

(ii) The property transfer tax arising on the transactions listed are as follows:
1. No properly transfer tax arising on the purchase of property as it only
arises on the transfer of property.

2. Properly transfer tax will arise on the market value of the property
when sold is as follows:
Property transfer tax: K30,000 X 5% = K1,500

52
 3. The sell of the residential property in Kabwata South will result in
property transfer tax based on the market value as follows:
Property transfer tax: K500,000 X 5% = K25,000

4. No PTT will arise on transfer to the immediate family and immediate

family include only spouse, blood children, step children or adopted
children. The nephew is not part of the immediate family. However,
where the immediate family pays a consideration to the transfer, PTT
arising will be based on the consideration paid. The PTT arising will
therefore be as follows:-
Disposal to son – K12,000 X 5% 600
Disposal to nephew (K60,000 X ½) X 5% 1,500
2,100

5. The transfer of the motor vehicles is outside the scope of property

transfer tax as motor vehicles are not property.
6. Transfer of shares listed on the Lusaka Stock Exchange is exempt
from property transfer tax, therefore, no PTT arises on disposal of
shares of a public limited company (Plc)

Summary – PTT arising

1. Disposal of Kafue land 1,500

2. Disposal of residential property 25,000
3. Disposal hectare land 2,100
28,600

(iii) The due dates for payment of the PTT which will arise is on or before the 14th
of the subsequent month of the disposal date.

SOLUTION FIVE
a) Subscriptions paid to any trade, profession or technical association that is related to the
business being carried on are allowed. Those that are paid to such associations which
are not related to the trade are not allowed.

b)
Income tax computation for the tax year 2018
K K
Earned Income
Salary (K280, 000 x 9/12) 210,000
Medical allowance (K6, 000 x 9/12) 4,500
Entertainment allowance (K15, 000 x 9/12) 11,250
Sitting allowance (K1, 800 x 9/12) 1,350

53
 Uniform allowance (K4, 500 x 9/12 - K1000) 2,375
Housing allowance (K12, 000 x 7/12) 7,000
Auxiliary services (K3, 270 x 2 mths) 6,540
Education allowance (K4,800x9/12 x3) 10,800
Bonus 6,800
Leave pay 13,800
Total earned income 274,415
Add investment income
Gross Mgt. consultancy (K12, 325 x 100/85) 14,500
Gross royalties (K25, 500 x 100/85) 30,000
44,500
Total gross income 318,915
Less allowable deductions
Subscriptions 8,400
Donations 9,350
17,750
Assessable income 301,165
Tax liability
First K74, 400 9,960
Balance K226,765 x37.5% 85,037
Total tax liability 94,997
Less
PAYE 70,600
WHT on Management consultancy
(14,500x15%) 2,175
1
WHT on Royalties (30,000x15%) 4,500
77,275
Income Tax Payable 17,722

END OF SOLUTIONS

54
 TAXATION PROGRAMME EXAMINATIONS
______________________

CERTIFICATE LEVEL
________________________

C5: INDIRECT TAXES

_______________________
THURSDAY 14 JUNE 2018
_______________________

TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each. You
MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A taxation table is provided on page 2 only.

55
Taxation Table for paper C5 Indirect Taxation

(June and December 2018 Examinations)

Value Added Tax

Registration threshold K800,000

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

Customs and Excise

Customs and Excise duties on used motor vehicles

56
 Aged 2 to 5 years Aged over 5 years

Motor vehicles for the transport of ten or Customs Excise Customs Excise
more persons, including the driver duty duty duty duty

K K K K

Sitting capacity of 10 but not exceeding 17,778 22,223 8,889 11,112

14 persons including the driver

Sitting capacity exceeding 14 but not 38,924 0 13,840 0

exceeding 32 persons

Sitting capacity of 33 but not exceeding 86,497 0 19,462 0

44 persons

Sitting capacity exceeding 44 persons 108,121 0 43,248 0

Aged 2 to 5 years Aged over 5 years

Motor cars and other motor vehicles

principally designed for the transport of
persons including station wagons and Customs Excise Customs Excise
racing cars duty duty duty duty

K K K K

Sedans

cylinder capacity not exceeding 1000 cc 12,490 10,824 7,136 6,185

Cylinder capacity exceeding 1000 cc but 16,058 13,917 8,564 7,422

not exceeding 1500 cc

Cylinder capacity exceeding 1500 cc but 16,545 21,508 8,423 10,950

not exceeding 2500 cc

Cylinder capacity exceeding 2500 cc but 18,049 23,463 10,528 13,687

not exceeding 3000 cc

Cylinder capacity exceeding 3000 cc 22,561 29,329 12,032 15,642

Hatchbacks

cylinder capacity not exceeding 1000 cc 10,705 9,278 7,136 6,185

Cylinder capacity exceeding 1000 cc but 14,274 12,371 8,564 7,422

not exceeding 1500 cc

Cylinder capacity exceeding 1500 cc but 15,041 19,553 8,423 10,950

not exceeding 2500 cc

Cylinder capacity exceeding 2500 cc but 16,545 21,508 10,523 13,687

not exceeding 3000 cc

57
Cylinder capacity exceeding 2500 cc but 16,545 21,508 10,523 13,687
not exceeding 3000 cc

Cylinder capacity exceeding 3000 cc 19,553 25,419 12,032 15,642

Station wagons

cylinder capacity not exceeding 2500 cc 16,545 21,508 9,024 11,731

Cylinder capacity exceeding 2500 cc but 18,049 23,463 13,357 17,598

not exceeding 3000 cc

Cylinder capacity exceeding 3000 cc but 22,561 29,329 18,049 23,463

not exceeding 2500 cc

SUVs

Cylinder capacity not exceeding 2500 cc 21,057 27,374 9,024 11,732

Cylinder capacity exceeding 2500 cc but 24,065 31,284 13,357 17,598

not exceeding 3000 cc

Cylinder capacity exceeding 3000 cc 28,577 37,150 18,049 23,463

Aged 2 to 5 years Aged over 5 years

Motor vehicles for the transport of goods

–with compression-ignitioninternal
combustion piston engine (diesel or semi- Customs Excise Customs Excise
diesel): duty duty duty duty

K K K K

Single cab

GVW exceeding 1.0 tonne but not 21,926 9,501 8,770 3,801
exceeding 1.5 tonnes

GVW exceeding 1.5 tonnesbut not 26,311 11,402 15,348 6,651

exceeding 3.0 tonnes

GVW exceeding 3.0 tonnesbut not 30,697 13,302 17,541 7,601

exceeding 5.0 tonnes

Double cabs GVW exceeding 3 tonnes but 30,274 0 24,119 10,452

not exceeding 5 tonnes

Double cabs GVW exceeding 3.0 tonnes 30,697 13,302 24,119 10,452
but not exceeding 5.0 tonnes, with spark
ignition internal combustion piston
engine

58
Panel Vans

GVW exceeding 1.0 tonne but not 15,348 6,651 8,770 3,801
exceeding 1.5 tonnes

GVW exceeding 1.5 tonnesbut not 17,541 7,601 15,348 6,651

exceeding 3.0 tonnes

GVW exceeding 3.0 tonnesbut not 21,926 9,501 17,541 7,601

exceeding 5.0 tonnes

Trucks

GVW up to 2 tonnes 21,926 9,501 10,963 4,751

GVW exceeding 2.0 tonnes but not 28,504 12,352 13,156 5,701
exceeding 5.0 tonnes

GVW exceeding 5.0 tonnesbut not 24,724 18,955 10,817 8,293

exceeding 10.0 tonnes

GVW exceeding 10.0 tonnesbut not 30,905 23,694 11,744 9,004

exceeding 20.0 tonnes

GVW exceeding 20 tonnes 51,898 0 19,461 0

GVW exceeding 20 tonnes, with spark 37,086 28,432 13,907 10,662

ignition internal combustion piston
engine

Value Added Tax

Registration threshold K800,000

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

Customs and Excise

Duty rates on:

1. Motor cars and other motor vehicles (including station wagons)

principally designed for the transport of less than ten persons,
including the driver:
Customs Duty:
Percentage of Value for Duty Purposes 30%
Minimum Specific Customs Duty K6,000

Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Cylinder capacity of 1500 cc and less 20%
Cylinder Capacity of more than 1500 cc 30%

59
 2. Pick-ups and trucks/lorries with gross weight not exceeding 20
tones:
Customs Duty
Percentage of Value for Duty Purposes 15%
Minimum specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 10%

3. Buses/coaches for the transport of more than ten persons

Customs Duty:
Percentage of Value for Duty Purposes 15%
Minimum Specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Seating Capacity of 16 persons and less 25%
Seating Capacity of 16 persons and more 0%

4. Trucks/lorries with gross weight exceeding 20 tonnes

Customs Duty:
Percentage of Value for Duty Purposes 15%
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 0%

5. Surtax

On all motor vehicles aged more than five (5) years from year of K2,000
manufacture

Attempt all FIVE (5) questions

QUESTION ONE
(a) Mwale Zulu is a logistics and transport graduate from Zambia Logistics and Transport
College (ZLTC). Instead of seeking for employment, he decided to venture into a
transport business in 2018.
He imported a 65 Seater coach costing US$9,800.
Insurance charges were US $1,200
Freight charges were US$2,300.
Other incidental expenses amounted to US$700.
Mr. Zulu spent K5,800 to transport the coach from the border to his car park.
All import taxes were paid when the coach arrived at Nakonde Border on 8 February
2018.
The exchange rate agreed with the Commissioner General was K9.25. However the
Bank of Zambia exchange rate at that time was K9.50

60
 Required:
(i) Explain four (4) conditions that should be satisfied for the transaction value
method to be applied. (4 marks)
(ii) Calculate the customs value (Value for Duty Purposes) of the coach.
(4 marks)
(iii) Compute the import taxes paid at the Border Post on the coach. (4 marks)
(iv) Explain the documents that should be presented at Nakonde Border.

(2 marks)
(b) (i) Explain how the value for duty purposes for export is calculated. (2 marks)
(ii) Explain any four (4) powers of ZRA officials in relation to importation and
exporting of goods. (4 marks)
[Total: 20 Marks]

QUESTION TWO
(a) There are a number of instruments used as barriers to free trade but the most
important ones are tariffs and quotas.
Required:
(i) Explain the difference between quotas and tariffs (2 marks)
(ii) Why are tariffs preferred to quotas (3 marks)

(b) The Customs Services division of ZRA has a number of functions with regards to
importation of goods.
Required:
(i) Explain any four (4) functions of the customs division (4 marks)
(ii) State any four (4) goods that are prohibited from importation (2 marks)
(iii) Explain any four (4) methods that is used to value imported goods (4 marks)

(c) Zambia is currently promoting the manufacture of goods locally through Multi-Facility
Economic Zones (MFEZ). Goods manufactured from these zones are subjected to
excise duty.
Required:
Explain any five (5) methods used to determine the value for excise duty on goods
manufactured in Zambia. (5 marks)
[Total: 20 Marks]

61
QUESTION THREE
(a) In relation to customs and excise Duties, explain how the Value for Duty Purposes is
calculated on the following:
(i) Imports.
(ii) Locally manufactured goods and services.
(iii) Export (5 marks)

(b) Mr. Pepala imported a new Nissan Two tonne light truck from Japan in March 2018
costing $3,000. The insurance charge was 2% of the F. O. B charge and freight was
$1,500. The freight charge from Nakonde to Mr. Pepala`s premises was K2, 800.
The Commissioner General exchange rate at the time of clearance was K9.8 per 1 US$.
However the Bank of Zambia exchange rate was K9.98

Required:
Calculate the customs and excise duty and the VAT payable on importation of the light
truck. (5 marks)
(c) Customs Services Division uses many official and reference documents in its
operations.

Required:
(i) Explain why the use of official documents is important when dealing with the
Customs Services Division. (2 marks)
(ii) State what is meant by excise duty. (2 marks)
(iii) List any four (4) reference documents used in the Customs Services Division.
(4 marks)
(iv) Explain why it is easy to value new imported goods rather than second hand
imported goods. (2 marks)
[Total: 20 Marks]

QUESTION FOUR
(a) When clearing a motor vehicle at the ZRA clearing point, there are various procedures
which must be followed. Some of the procedures are carried out at the clearing point,
whilst other procedures and details are sent to the Lusaka ZRA customs divisions who
send back the details to the clearing point.

62
 Required:
(i) Describe the various documents which are necessary for the clearance of a
motor vehicle. (6 marks)
(ii) Explain why part clearance procedures are now carried out in Lusaka.
(2 marks)

(b) The two VAT accounting schemes are; the normal VAT accounting scheme and the
extended accounting scheme.
Required:
Explain the above stated two VAT Accounting Schemes. (4 marks)

(c) In order to claim a VAT bad debt, a business must show proof of the bad debt.
Required:
(i) Explain how a bad debt may arise for VAT and the conditions that must
apply. (2 marks)
(ii) Explain the circumstances under which a bad debt relief can be claimed.
(6 marks)
[Total: 20 Marks]
QUESTION FIVE

Joe Zaza enterprises started trading and opened an outlet on the 1 March 2018 along
Lumumba road, in Lusaka. It was trading in assorted goods and building materials and most
of them were taxable supplies. The expected Turnover was well above K850,000.

Required:

(a) State the effective date of registration for VAT purposes for Joe Zaza. (1 mark)
(b) State the obligations that Joe Zaza should observe after having duly registered as a
VAT registered supplier. (6 marks)
(c) There are a number of advantages and disadvantages for VAT registration.
Explain
(i) The advantages of VAT registration. (3 marks)

(ii) The disadvantages of VAT registration. (3 marks)

(d) (i) Explain the circumstances that may lead Joe Zaza to cancel the VAT
registration. (4 marks)
(ii) State when the cancellation may take effect. (2 marks)
(iii) State the procedure that is followed in cancellation of the registration.
(1 marks)
[Total: 20 Marks]

END OF PAPER

63
C5: INDIRECT TAXES SOLUTIONS
SOLUTION ONE
a)
i) The four (4) conditions that should be satisfied for the transaction value
method to be applied are:-
- There should be no restrictions to the use of the goods
- There should be no conditions to deter determination of the VDP
- No part of the proceeds on resale would accrue to the seller, unless
included in the value
- No relationship exists to influence the value
ii) Value for duty purpose
$
Cost 9,800
Insurance charges 1,200
Freight charges 2 300
Incidental expenses 700
CIF value 14,000

Value for duty purposes = $14 000 x K9.25 = K129,500

iii) Import taxes paid
Value Tax paid
K K
Value for duty purposes 129 500
Customs value @ 15% 19 425 19 425
Excise Duty 148 925
148 925@ 0% 0 (1mark)

Value added tax @ 16% 23 828 23 828

172 753 43 253

iv) The following documents should be presented at Nakonde boarder:-

- Invoice or letter of sale indicating the price paid
- Bill of landing (consignment rail note)
- Freight statement
- Insurance certificate

64
 b)
i) The value for duty purpose for export is based on free on board (F.O.B) at the
place of dispatch or customs port of shipment.
This excludes insurance and freight charges incurred on exporting
ii) The four (4) powers of ZRA customs officials are:-
- Power to enter and search tax payer’s premises, for money and documents
- Power to assess, charge and collect tax dues and make recoveries
- Power to request and examine financial statements of the tax payer for
the purpose of obtaining information.
- Power of charge interest on overdue tax payments
- Power to charge penalties
- Power to seize property

SOLUTION TWO
a)
i) The difference between quotas and tariffs is that quotas are quantitative
restrictions on the quantity or value of a commodity to be imported in a country
during a period while tariffs are taxes that are levied on imported goods
ii) Tariffs are preferred to quotas because:-
- They are taxes that raise tax revenue to the government
- Administrative corruption is minimized
- Quotas are more likely to encourage smuggling of goods into the
country
b)
i) Four functions of the customs divisions are:-
- Collection and management of customs duties.
- Regulation and control of imports and exports.
- Facilitation of trade, travel and movement of goods.
- Providing statistical data to the government on imports and exports
ii) Goods that are prohibited from importation are:-
- Bases or counterfeit coins.
- Goods that are indecent, obscene or objectionable.
- Goods that corrupt the morals of people.
- Goods that are prohibited by or under the authority of any law

65
 iii) Methods used to value important goods are:-
- Transaction value
This is based on the price actually paid or payable including insurance, freight and
other incidental costs to the extent that they are paid
- Deductive value
This is the price at which identical or similar goods are sold in their quantity in
Zambia
- Computed value
This is the price based on cost of production, insurance, freight and other costs
incurred in the delivery of goods to Zambia.
- Residual basis of value/fall back method
This is the price arrived at by using all other methods flexibly.
- Transaction value of identical goods
This is the price of identical goods imported by another importer into Zambia from
the same source, including insurance, freight and other incidental costs
- Transaction value of similar goods
This is the price of similar goods imported by another importer into Zambia from
the same source, including insurance freight and other incidental costs

c) The methods are:-

- The price at which a licensed manufacturer of excitable goods offers the goods for
sale on the open market
- The lowest price at which identical goods in the same quantity are sold in Zambia.
- The lowest price at which identical goods in different quantities are sold within
Zambia by another licensed manufacturer in the open market
- The lowest price at which similar goods in the same quantity or almost the same
quantities are sold within Zambia by another licensed manufacturer in the open
market
- The lowest price at which similar goods in different quantities are sold within
Zambia by another licensed manufacturer in the open market
- The price at which the goods would fetch less profit and other costs beyond the
manufacturing level

66
SOLUTION THREE
a)
(i) The value for duty purposes on imports is based on the cost, insurance and
freight (C.I.F) charges. The duty rate is charged or determined on the
transaction value of the item.

(ii) For locally manufactured goods and services, the value for duty purposes is
also determined on the transaction value based on cost, insurance and
freight (if any) – (C.I.F).

(iii) The value for duty purposes for exports is based on the free on board (F.O.B)
value i.e. the duty excludes insurance and freight on computation.

b) Mr Pepala – Light Truck taxes and cost.

US$
Cost 3, 000
Insurance (2% X 3,000) 60
Freight 1, 500
4,560
Taxes
K K
VDP 4,560 X K 9.8 44,688

Custom duty 15% X K44, 688 6, 703 6,703

Value for excise duty purposes 51,391
Excise duty 10% X K51,391 5,139 5,139
Value for VAT purposes 56,530
VAT 16% 9, 045 9, 045
Total cost/taxes 65,575 20,887

c) (i) All persons dealing with the Customs Services Division must do so on official documents.
This is important because it provides audit trail, establishes accountability and follow laid
down procedures.
(ii) Excise duty is a levy/tax charged on goods of a luxurious nature such as alcoholic
beverages, soft drinks, motor vehicles, perfumes etc.

67
 (iii) Reference documents include:-
 The Customs and Tariff Book
 The Harmonised System Explanatory Notes
 The Compendium of Classification Opinions
 The Compendium of Policies and Procedure
 Ports of Entry and Routes Order
(iv) Second hand imported goods cause problems for valuation purposes as in most
cases, the value used are subjective and are prone to manipulation by the
importer in order to reduce the imported value for duty purposes. Brand new
goods however, are easy to ascertain for value purposes as the internet can
be used to ascertain the manufacturers invoice value.

SOLUTION FOUR
(a) (i) When clearing an imported motor vehicle, ZRA customs division will require
proper documents as follows:-
- Purchase invoice
- Road rail consignment
- Bill of lading / manifest
- Insurance certificate
- Freight statement
- Contract of sale

(ii) Part of the motor vehicle clearance procedures now have to be done by the
Lusaka customs division though the motor vehicle is at the clearance point
(or border). This is done in order to remove the clearance subjectivity at
clearance points and the biasness and corruption prevalent at the clearance
points.

(b) When VAT is accounted for some special schemes are available namely, the normal
accounting scheme and an extended accounting scheme.
A normal accounting scheme for VAT is where both credit and cash transactions
occurring in a month have to be accounted for.
The due date is on the 16th of the subsequent month.

68
 An extended accounting scheme (extended tax period) is where VAT is accounted for
at an extended tax period of 3 months instead of the normal one month period. This
is normally granted where the trader’s business is not continuous on a daily basis.

(c) (i) A bad debt for VAT arises where the business pays for VAT on a credit sale of
goods or service but the business does not receive the amount due (both the
principal and the VAT element)
For the VAT bad debt relief to be effective, the following conditions must
apply;
- The creditor proves the amount in insolvency or bankruptcy.
- The property or title has passed to the person or business to whom they
were supplied.
- The value of the supply does not exceed its open market value.
- The bad debt has been outstanding for at least 18months.

(ii) ZRA may agree to the bad debt relief if the following documents are lodged;
- A copy of the fax invoice issued for the debtor that has become a bad
debt.
- Evidence that the VAT bad debt claim was actually remitted to ZRA.
- Copies of correspondence between the supplier and the administrator,
receiver or liquidator of the insolvent customer.

SOLUTION FIVE

JOE ZAZA
(a) The effective date for VAT registration is 1st March 2018
(b) Obligations
- Notify Zambia Revenue Authority when the business starts or change in
circumstances
- Display the VAT registration certificate
- Charge VAT on taxable supplies
- Complete and submit returns by the due date which is specified by ZRA
- Maintain sufficient records for at least 6 years
- Cooperate with ZRA officers
- Provide information to ZRA officers

(c) (i) Advantages of VAT registration

 The trader will be able to reclaim input VAT on expenses as long as that
input VAT is recoverable

69
  The impression of a substantial business will be given since traders should
only register if the turnover is substantially high
 Business will compete well with other businesses which are registered for
VAT in that their costs will not be distorted by being VAT inclusive

(ii) Disadvantages of VAT registration

 VAT registration results in increased administrative costs
 Non –registered customers who get supplies from the trader will have an
increased cost
 Penalties will be charged if the trader fails to pay VAT or to submit the
VAT return

(d) (i) Circumstances leading to the cancellation of VAT registration

 Where there is change in the legal status of the entity
 If the business ceases to trade permanently
 If the business is sold
 If the business as a VAT registered trader ceases to make taxable
supplies

(ii) When the cancellation may take effect

 When the value of taxable supplies falls consistently below the VAT
registration threshold
 If upon being granted registration, fails to commence a business on a
certain date

(iii) Procedure to follow for cancellation

The de-registration must be in writing, addressed to the commissioner
General through the nearest ZRA offices

END OF SOLUTIONS

70
 TAXATION PROGRAMME EXAMINATIONS
_______________________

CERTIFICATE LEVEL
________________________

C6: LAW FOR TAX PRACTITIONERS

_______________________
FRIDAY 15 JUNE 2018
_______________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FIVE (5) questions of twenty (20) marks each. You
MUST attempt all the FIVE (5) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

71
 Attempt all FIVE (5) Questions
QUESTION ONE
Blair was selling a book at K450, which he wished to sale to his friend Mark. Mark was in
dire need of that book and promised to call Blair on 5 May, 2017. Mark, being a student
pursuing an accountancy course decided to work on a part time basis at Southern Sun
Hotel to raise the said amount of money.
He was to be paid by the end of March, but unfortunately, the signatory to the account
had travelled out and therefore, he could not get the payment. On 4 May, he decided to
approach Blair with K400, stating that this was the only money he had at that time.

Required:
(a) State giving reasons whether an agreement was made or not. (5 marks)
(b) Define a counter-offer and explain the effect of a counter-offer. (5 marks)
(c) Explain the following rules of consideration:
(i) Consideration must move from the promisee (3 marks)
(ii) Consideration must not be past (3 marks)
(iii) Consideration must be sufficient, it need not be adequate (4 marks)
[Total: 20 Marks]
QUESTION TWO

(a) Chuluka Ben bought three tables from Shopleft Ltd. A sales representative from Shopleft
persuaded him to do so. Two days later, he discovered that one of the table’s legs had a
fault and he took it back to Shopleft Ltd who refused to accept it, saying they already sold it
to him and had nothing to do with Chuluka Ben any more. He has now come to you for help.

Required:

(i)State two (2) remedies available to Chuluka Ben in the above case. (2 marks)
(ii)Explain the remedies you have stated above. (2 marks)

(iii) Chuluka Ben now wants to buy a spring mattress on hire purchase from Shopleft Ltd.

Explain to him two (2) features of a hire purchase agreement. (4 marks)

(b) Define the following:

(i) Finance lease (3 marks)

(ii) Negotiable instruments (3 marks)
(iii) Holder in due course (3 marks)
(iv) Transfer of property in goods (3 marks)
[Total: 20 Marks]

72
QUESTION THREE

The Judiciary of Zambia is the branch of the Government of the Republic of Zambia. Under
the Constitution of Zambia, Justices and Magistrates are independent of the government and
subject only to the Constitution and the law.
According to the constitution the structure of the judicature shall comprise the Supreme Court
of Zambia, the High Court of Zambia, the Industrial Relations Court, the Subordinate Court,
the Local Court and such lower Courts as may be prescribed by an Act of Parliament.

Required:

(a) Discuss in detail, the functions of the judiciary (5 marks)

(b) Explain in detail the role and emergency of equity. (5 marks)

(c) Discuss in detail, the Golden rule of statutory interpretation (5 marks)
(d) Explain the jurisdiction of the Land Tribunal as provided under the Lands Act, Cap
184 of the laws of Zambia. (3 marks)
(e) Define an insurable interest in insurance law (2 marks)
[Total: 20 Marks]

QUESTION FOUR

(a) State the ways in which an agency relationship can be created (5 marks)
(b) Discuss the three (3) main elements of negligence. (9 marks)
(c) Define a contract of sale. (3 marks)
(d) List any three (3) remedies available to the buyer under the sale of goods. (3 marks)
[Total: 20 Marks]

QUESTION FIVE

(a) Explain the duties of carriers under the contract of Sale. (8 marks)
(b) Differentiate between choses in action and choses in possession. (4 marks)
(c) State two (2) duties of a buyer under a contract of sale (2 marks)
(d) Nomsa and Stacey are about to enter or form a partnership. Nomsa is not sure of what
a partnership entails and decides to approach you for advice. Please advise Nomsa on
any least two (2) disparities between a Partnership and a Limited Company.
(4 marks)
(e) State remedies which available for breach of contract of employment. (2 marks)
[Total: 20 Marks]

END OF PAPER

73
C6 LAW FOR TAX PRACTITIONERS SOLUTIONS

SOLUTION ONE

(a) For an agreement to be formed, two elements have to be present which are
offer and acceptance. An offer being defined as a definite promise to be bound
on certain specific terms and acceptance being the unconditional expression of
willingness to be bound by the terms of an offer. Once offer and acceptance
co-incide then an agreement is formed (mirror image). However, where new terms
are introduced before accepting, this introduces a counter offer which cancels
the original offer. Therefore, in this case, the original offer of K450 was replaced
by the counter offer of K400. In this way an agreement was not made since the
terms of the offer and acceptance did not correspond. Example, Hyde v
Wrench[1840] 3 Beav 334, the defendants wrote the plaintiffs offering to sell
his farm for £1,000; the plaintiff made another offer of £950 which the defendant
did not accept. It was held that there was no binding contract as the plaintiff had
rejected the original offer thus cancelling the original offer.
(b) A counter offer is a proposal that is made as a result of an undesirable offer.
A counter offer rejects the original offer and permits a person to decline a
previous offer allows offer negotiations to continue. The effect of a counter offer
is that it cancels the original offer.
(c) (i) Consideration must move from the promise means that the promisee can only
enforce the promise if they themselves, and not a third party, provided
consideration for that promise.
(ii) Consideration must not be past-past consideration is defined as an act done
before a contract is made. It is consideration that is already given or some act
that is already performed and therefore, cannot be induced by the other party’s
act. It is considered not to be consideration at all. A promise must be made
before an act for it to be consideration.
(iii) Consideration must be sufficient, it need not be adequate-according to the
law, consideration for a contract must be sufficient but it need not be adequate.
The principle of consideration is to ensure that promises are enforced to the
parties that promised to exchange something of value in the view point of the
law.

74
SOLUTION TWO

(i) Remedies available to Chuluka Ben (Buyer):

- Reject the goods or get a refund
- Rescission
- Damages
- Specific performance

(ii) The remedies are explained below:

- Reject the goods – the buyer can reject the defective goods and claim a
refund from Shopleft Ltd.
- Rescission – He can rescind (cancel) the contract on the ground that Shopleft
Ltd misrepresented (fraudulently) on the condition of the table before buying
it.
- Damages – He can sue for monetary compensation for the wrong goods
and breach of contract.
- Specific Performance – Chuluka Ben as a buyer can sue for specific
performance, i.e. having Shopleft perform their part of the contract by
supplying him with a table in good condition.

(iii) Features of Hire Purchase:

- Deposit – The buyer pays a deposit before getting the item
- Hirer does not become owner until last instalment is paid
- Parties are not committed to sell until the buyer exercises his option to buy.
- The owner of the goods could repossess the goods where the hirer fails to
finish payments.
- Property in the goods does not pass until the final instalment is paid.

(iv) Definitions of the following:

(a) Finance Leases – A finance lease involves the lease of an asset, such as
machinery, to a commercial customer under an arrangement which is non-
cancellable or only cancellable on payment of a financial penalty. The lessor
provides the funding for the equipment but maintenance is done by the
lessee. The lessee has no option to purchase the equipment. The equipment
remains property of the lessor until the end of the agreement or when the
asset is duly paid for by the lessee.

(b) Negotiable Instruments – This is a written instrument, signed by the maker

or drawer of the instrument, that contains an unconditional promise or order to
pay an exact sum of money on demand or at an exact future date to a specific
person, or order, or to its bearer.

(c) Holder in Due Course – This is a person who takes the negotiable instrument
for value, in good faith, and without notice that it is overdue or defective. This
is a holder who has taken the bill, complete and regular on the face of it, without
notice that it was overdue, previously dishonoured or encumbered in any way
and took it in good faith without notice of any defect in title of the person who
negotiated it.

75
 (d) Transfer of Property in Goods – This is one of the aims of the Sale of Goods
Act 1893. It simply means that the seller must transfer the whole property in the
goods to the buyer once the buyer has paid for the goods or once all the
conditions attached to the sale have been fulfilled.

SOLUTION THREE

a) The functions of the Judiciary include the administration of justice through resolving
disputes between individuals or between individual and the state, interpreting the
constitution and the laws of Zambia, promoting the rule of law, and protecting the
human rights of individuals and groups.

b) In jurisdictions following the English common law system equity is the body of law
which was developed in the English Court of Chancery and which is now administered
concurrently with the common law. For much of its history, the English common law
was principally developed and administered in the central royal courts: the Court of
King's Bench, the Court of Common Pleas, and the Exchequer. Equity was the name
given to the law which was administered in the Court of Chancery. The Judicature
Reforms in the 1870s effected a procedural fusion of the two bodies of law, ending
their institutional separation. The reforms did not effect any substantive fusion,
however. Judicial or academic reasoning which assumes the contrary has been
described as a "fusion fallacy". Jurisdictions which have inherited the common law
system differ in their current treatment of equity. Over the course of the twentieth
century some common law systems began to place less emphasis on the historical or
institutional origin of substantive legal rules. In England, Australia, New Zealand, and
Zambia, equity remains a distinct body of law. The main function of equity was
basically to mitigate the harshness of common law
c) The Golden rule , as was seen in the case of Grey v. Pearson (1857) 6HL CAS 61,
allows a judge to depart from a word’s normal meaning in order to avoid absurdity in
the event of ambiguity in a statute. A meaning must therefore be given which best
express the intention of the parties.

d) The tribunal has the jurisdiction to inquire into and make awards in matters relating
to ;

76
 (i) Land under the Lands Acts
(ii) Payment of compensation
(iii) Matters affecting land rights and obligations
(iv) Other functions as designated
e) An insurable interest is a stake in the value of an entity or event for which an
insurance policy is purchased to mitigate risk of loss. ... Entities not subject to
financial loss from an event do not have an insurable interest and cannot purchase
an insurance policy to cover that event.

SOLUTION FOUR

The formation of a principal/agent relationship could be in the following ways:

(i) By express appointment, no formality for the appointment of an agent is
required and be written or oral.
(ii) Agency by estoppel-this where there is an agency by implication or conduct.
Whilst a person cannot be bound by a contract made without his consent,
proof that his conduct appeared that he had appointed an agent would
entail that he will be estopped from denying the existence of authority.
(iii) Agency by ratification-This is where the principal ratifies and adopts the acts
of his agent which were done without his authority, creating an agency
relationship.
(iv) Agency of necessity-this type of agency arises where a person takes urgent
action on behalf of another in an emergency. Such a person must show
that he had acted in the best interest of the principal, the action was
reasonable and there was no way of contacting the principal.

(b) In order to establish the tort of negligence, the claimant must prove the following:
 A duty of care owed, where the defendant owes the plaintiff certain obligations;
 Breach of duty-the duty of care is breached if the defendant does not take
reasonable care in the circumstances.
 Resultant damage-injury, loss or harm must be suffered by the plaintiff due
to the breach of duty.
 Donoghue v Stevenson [1932] AC 562 (HL), the plaintiff fell ill after
taking a bottle of ginger beer containing remains of a dead snail. When the

77
 action was taken to court, the manufacturers of the drink were held liable and
ordered to pay the plaintiff damages for injury suffered.
(c) A contract of sale is a contract by which the seller transfers or agrees to
transfer property in goods to the buyer for a money consideration called the
price
(d) The remedies available to the buyer under the contract of sale are: Rejection of
the goods; rescission for innocent misrepresentation, damages and specific
performance.

SOLUTION FIVE

Duties
a) i) To carry all goods of the class he professes for anybody who delivers them to him ,
provided he has room in his carriage and the person offers to pay the proper
charges.
ii) To carry the goods by his ordinary routes
iii) To deliver the goods to the consignee at the designated place
iv) To receive and carry all goods offered for carriage
v) To take utmost care of the goods from the moment of receipt to the place of
destination
vi) To deliver the goods within reasonable time depending on the case by case
basis.

b) A chose in action is essentially a right to sue. It is an intangible personal property

right recognized and protected by the law, that has no existence apart from the
recognition given by the law, and that confers no present possession of a tangible
object. Another term is a thing in action. A chose in action, sometimes called a chose
in suspense, in its more limited meaning, denotes the right to enforce payment of a
debt by legal proceedings, obtain money by way of damages for contract, or receive
recompense for a wrong. A chose in possession is an item of tangible personal
property that can be physically possessed by the owner and can be transferred by
delivery. Possession of a chose in possession is prima facie evidence of ownership.

Chose in possession is opposed to chose in action, and denotes not only the right
to enjoy or possess a thing, but also the actual or constructive enjoyment of it. The
possession may be absolute or qualified. It is absolute when the person is fully and
completely the proprietor or owner of the thing; it is qualified when he "has not an
exclusive right, or not a permanent right, but a right that may sometimes subsist and
at other times not subsist.

c) Accept the goods and make payments

d) Limited companies are formed under the Companies Act, Cap 388. A partnership is

78
formed under an agreement, the Partnership deed. There is separate existence
between the company and members in a company, whereas a partnership and
partners does not have this separation, and the firm and partners are one unit.
A company is responsible for its debts, and member’s liability for the debts of the
company is limited to the shares they have bought or have agreed to buy. In a
partnership the liability is joint and several, meaning that the creditor may sue the
firm or the individual partners or both the firm and partners.
 Damages or compensation
 Re-employment or re-instatement
 An appropriate remedy depending on circumstances

END OF SOLUTIONS

TAXATION PROGRAMME EXAMINATIONS

________________________

79
 DIPLOMA LEVEL
________________________

D1: BUSINESS INFORMATION MANAGEMENT

_______________________
WEDNESDAY 13 JUNE 2018
_______________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FOUR (4) questions of Twenty Five (25) marks each.
You must attempt all the FOUR (4) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

Answer all FOUR (4) questions

QUESTION ONE

(a) The Feasibility Study consists of three parts namely:

(i) Technical
(ii) Operational

80
 (iii) Economical

Explain what is considered or done in the different Feasibility Studies that can be
conducted when developing a system. (12 marks)

(b) List any five (5) testing methods/techniques that can be used to test the system that
is being developed for an external client (5 marks)
(c) The key elements of an organisation are its people, structure, operating procedures,
politics and culture.

Required:
List five (5) major business functions or specialized task performed by business
organisations. (5 marks)
(d) Explain what Data Redundancy is. (3 Marks)

[Total: 25 Marks]

QUESTION TWO

(a) The internet has transformed traditional business operations into a hypercompetitive
electronic marketplace. Companies must strategically position themselves to compete
in the e-commerce environment.
Compare and contrast the brick-and –mortar strategy and the click-and-mortar
strategy (10 marks)
(b) Managers in organisations are found at different levels.
With the aid of a diagram, explain the levels of management in an organisation
(9 marks)
(c) Information System security is a critical issue in every organisation.

Explain the following security risks to information systems and how they can be
prevented:

(i) Denial of Service (DoS) attack (2 marks)

(ii) Eavesdropping (2 marks)
(iii) Password cracking (2 marks)

[Total: 25 Marks]

QUESTION THREE

(a) Describe in detail the components of Expert systems (12 marks)

(b) Fire is a serious hazard to computers systems. Destruction of data can be more costly
than the destruction of hardware. A proper fire safety plan is an essential feature of
security procedures, in order to prevent fire, detect fire and put out the fire.

Required:

81
 Explain what the Fire safety can include or take into consideration. (8 marks)
(c) Explain what is meant by the term Total Quality Management (TQM). (5 marks)
[Total: 25 Marks]

QUESTION FOUR

(a) Data and knowledge management coupled with communication and information flow
have become very important considerations in the information systems development
project.

Required:
Distinguish between Data Mining and Data Warehousing. (6 marks)
(b) Briefly explain the stages involved in project management (10 marks)
(c) Describe any three (3) models of e-commerce (9 marks)
[Total: 25 Marks]

END OF PAPER

D1 BUSINESS INFORMATION MANAGEMENT SOLUTIONS

SOLUTION ONE
a)
i) TECHNICAL

 the technical issues that are raised during the feasibility stage of investigation include
queries on whether the intended technology exists

82
  the proposed system provide adequate response to equerries regardless of the number
of users
 the system can be expanded if developed, are there technical guarantees of accuracy,
reliability, case of access and data security.
 the hardware functional or absolute and or will need least equipment

ii) OPERATIONAL

 This test of the feasibility asks if the system will work when it is developed or installed.

 It also analyses management support of the project/ users, if current is well liked and
whether the users see the need for change hence avoiding resistance to change

 if the current business methods are accepted by the users, whether the users where
part/ involved in the planning and the development of the project.

 Questions are asked concerning the harm the proposed system might produce in any
area or respect, will there be loss of control, will individual performance be poorer than
before and will customers be affected in a negative way?

iii) ECONOMICAL

 The financial costs to the organization in terms of the profits or losses the project will
bring.
 The benefits must equal or exceed the costs.
 The system that is developed and installed should be good investment for the
organization.
 The questions that are raised are to estimate the following.
- cost conduct the full system investigation
- the cost of hardware and software for the class of application

b) List any five (5) testing methods/techniques that can be used to test the system that is
being developed for an external client
i) Unit testing
ii) Integrated testing
iii) User acceptance testing
iv) System testing
v) White box testing
vi) Black box testing
vii) Alpha testing
viii) Beta testing

83
c) The key elements of an organisation are its people, structure, operating procedures,
politics and culture.
List five (5) major business functions or specialized task performed by business
organizations
 Sales and marketing
 Manufacturing and production
 Finance
 Accounting
 Human resources

d) What is Data Redundancy?

Data redundancy is the presence of duplicate data in multiple data files. Data redundancy
occurs when different divisions, functional areas, and groups in an organization
independently collect the same piece of information.

84
SOLUTION TWO
a) Compare and contrast the brick-and –mortar strategy and the click-and-mortar strategy
a) Brick-and-mortar strategy

 Operates solely in the traditional physical markets, shop or business office

 It can operate even with internet or ecommerce
 It focuses on one distinct way of doing business
 It makes customers have a feel or physical touch of product or good being
bought
 Always assisted by someone who will explain or illustrate the product to
customer or demonstrate on how to use or operate it

Click-and –mortar strategy

 Operates in the physical location but have added the ecommerce or use of
the internet to the business activities
 Transactions occur in both physical and virtual environments
 It fully maximizes commercial opportunities in both domains
 Design and development of complex computing systems are required to
support strategy
 Different skills are necessary to support the strategy to be used effectively

b) Manages in organisations are found a different levels.

With the aid of a diagram, explain the levels of management in an organisation

Levels of management
There are basically three levels of management in an organisation; the top-Level
(strategic) management, Middle-level (tactical) management and the lower-level
(operational) management.
Top-level management are the top executives of the company. They set decisions that
affect the whole organisation. They are responsible for developing the company's vision
and making the executive decisions that affect the organization's future.
Middle-level management accountable to senior management, middle-level managers
devote most of their work to organisational and directional functions such as controlling
the work of lower-level managers and implementing policy. They basically carry out goals
set by top management.
Lower-level management also called first line managers or supervisors, they are
responsible for day to day work in the organisation. They supervise the flow line workers
on their day to day work and report to the middle level managers.

Top Level

Middle Level

Lower Level

85
c) Information system security is a critical issue in every organisation.
Explain the following security risks to information systems and how they can be prevented

Computer security risks

i) Denial of service (DoS) attack

 This is a security threat where the attacker attempts to prevent legitimate users
from accessing the information system service they deserve.
 It is a cyber-attack in which the perpetrator seeks to make the system
resources unavailable to its intended users.
 The most common types of DoS attack are when the attacker floods the
network server with request for authentication whose return addresses are not
valid and since servers can only handle a certain number of requests at once,
it cannot process users’ requests once it is overloaded, thus denying the
legitimate users access to the resource they need.
 Denial of service attacks are difficult to prevent but one can install firewalls,
up-to-date antivirus software including applying email filters.
ii) Eavesdropping
 Eavesdropping is unauthorised interception or listening of communication
between two points on a network
 It is an electronic attack where digital communications are intercepted by an
individual for whom they are not intended.
 Eavesdropping can be avoided by encrypting the data that is being transmitted
on computer networks.
iii) Password cracking
 This involves various measures used to discover computer passwords
 It is usually done by repeatedly guessing the password using a computer
algorithm for various reasons but mostly for gaining unauthorised access.
 Password cracking can be avoided by choosing strong password that has
characters that are a combination of letters and numbers in both upper and
lower case.

SOLUTION THREE

a) Describe in detail the components of expert systems

 Inference engine: this is the main processing element of the expert system. The
engine chooses rules to execute. If there are no rules, the inference must obtain
information from the user
 Knowledge Base: this is a collection of rules or other information derived from the
human expert. Rules are normally structured in the form of if …then statements.
 User Interface: this the method by which the expert system interacts with a user.
This can be through a dialog box, command prompts and other input methods.

86
b) Fire is a serious hazard to computers systems. Destruction of data can be more costly than
the destruction of hardware. A proper fire safety plan is an essential feature of security
procedures, in order to prevent fire, detect fire and put out the fire.
Explain what the Fire safety can includes or take into consideration?
Fire safety includes:

 Site preparation e.g. appropriate building materials, fire doors

 Detection e.g. smoke detectors
 Extinguishing e.g. fire extinguisher, ceiling sprinkler
 Training for staff in observing fire safety procedures, no flammable fluids & no
smoking in computer room
 Weather may be a threat, wind, rain and storm can all cause substantial damage
to buildings
 Lightning & electrical storms pose an additional threat with power supply, causing
power failures one way of the combating this is by the use of Uninterrupted Power
Supply (UPS). This will protect equipment from fluctuations in the supply. Power
failure can be protected against by the use of a generator

c) Understanding of the term Total Quality Management (TQM)

Total Quality Management (TQM) is a business management strategy used to improve the
quality of the products and services offered by an organisation. The concept makes quality
the responsibility of all the people and functions within an organisation where everyone is
expected to contribute to the overall improvement of quality.
Total Quality Management, is a method by which management and employees can become
involved in the continuous improvement of the production of goods and services. It is a
combination of quality and management tools aimed at increasing business and reducing
losses due to wasteful practices.

SOLUTION FOUR

a) Data and knowledge management coupled with communication and information flow have
become very important considerations in the information systems development project.
Distinguish between Data Mining and Data Warehousing.
a) Data warehouse is a technique for collecting, storing and managing data from various
sources for business information. It is the technologies and features required to use
data strategically. This pool of data is available for query and analysis. This is a method
of centralizing a pool of related data.

Data mining is a method of looking for hidden, valid and potentially useful patterns in
huge data sets. It is a way of discovering new trends, unknown relationships and depth
in data.

87
b) Briefly explain the stages involved in project management
 Initiation Stage
Project description
Project approvals
 Planning Stage
Planning in terms human and financial resources
Timing constraints and the mitigation
 Execution Stage
This the stage when the actual tasks are carried out in order to achieve the project
objectives
 Monitoring and Controlling Stage
Monitoring and evaluating and making sure that controls are being done
 Closing Stage
Closing of the project and handing over to the rightful owner

c) Describe any three models of e-commerce

Main models of e-commerce:

i. B2B: this model of e-commerce involves a business organisation selling its goods
and services to another business organisation

ii. B2C: In this model business organisations sell directly to their consumers without
a middleman involved. Both the buyers and the sellers are business entities.

iii. C2C: In model involves consumers selling fellow consumers

iv. G2C : The model involves the government to citizens

v. C2B : The model involves consumer to business

vi. B2G : The model involves business to government

vii. G2B : The model involves government to business

END OF D1 SOLUTIONS

88
 TAXATION PROGRAMME EXAMINATIONS
________________________
DIPLOMA LEVEL
________________________

D2: FINANCIAL MANAGMENT

_______________________
FRIDAY 15 JUNE 2018
_______________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FOUR (4) questions of Twenty Five (25) marks each.
You must attempt all the FOUR (4) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.
10. Formulae, Present Value, and Annuity tables are provided at the end of this question
paper.

89
Attempt all (FOUR) questions

QUESTION ONE

WT Ltd has 10% debenture capital of K250, 000 with 6 years to maturity. The par value of
the debentures is K1,000 each. The interest payments are payable semi-annually and the
debentures are redeemable at a discount of 5% to the par value. WT Ltd uses a yield to
maturity of 8% to appraise all its investments. The company recently engaged a new
consultant. He is skeptical about the suitability of this discount rate for the company and he
recently recommended the use of the weighted average cost of capital as a discount rate for
all WT investments. WT Ltd acquired 75% of the ordinary shares of CCP Ltd 5 years ago for
K60,000. CCP Ltd balance sheet had total assets of K48,000 on the date of acquisition. CCP
Ltd has maintained a return on capital employed of 10% and a dividend payout ratio of 40%
over the last 10 years. CCP Ltd has ordinary share capital of K40,000 and Reserves of K12,000
while WT Ltd has reserves of K150,000 and ordinary share capital of K200,000.

Required:
(a) Calculate the market value of the debentures using the yield to maturity of 8%.
(6 marks)
(b) Explain what is meant by the weighted average cost of capital and why many
companies use it as a discount rate in investment appraisal. (8 marks)
(c) Calculate the amount to be recognized in the consolidated financial statements of WT
Ltd for:
(i) Goodwill on acquisition (6 marks)
(ii) Reserves (5 marks)

[Total: 25 Marks]

QUESTION TWO

(a) Explain the following concepts:

(i) Agency Problem (2 marks)
(ii) Alternative investment market (2 marks)
(iii) Goodwill (3 marks)
(iv) Factoring (3 marks)

(b) Discuss the relationship between investment, financing and dividend decisions as key
decisions made by a financial manager. (6 marks)

(c) Explain the THREE (3) main types of market efficiency and comment on how
information plays a pivotal role in investment decisions made by financial managers.
(9 marks)
[Total: 25 Marks]

90
QUESTION THREE

Solar Power and refrigeration investments has 200,000 ordinary shares in issue and the
current market price is K12 per share. The company also has 50,000 preference shares in
issue with a market price of K15 each. The company’s outstanding loan notes have 14 years
to maturity, a face value of K1,000,000 with a coupon rate of 5% per annum.

Additional information

(i) Solar Power and refrigeration pays corporation tax at 35% per annum and it has a
dividend pay -out ratio of 16%.
(ii) The company maintains a return on capital employed of 20%.
(iii) The company recently paid a dividend of 50 ngwee per ordinary share and K2 per
preference share.
(iv) The loan notes have an internal rate of return of 8%.

Required:
Using the information given above, calculate the weighted average cost of capital of Solar
Power and refrigeration investments using market values as weights.
[Total: 25 Marks]

QUESTION FOUR

ABC limited is considering investing in a project that will cost ZMW 50m to be paid at the
beginning of the first year of operation. The investment project provides the following
information:
Year 1 Year 2 Year 3 Year 4
Sales volume (units/year) 1,040,000 1,248,000 1,434,000 1,576,000
Selling price (K/unit) 60.00 60.00 60.00 60.00
Variable costs (K/unit) 20.00 20.40 21.22 21.86
Fixed costs (K/year) 1,400,000 1,470,000 1,558,000 1,682,000

The above information takes into consideration a selling price inflation rate of 8% per year
and variable cost inflation of 6% per year. The incremental fixed costs related to the
investment project are in nominal terms with the 4-year sales volume expected to continue
for the foreseeable future. ABC Ltd pays a 30% corporate tax a year in arrears.
The directors of ABC Ltd require the evaluation of investment projects over the four years of
operation, with an assumed terminal value at the end of the fourth year of 5% of the initial
investment cost. The use of both the net present value and discounted payback must be used,
with a maximum discounted payback period of two years. The real after-tax cost of capital for
this company is 14% and its nominal after-tax cost of capital is 24%.

Required:

(a) Calculate the following for this planned investment project:

(i) The net present value (7 marks)

(ii) The discounted payback period (2 marks)

(b) Using the findings in (a), explain to the directors of ABC Ltd whether this investment
project is financially acceptable or not. (3 marks)

91
(c) In appraising investments, there will always be an element of risk and uncertainty.

Required:

Discuss the following techniques that can be applied to assess the impact of risk on a project:

(i) Payback period technique (3 marks)

(ii) Adjusted Discount Rate technique (4 marks)
(iii) Sensitivity Analysis technique (6 marks)

[Total: 25 marks]

END OF PAPER

92
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D2 FINANCIAL MANAGEMENT SOLUTIONS

SOLUTION ONE

a) Market Value of debentures = PV interest payments (annuity) + present value of

capital repayment amount.

Workings
Interest 10% * k1000*0.5=k50
Number of periods to maturity 6 * 2=12
K50* annuity factor for 12 periods @ 4%+ k1000*0.95* PVIF 12 periods at 4%
K50*9.385+k950*0.625 =K1063

b) The weighted average cost of capital is the average cost of the different elements
within the capital structure of a company, using weightings based on the market
values of each of the different elements. The computed WACC represents the cost of
the capital currently employed. This represents financial decisions taken in previous
periods.
In many cases it will be difficult to associate a particular project with a particular
form of finance. A company’s funds may be viewed as a pool of resources. Money is
withdrawn from this pool of funds to invest in new projects and added to the pool as
new finance is raised or profits are retained. Under these circumstances it might
seem appropriate to use an average cost of capital as a discount rate.
The correct cost of capital to use in investment appraisal is the marginal cost of the
funds raised (or earnings retained) to finance the investment.
The marginal cost of capital (MCC) is the additional cost the firm will pay to raise an
additional kwacha of capital, assuming the capital is raised using the optimal capital
proportions.
The WACC might be considered the most reliable guide to the marginal cost of
capital, but only on the assumption that the company continues to invest in the
future, in projects of a standard level of business risk, by raising funds in the same
proportion as its existing capital structure.

c) Pre-acquisition reserves of subsidiary

Profit after tax 10% x K48000=K4800
Earnings retention rate 1-0.4=0.6
Retained earnings on acquisition =K4800 x 0.6 = K2880

GOODWILL COMPUTATION
Consideration K60000
Ordinary Share capital K40000
Reserves K2880
Total K42880
Total x shareholding 75% K32160
Goodwill K27840

RESERVES
Parent Reserves K150000
Add: Post acquisition reserves of CCP:
K12000 - K2880 =K9120 *75% K6840
Reserves for WT Group K156840

96
SOLUTION TWO

a) Briefly explain the following terms:

(i) Agency Problem – is a conflict that arises when managers behave in a manner that
is not in the best interest of the shareholder.
(ii) Alternative investment market – is a second tier market for securities of smaller
growing companies that have not yet met the full listing requirements.
(iii)Goodwill - Goodwill is an intangible asset that arises when one company purchases
another for a premium value. The value of a company’s brand name, solid customer
base, good customer relations, good employee relations, and any patents or
proprietary technology represents goodwill.

Goodwill is considered an intangible asset because it is not a physical asset like

buildings or equipment.
(iv)Factoring – the outsourcing of the credit control department to a third party. The
debts of the company are effectively sold to a factor (normally owned by a bank).
The factor takes on the responsibility to collect the debt for a fee.

b) Investment, financing and dividend decisions are very closely interrelated. Investment
decisions cannot be taken without consideration of where and how the funds are to be
raised to finance the investment. They type of finance available will, in turn, depend to
some extent on the nature of the project – its size, duration, risk, capital asset backing
etc…

Dividends represent the payment or returns on the investment back to the shareholders,
the level and risk of which will depend upon the project itself, and equally how it is
financed.

Fixed debt finance, for example, can be cheap (particularly where a tax shield is applied)
but requires a fixed payment to be made out of project earnings, which can increase the
risk of the shareholders’ dividends.

c) Market Efficiency

Operational efficiency – efficiency is met when costs are low

Allocative efficiency – efficiency is met when funds are swiftly channeled to those
companies which would make their best use
Information processing efficiency – efficiency in this sector reflects the extent to
which information regarding the future prospects of a security is reflected in its current
price. There are three forms of information processing efficiency: 1. The Weak form –
concerned with past information. 2. The Semi-strong form – for all publicly available
information; and 3. The Strong form – information both private and publicly available.

Information processing efficiency is vital to the decision making process by financial

managers as it means the results of management decisions will be quickly and accurately
reflected in share prices. Without efficient information processes, market analyses would
be inaccurate and this could result in forgone opportunities the market could have offered,
or hasty, unprofitable decisions

97
SOLUTION THREE

MARKET VALUES

Ordinary shares 200,000* K12 = K2,400,000

Preference Shares 50,000 * K15 = K750,000
Loan Notes = PV of annuity of interest payments + PV of capital repayment
K500,000* 0.05=k25,000
K25000 * PVAF for 14 years at 8% per annum + K500000 *PVF
K25000 * 8.244 + K500000 *0.340
K206100 + K170000
K376100

COST
Cost of equity
Gordon’s growth approximation
g = br
b = 1-0.16
=0.84
r = 0.2
g = 0.84 * 0.2
=0.168
=16.8%

Ke = {[do (1 +g)]/Po} + g
[K0.5 (1+0.168)]/K12 + 0.168
0.2167
=21.67%

Cost of Loan notes

8% * (1 – 0.35)
8% *0.65
5.2%

Cost of preference shares

Kp = [D/Po] * 100
= [K2/K15] * 100
13.333%

WACC

SOURCE MARKET VALUE COST COST*MKT VALUE

K K
Equity 2400000 0.2167 520080
Preference shares 750000 0.1333 99975
Loan Notes 376100 0.5200 195572
3526100 815627
WACC = [815,627/3,526,100]*100
=23.13%

98
 SOLUTION FOUR
(a) COMPANY ABC
i.

SOLUTION
Year 1 2 3 4 5

Sales Income 67,392,000 87,340,032 108,385,620 128,647,836

Variable costs 22,048,000 28,605,957 36,241,998 43,494,048
Contribution 45,344,000 58,734,075 72,143,623 85,153,788
Fixed Costs 1,400,000 1,470,000 1,558,000 1,682,000
Cash Flow Before Tax 43,944,000 57,264,075 70,585,623 83,471,788
Corporate Tax - 13,183,200 17,179,222 21,175,687 25,041,536

After-tax Cash Flow 43,944,000 44,080,875 53,406,400 62,296,101 (25,041,536)

Terminal Value - - - 2,500,000 -

Projected Cash Flow 43,944,000 44,080,875 53,406,400 64,796,101 (25,041,536)

Discount at 24% 0.8065 0.6504 0.5245 0.4230 0.3411

Present Values 35,438,710 28,668,623 28,010,977 27,407,040 (8,541,862)

PV of Future Cash
Flows 110,983,488
ICO 50,000,000
NPV 60,983,488

WORKINGS
Year 1 2 3 4
Sales volume
(units/year) 1040000 1248000 1434000 1576000
Selling price (K/unit) 60 60 60 60
Inflated by 8% per
year 64.8 69.984 75.58272 81.6293376
Income per year 67392000 87340032 108385620.5 128647836.1

Year 1 2 3 4
Sales volume
(units/year) 1040000 1248000 1434000 1576000
Variable costs
(K/year) 20 20.4 21.22 21.86
Inflated by 6% per
year 21.2 22.92144 25.27335952 27.59774635

99
 Variable costs per
year 22048000 28605957.12 36241997.55 43494048.24

Year 1 2 3 4
Fixed costs 1,400,000 1,470,000 1,558,000 1,682,000

ii.

Year 1 2 3 4 5
Present Values 35,438,710 28,668,623 28,010,977 27,407,040 (8,541,862)
Cumulative Net Present
Value (14,561,290) 14,107,333 42,118,309 69,525,349 60,983,488
Pay Back Period Year Months
1.000 0.508
Discounted Payback
(years) 1.508

(b) The investment project is financially acceptable under the NPV decision rule because it
has a substantial positive NPV of K 60,983,488. The discounted payback period of 1·5
years is greater than the maximum target discounted payback period of two years and
equally so, from this perspective the investment project is financially acceptable. Both
indicators prove that the investment is viable and financially acceptable.

(c) Risk and Uncertainty

i. Payback Period
Estimates of cash flows several years ahead are quite likely to be inaccurate and unreliable.
It may be difficult to control capital projects over a long period of time. Risk may be limited
by selecting projects with short payback periods, in addition to positive NPVS.
ii. Adjusted Discounting rates
The discount rate we have assumed so far is the rate that reflects either the cost of
borrowing funds in the form of a loan rate or it may reflect the underlying return of the
business (i.e. the return required by the shareholder), or a mix of both.
If an individual investment or project is perceived to be more risky that existing investments,
the increased risk could be used as a reason to adjust the discount rate. The application of
increased discount rate is often successful in eliminating marginal projects. The addition to
the usual discount rate is called the Risk Premium.
iii. Sensitivity Analysis
Sensitivity analysis typically involves posing what if questions? For example, what if demand
fell by 10%, selling price was decreased by 5%, etc…
Alternatively, we may wish to discover the maximum possible change in one of the
parameters before the project is no longer viable. This maximum possible change in one of
the parameters before the project is no longer viable. This maximum possible change is
often expressed as a percentage:
Sensitivity margin = NPV / PV of flow under consideration

100
Advantages:

- Allows managers to make better judgments by providing them with information as to

the critical estimates
- Simple to calculate and understand

Disadvantages:

- Does not assess the chance of a variable changing

- Ignores the interrelationships between variables
- Does not provide a decision rule

END OF SOLUTIONS

101
 TAXATION PROGRAMME EXAMINATIONS

DIPLOMA LEVEL

D3: BUSINESS TAXATION

WEDNESDAY 13 JUNE 2018

_______________________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

_______________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2. This question paper consists of FOUR (4) questions of twenty (25) marks each. You
MUST attempt all the FOUR (4) questions.

3. Enter your student number and your National Registration Card Number on the front
page of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. DO NOT write in pencil (except for graphs and diagrams.

5. Cell phones are NOT allowed in the examination room.

6. The marks shown against the requirement (s) for each question should be taken as an
indication of the expected length and the required depth of the answer.

7. You must write ALL your answers in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A taxation table is provided on pages 2,3 and 4 of this paper

102
Taxation table for paper D3 – Business Taxation (June and December 2018
Examinations)
Income Tax
Standard personal income tax rates

Income band Taxable Rate

amount
K1 to K39,600 first K39,600 0%
K39,601 to 49,200 next K9,600 25%
K49,201 to K74,400 next K25,200 30%
Over K74,400 37.5%

Income from farming for individuals

K1 to K39,600 first K39,600 0%
Over K39,600 10%

Company Income Tax rates

On income from manufacturing and other 35%

On income from farming 10%
On income of Banks and other Financial Institutions 35%
On income from mineral processing 30%
On income from mining operations 30%

Mineral Royalty

Mineral Royalty on Copper

Range of Norm Price Mineral Royalty Rate

Less than US$4,500 4% of norm value
From US$4,500 to less than US$6,000 5% of norm value
From US$6,000 and above 6% of norm value

Mineral Royalty on other minerals

Type of mineral Mineral Royalty Rate

Base Metals (Other than Copper) 5% on norm value
Energy and Industrial Minerals 5% on gross value
Gemstones 6% on gross value
Precious Metals 6% on norm value

Capital Allowances
Implements, plant and machinery and commercial vehicles:
Wear and Tear Allowance – Plant used normally 25%
Used in Manufacturing and Leasing 50%
Used in farming and agro-processing 100%

103
 Non- commercial
vehicles
Wear and Tear Allowance 20%

Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%
Low Cost Housing (Cost up to K20,000)
Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%
Presumptive Taxes
Turnover Tax

Monthly turnover Turnover Tax per month

K1to K4,200 3% of monthly turnover above K3,000
K4,200.01to K8,300 K225 per month+3% of monthly turnover above K4,200
K8,300.01 to K12,500 K400 per month+3% of monthly turnover above K8,300
K12,500.01 to K16,500 K575 per month+3% of monthly turnover above K12,500
K16,500.01 to K20,800 K800 per month+3% of monthly turnover above K16,500
Above K20,800 K1,025 per month+3% monthly of turnover above K20,800

Annual turnover Turnover Tax per annum

K1to K50,400 3% of annual turnover above K36,000
K50,400.01to K99,600 K2,700 per annum+3% of annual turnover above K50,400
K99,600.01 to K150,000 K4,800 per annum +3% of annual turnover above K99,600
K150,000.01 to K198,000 K6,900 per annum+3% of annual turnover above K150,000
K198,000.01 to K249,600 K9,600 per annum+3% of annual turnover above K198,000
Above K249,600 K12,300 per annum +3% of annual of turnover above
K249,600

Presumptive Tax for Transporters

Seating capacity Tax per annum Tax per day

K K
From 64 passengers and over 10,800 29.60
From 50 to 63 passengers 9,000 24.70
From 36 to 49 passengers 7,200 19.70
From 22 to 35 passengers 5,400 14.80
From 18 to 21 passengers 3,600 10
From 12 to 17 passengers 1,800 5.0
Less than 12 passengers and taxis 900 2.50

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 Property Transfer Tax

Rate of Tax on Realised Value of Land, Land and Buildings and shares 5%
Rate of Tax on Realised Value on a transfer or sale of a mining right 10%
Rate of Tax on Realised Value on a transfer of Intellectual Property 5%

Value Added Tax

Registration threshold K800,000
Standard Value Added Tax Rate (on VAT exclusive turnover) 16%
Customs and Excise
Customs and Excise duties on used motor vehicles
Aged 2 to 5 years Aged over 5
years
Motor vehicles for the transport of ten or Customs Excise Customs Excise
more persons, including the driver duty duty duty duty
K K K K
Sitting capacity of 10 but not exceeding 14 17,778 22,223 8,889 11,112
persons including the driver
Sitting capacity exceeding 14 but not exceeding 38,924 0 13,840 0
32 persons
Sitting capacity of 33 but not exceeding 44 86,497 0 19,462 0
persons
Sitting capacity exceeding 44 persons 108,121 0 43,248 0

Aged 2 to 5 years Aged over 5 years

Motor cars and other motor vehicles Customs Excise Customs Excise
principally designed for the transport of duty duty duty duty
persons including station wagons and
racing cars
K K K K
Sedans
cylinder capacity not exceeding 1000 cc 12,490 10,824 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 16,058 13,917 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 16,545 21,508 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 10,528 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 22,561 29,329 12,032 15,642

Hatchbacks
cylinder capacity not exceeding 1000 cc 10,705 9,278 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 14,274 12,371 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 15,041 19,553 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 16,545 21,508 10,523 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 19,553 25,419 12,032 15,642

105
Station wagons
cylinder capacity not exceeding 2500 cc 16,545 21,508 9,024 11,731
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc but not 22,561 29,329 18,049 23,463
exceeding 2500 cc

SUVs
Cylinder capacity not exceeding 2500 cc 21,057 27,374 9,024 11,732
Cylinder capacity exceeding 2500 cc but not 24,065 31,284 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 28,577 37,150 18,049 23,463
Aged 2 to 5 years Aged over 5
years
Motor vehicles for the transport of goods
–with compression-ignitioninternal Customs Excise Customs Excise
combustion piston engine (diesel or semi- duty duty duty duty
diesel):
K K K K
Single cab
GVW exceeding 1.0 tonne but not exceeding 1.5 21,926 9,501 8,770 3,801
tonnes
GVW exceeding 1.5 tonnesbut not exceeding 3.0 26,311 11,402 15,348 6,651
tonnes
GVW exceeding 3.0 tonnesbut not exceeding 5.0 30,697 13,302 17,541 7,601
tonnes
Double cabs GVW exceeding 3 tonnes but not 30,274 0 24,119 10,452
exceeding 5 tonnes
Double cabs GVW exceeding 3.0 tonnes but not 30,697 13,302 24,119 10,452
exceeding 5.0 tonnes, with spark ignition
internal combustion piston engine

Panel Vans
GVW exceeding 1.0 tonne but not exceeding 1.5 15,348 6,651 8,770 3,801
tonnes
GVW exceeding 1.5 tonnesbut not exceeding 3.0 17,541 7,601 15,348 6,651
tonnes
GVW exceeding 3.0 tonnesbut not exceeding 5.0 21,926 9,501 17,541 7,601
tonnes

Trucks
GVW up to 2 tonnes 21,926 9,501 10,963 4,751
GVW exceeding 2.0 tonnes but not exceeding 28,504 12,352 13,156 5,701
5.0 tonnes
GVW exceeding 5.0 tonnesbut not exceeding 24,724 18,955 10,817 8,293
10.0 tonnes
GVW exceeding 10.0 tonnesbut not exceeding 30,905 23,694 11,744 9,004
20.0 tonnes
GVW exceeding 20 tonnes 51,898 0 19,461 0
GVW exceeding 20 tonnes, with spark 37,086 28,432 13,907 10,662
ignition internal combustion piston engine

106
 Customs and excise duty on new vehicles

1 Motor cars and other motor vehicles (including station wagons) principally designed for
the transport of less than ten persons, including the driver:
Customs duty: 30%
Excise duty:
Cylinder capacity of 1500 cc and less 20%
Cylinder capacity of more than 1500 cc 30%
2 Pick-ups and trucks/lorries with gross weight not exceeding 20 tonnes:
Customs duty 15%
Excise duty 10%
3 Buses/coaches for the transport of more than ten persons
Customs duty: 15%
Excise duty:
Seating capacity of 16 persons and less 25%
Seating capacity of 16 persons and more 0%
4 Trucks/lorries with gross weight exceeding 20 tonnes
Customs duty: 15%
Excise duty: 0%
The minimum amount of customs duty on motor vehicles is K6,000.
Import VAT is added to the sum of VDP, customs duty and excise duty. It is determined at
the standard rate of 16%

107
Attempt all FOUR (4) questions

QUESTION ONE
Mansa Copper Mines (MCM) plc is an 80% owned subsidiary of AK mineralsa multinational
mining company. MCM plc is engaged in the mining of copper in the Luapula province of
Zambia. The statement of profit or loss for the year ended 31 December 2018 is provided
below:
K
Revenue (note 1) 22,600,400
Cost of sales (note 2) (11,700,000)
Gross profit 10,900,400
Operating expenses (note 3) (3,500,200)
Profit from operations 7,400,200
Finance costs (note 4) (2,100,000)
Other income (note 5) 500,000
Profit before tax 5,800,200
Income tax expense (note 6) (2,320,080)
Profit for the year 3,480,120

The following additional information is available:

NOTE:
1. The figure for revenue represents the gross sales of copper. The average copper price
in the tax year 2018 was $4,700 per metric tonne as quoted by the London Metal
Exchange (LME). Mineral royalty tax paid during the year has not been accounted for
in the statement of profit or loss.

2. Cost of sales includes depreciation charge on tangible non-current assets amounting

to K1,960,250 and amortization expenses on intangible assets amounting to
K1,050,400.

3. Operating expenses include construction of community school at a cost of K1,060,000,

construction of mine road within the mine site amounting to K870,000, donation to
political party amounting to K130,700 and audit fees amounting to K300,000. The
remainder consists of revenue expenses which are allowable for tax purposes.

4. Finance costs consist of interest on loan. The loan was obtained from another mining
company which is not related to MCM plc. The debt to equity ratio of MCM plc is 5: 1.

5. Included in other income is profit on sale of drilling plant amounting to K280,000 and
royalties amounting to K220,000 (gross). Withholding tax has already been deducted
at source.

6. The income tax expense in the statement of profit or loss represents the provisional
income tax paid by the company during the tax year 2018.

7. The income tax values of non-current assets as at 1 January 2018 were as follows:
Drilling plant K150,000
Haulage vehicles K1,250,000

108
 The drilling plant was acquired in 2015 at a cost of K600,000. This plant was sold in
the tax year 2018 for proceeds of K400,000 making a profit of K280,000 (see note 5
above). The haulage vehicles were acquired in the tax year 2016 at a cost of
K2,500,000.

The company acquired the following assets during the tax year 2018:
Range Rover car (3200 cc) K650,000
Toyota Prado car (3100 cc) K400,000
Smelter equipment K1,100,000

The Range Rover and the Toyota Prado cars are used by the managing director and
chief finance officer respectively on a personal-to-holder basis.

8. The company has employed ten (10) differently abled persons on full time basis who
are registered with Zambia Centre for Persons Living with Disabilities. The company
has accommodated them in company owned houses for which they pay no rent. The
total emoluments paid by the company to these disabled employees amounted to
K500,000 included and is in the operating expenses.

Required:

(a) Calculate the adjusted mining profit for the tax year 2018. (19 marks)
(b) Calculate the total income tax payable by the company for the tax year 2018.
(6 marks)
[Total: 25 Marks]

QUESTION TWO

For the purposes of this question, assume that today’s date is 31 December 2018
and that the tax rates for the tax year 2018 apply throughout.

Gold Bank Plc has been in business for many years, and has always prepared accounts for
years ending on 31 March. On 1 October 2017, Diamond Bank Plc international, a multinational
bank which is resident in foreign country acquired 100% of the equity of Gold Bank Plc. As a
result of its acquisition, Gold bank changed its accounting period to align its accounting period
with that of the parent. Therefore after preparing the accounts for the year ended 31 March
2017, the company prepared the next accounts on 30 September 2018 and will prepare
accounts annually thereafter.

Gold Bank Plc made a final taxable profit of K1, 220,000 for the year ended 31 March 2017.

The statement of profit or loss of Gold Bank Plc for the period from 1 April 2017 to 30
September 2018 shows a net profit as per accounts of K4,937,300 which was arrived at after
accounting for the following items:

(1) Irrecoverable loans losses written of amounting to K950,000

(2) An increase in general provision against loan losses of K460,000

(3) Increase in specific provision against loan losses of K80,000

109
(4) Loan losses previously written off recovered during the period of K350,000

(5) Depreciation of assets of K145,000

(6) Profit on disposal of office furniture of K12,400

(7) Trading gains of K160,000 out of which K50,000 were unrealised trading gains and the
remaining K110,000 were realised trading gains.

(8) Rental income of K250,000 (gross)

(9) General allowable business expenses of K1,450,000

Other information

Gold Bank plc had the following transactions in capital assets during the period:

(1) On 10 April 2017, Gold Bank Plc completed the construction of new central administration
offices at a cost of K420,000 (VAT exclusive) which were brought into use immediately.

(2) On 16 June 2017, Gold Bank Plc acquired office equipment at a cost of K139,200 inclusive
of Value Added Tax.

(3) On 1 July 2018, Gold Bank Plc purchased a motor car to be used as pool car, with a
cylinder capacity of 2,000cc at a VAT inclusive cost of K232,000.

(4) On 1 September 2018, the company acquired a motor van with cylinder capacity of 3000cc,
at a VAT inclusive cost of K174,000, to be used wholly and exclusively for business
purposes.

(5) The only assets qualifying for capital allowances held by the Gold Bank Plc on 1 April 2017
was office furniture which was acquired at a VAT inclusive cost of K104,400 in November
2016. Following its acquisition by the Diamond Bank Plc, the office furniture became
surplus to the requirement of the Gold Bank Plc and was therefore sold on 5 November
2017 for VAT inclusive proceeds of K81,200.

Required:

(a) In respect of the period from 1 April 2017 to 30 September 2018:

(i) Compute the tax adjusted profits before capital allowances. (3 marks)

(ii) Determine the tax years in which the profits generated during the period will
be assessed to income tax and explain how the tax adjusted profits before
capital allowances you have computed in (a) (i) above, will be dealt with in
computing the final taxable profit for each relevant tax year. (6 marks)

(iii) Compute the final taxable profits after capital allowances for each relevant tax
year. (13 marks)

110
(b) Explain what is meant by overlap profits and calculate the amount of overlap profits
arising on the change of the accounting date in (a) above. (3 marks)

[Total: 25 Marks]

QUESTION THREE

(a) Acquisition of non-current assets can be financed by outright purchase, hire purchase and
leasing. Each of the options has taxation implications.

Required:

Explain the income tax and value added tax implications of financing the purchase of non-
current assets using the following options:

(i) Hire purchase (3 marks)

(ii) Outright purchase (2 marks)

(b) Waterproof Ltd is a VAT registered Zambian resident company which manufactures plastic
water tanks. The directors of the company intends to buy manufacturing equipment on 1
January 2018 at a cost of K458,200 (VAT inclusive). The directors now wish to know the
taxation implications of the intended following finance options:

(i) Obtain a loan of K458,200 at an interest rate of 22% per annum from a
Zambian bank. The loan will then be used to purchase the equipment
outright.
(ii) Purchase the equipment under a finance lease whose terms requires
Waterproof Ltd to pay a deposit of K100,000 followed by five K82,386 annual
lease rentals whose implicit interest is 15% per annum.
(iii) Purchase the equipment under an operating lease. The terms of the lease
are that Waterproof Ltd will be required to pay annual lease rentals of
K69,600 (VAT inclusive) for five years.
(iv) Issue of 2000 K1 ordinary shares for K229.1 each. The proceeds of the issue
will then be used to purchase the equipment outright. The share issue costs
are expected to be K15,000.

Required:
Advise the directors of Waterproof Ltd, using appropriate calculations, of the income
tax and value added tax implications of each of the above options.
(13 marks)

(c) Jojo, a sole trader, imported a 1900 cc Toyota Allion car for exclusive use in his business
on 23 January 2018. The car was manufactured in Japan in January 2016. The cost of the
car was $2,760 (free on board). Jojo incurred insurance costs of $500, transportation
costs of $800 and other incidental costs of $250 up to the Nakonde border post. Other
incidental costs incurred in transporting the vehicle from Nakonde to Monze amounted to
$1,500.

111
 At the date of entry into Zambia, the exchange rate provided by the Bank of Zambia and
approved by the Commissioner General was K9.70 per US$1.

Required:
Calculate the total import taxes paid by Jojo on the importation of the car.
(7 marks)
[Total: 25 Marks]

QUESTION FOUR

Nkonde has been a sole trader for many years now running the famous Nkonde Farms in
Chipata. He prepares accounts to 31 December each year and his annual turnover has always
exceeded K800,000. Nkonde has always involved his son Chikonde, in running the business,
as an employee, paying him an annual salary of K144,000. Nkonde’s own annual salary is
K360,000.

On 1 July 2018, Nkonde decided to start running the farming business as a partnership after
taking his son Chikonde, into the business as a partner. Nkonde will continue preparing
accounts to 31 December each year. The partnership agreement provided for annual
partnership salaries of K420,000 for Nkonde and K180,000 for Chikonde.The balance of profits
or losses are to be shared between Nkonde and Chikonde in the ratio 7:3 respectively.

The summarised statement of profit or loss for the year ended 31 December 2018 is presented
below:

Note K K
Gross profit 1,626,080
Other income:
Profit on sale of tractor 6,500
Discount received 200
6,700
1,632,780
Expenses
Entertainment expenses (1) 17,000
Professional fees (2) 84,000
Salaries and wages (3) 970,400
General expenses (4) 65,100
(1,136,500)
Net profit 496,280

Note 1: Entertainment expenses:

K
Entertaining customers 3,100
Birthday party for Nkonde’s daughter 4,900
Gifts of Nkonde Farm branded milk, to customers worth K60 each 6,000
Gifts of vegetables worth K30 per customer 3,000
17,000

112
Note 2: Professional fees
K
Accountancy services 18,600
Subscriptions to Farmer’s Co-operative Society 5,400
Alimony payments to his former wife 24,000
Legal fees in connection with defending title to farm land 14,300
Legal fees in connection with the drafting the partnership agreement 8,200
Fees in connection with acquisition of new lease of farm land 13,500
84,000
Note 3: Salaries and wages
K
Nkonde’s salary 392,000
Chikonde’s salary 162,000
Farm workers salaries and wages 416,400
970,400

Other employees in the business are generally entitled to a similar level of remuneration as
that of Chikonde.

Note 4: General expenses

K
Discounts allowed 1,120
Trade debts written off 6,700
Insurance 8,300
Depreciation 21,200
Motor vehicle running expenses 11,400
Miscellaneous allowable expenses 16,380
65,100

The motor vehicle running expenses relate to a motor car which is partly used by Nkonde for
private purposes. It has been agreed with the Commissioner General that the business use of
the vehicle is 20%.

Note 5: Drawings

During the year Nkonde withdrew farm produce with a cost of K10,500 from the business for
family use without making any entries in the statement of profit or loss shown above. He
makes a mark-up of 20% on all farm produce.

Note 6: Implements, plant and equipment

At 1 January 2018, implements, plant and machinery qualifying for capital allowances
included the following:

Asset Income Tax Value at 1 January 2018 Original cost

K K
Delivery Truck 115,000 230,000
Motor Car 54,000 90,000

113
The following expenditure was incurred during the year:
K
Dwelling houses for farm employees (each unit costing K45,000) 450,000
Farm implements 26,000
Tractor 45,000
Development expenditure on a new banana plantation 22,000

Required:

(a) Calculate the capital allowances for the year 2018 (6 marks)
(a) Calculate the tax adjusted business profit for the year 2018 (7 marks)
(c) Calculate the amount of income tax payable by Nkonde and Chikonde for the tax
year 2018. (12 marks)
[Total: 25 Marks]

END OF PAPER

114
D3: BUSINESS TAXATION SOLUTIONS

SOLUTION ONE

(a) Mansa Copper Mines plc

Adjusted mining profit for the tax year 2018
K K
Profit before tax 5,800,200
Add:
Depreciation 1,960,250
Amortisation 1,050,400
Construction of community school 1,060,000
Construction of mine road 870,000
Donation to political party 130,700
Finance costs: K2,100,000 x 2/5 840,000
Personal-to-holder cars:
Range rover car 40,000
Toyota prado car 40,000
Free residential accommodation:
(K500,000 x30%) 150,000
6,141,350
11,941,550
Less:
Profit on disposal 280,000
Royalties 220,000
Mineral royalty tax (K22,600,400 x 5%) 1,130,020
Capital allowances (w1) 1,342,500
Differently abled persons (K1,000 x 10) 10,000
(2,982,520)
Adjusted mining profit 8,959,030

Workings
Capital allowances
K
Drilling plant : K150,000 – K400,000) (250,000)
(balancing charge)
Haulage vehicles: K2,500,000 x 25% 625,000
Range Rover car: K650,000 x 20% 130,000
Toyota Prado car: K400,000 x 20% 80,000
Smelter equipment: K1,100,000 x 25% 275,000
Community school: K1,060,000 x 25% 265,000
Mine road: K870,000 x 25% 217,500
Total capital allowances 1,342,500

(b) Mansa Copper Mines Plc

Income tax payable for the tax year 2018
K
Adjusted mining profit 8,959,030
Investment income
Royalties 220,000
Total taxable income 9,179,030

115
 Income tax
Mining profits: K8,959,030 x 30% 2,687,709
Non-mining income: K220,000 x 35% 77,000
Income tax liability 2,764709
Less:
Provisional income tax paid (2,320,080)
WHT-Royalties: K220,000 x 15% (33,000)
411,629
Mineral royalty tax: K22,600,400 x 5%) 1,130,020
Total tax payable 1,541,649

SOLUTION TWO

(a) (i) COMPUTATION OF TAXABLE PROFITS BEFORE CAPITAL ALLOWANCES

FOR 2018
K K
Profit for the period 4,937,300
Add
Increase in general provision for loan
losses 460,000
Depreciation 145,000
605,000
5,542,300
Less:
Unrealised trading gains 50,000
Profit on disposal of office furniture 12,400
Rental income 250,000
(312,400)
Taxable profit before capital allowances 5,229,900

(ii) Gold Bank Plc has always prepared its accounts to a date falling between
1 January and 31 March, inclusive in the year. So the preceding year basis
has always applied. And following the change of accounting date to
30 September, the basis of assessment changes to the current year basis.

For the tax year 2016, the basis period is the year ended 31 March 2017 and
for the tax year 2018, the basis period is the 12 months ended 30 September
2017 which is the new accounting date. But this accounting date does not
exist and therefore the profits adjusted for tax purposes but before capital
allowances for 18 months to 30 September 2018 shall be expanded to equal
profits for 24 months. The expanded profits will then be shared between the
two tax years, 2017 and 2018.

This will be done as follows:

Expanded taxable profits = K5,229,900 × 24/18

= K6,973,200

116
 Profit chargeable for tax year 2017 = K6,973,200 × 12/24
= K3,486,600

Profit chargeable for tax year 2018 = K6,973,200× 12/24

= K3,486,600

(iii) The final assessments for all the relevant tax years are as follows:

Tax Basis period Taxable Profit Capital Final Taxable

year before capital allowance profit
allowances
K K K
2016 y/e 31 March 2016 1,220,000 - 1,220,000
2017 y/e 30 September 2017 3,486,600 (60,900) 3,425,700
2018 y/e 30 September 2018 3,486,600 (97,300) 3,389,300

WORKINGS

(1) COMPUTATION OF CAPITAL ALLOWANCES

Year ended 30 Sept 2017 K K
Office furniture
Wear and tear allowance
(K104,400 x25/29) x 25% 22,500
Administration buildings
Wear and tear allowance
(K420,000 x 2%) 8,400
Office equipment
Wear and tear allowance
(K139,200 x 25/29 ) x 25%) 30,000
Total allowances 60,900

Year ended 30 September 2018

Office furniture
ITV B/f
[K104,400 x25/29 = K90,000 - ( 90,000 x 25% 45,000
x 2)]
Proceed (K81,200 x 25/29) 70,000
Balancing charge (25,000)
Administration buildings
Wear and tear allowance
(K420,000 x 2%) 8,400
Office equipment
Wear and tear allowance
(K139,200 x 25/29 ) x 25%) 30,000
Pool Car
Wear and tear allowance

117
 (K232,000 x 20%) 46,400
Motor Van
Wear and tear allowance
(K174,000 x25/29) x 25% 37,500
97,300

(b) Overlap profits are profits which are assessed in more than one tax year.

There are overlap profits arising as profits for the period from 1 April 2017 to 30
September 2018 have been expanded to 24 months when they were only for 18
months. The amount of overlap profit is:

Overlap profit for period = K6,973,200 – K5,229,900

= K1,743,300

SOLUTION THREE

(a) The following are the taxation implications:

(i) Hire purchase
1. Hire purchase interest (difference between the cash price of the asset and
total repayments) is an allowable deduction when computing the taxable
business profits.
2. Capital allowances are claimable on the cash price of the qualifying asset.
3. Value added tax on the cash price of the asset is claimable provided the
VAT is one which is recoverable.

(ii) Outright purchase

1. Capital allowances are claimable on the cost of the qualifying asset
2. Value added tax is claimable on the cost of the asset provided the VAT is
one which is recoverable.

(b) Taxation implications of the financing options

(i) Loan
1. Interest cost of K100,804 (K458,200 x 22%) per annum will not be an
allowable expense when computing the taxable business profit of the
company because the loan was used to finance the purchase of a non-
current asset.
2. Capital allowances at a rate of 50% will be claimable on the VAT exclusive
cost of the equipment. i.e K458,200 x 25/29 x 50% = K197,500.
3. The input VAT incurred on the purchase of the equipment will be
claimable. i.e K458,200 x 4/29 = K63,200.

(ii) Finance lease

1. Finance lease interest will be an allowable expense when computing the
taxable business profits of the company.
2. Capital allowances on the VAT exclusive cost of the asset will be claimable
at 50%. i.e K458,200 x 25/29 x 50% = K197,500.

118
 3. The input VAT incurred on the purchase of the equipment will be
claimable. i.e K458,200 x 4/29 = K63,200.

(iii) Operating lease

1. The operating lease rentals exclusive of VAT will be allowed when
computing the taxable business profits of the company i.e K69,600 x
25/29 = K60,000.
2. No capital allowances will be claimable by the company on the leased
equipment.
3. The input VAT on operating lease rentals will be claimed by the company.
i.e K69,600 x 4/29 = K9,600.

(iv) Issue of ordinary shares

1. The share issue costs will not be allowed when computing the taxable
business profits of the company.
2. Dividends payable on the shares are not allowable expenses when
computing the taxable business profits.
3. Capital allowances will be claimed on the VAT exclusive cost of the asset
at a rate of 50% i.e K458,200 x 25/29 x 50% = K197,500.
4. The input VAT incurred on the purchase of the equipment will be claimed.
i.e K458,200 x 4/29 = K63,200.

(c) Jojo
Value for duty purposes $
Cost 2,760
Insurance 500
Freight charges 800
Other incidental costs 250
4,310
Exchange rate K9.70
VDP in Zambian kwacha 41,807

Value of the vehicle Import taxes

Value for customs duty 41,807
Customs duty - Fixed 16,545 16,545
58,352
Excise duty - Fixed 21,508 21,508
79,860
Import VAT @16% of k79,860 12,778 12,778
92,638
Total import taxes 50,831

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SOLUTION FOUR

a) COMPUTATION OF CAPITAL ALLOWANCES

Year ended 30 Sept 2018 K K

Delivery truck
Wear and tear allowance
(K230,000 x 25%) 57,500
Motor car
Wear and tear allowance
(K90,000 x 20%) x 25% 4,500
Dwelling Houses
Wear and tear allowance
(K20,000 x 10) 200,000
Farm implements
Wear and tear allowance
(K26,000 x 100%) 26,000
Banana plantation
Wear and tear allowance
(K22,000 x 10%) 2,200
Tractor
Wear and tear allowance
(K45,000 X 100%) 45,000
335,200
b) COMPUTATION OF TAXABLE BUSINESS PROFIT

K K
Net profit as per accounts 496,280
Add
Entertaining farm workers 3,100
Birthday party for Nkonde’s daughter 4,900
Gifts of vegetables 3,000
Alimony to former wife 24,000
Legal fees in connection with new lease 13,500
Nkonde’s salary 392,000
Chikonde’s Salary 162,000
Depreciation 21,200
Motor vehicle running expenses
(K11,400 x 80%) 9,120
Drawings (K10,500 x 120/100) 12,600
645,420
1,141,700
Less: Capital allowances (W) 335,200
Profit on sale of tractor 6,500
(341,700)
800,000

120
c) DIVISION OF PROFITS
Total Nkonde Chikonde
1.01.2018- 30.06.2018 K K K
Tax adjusted profit (K800,000 x 6/12) 400,000 400,000 -
Less
Chikonde’s salary (K144,000 x 6 /12) (72,000) (72,000) -
Taxable Profit 328,000 328,000 -

1.07.2018 -31.12.2018
Salaries (K420,000/K180,000 x 6/12) 300,000 210,000 90,000
Balance 7:3 100,000 70,000 30,000
Profit (K800,000 x 6/12) 400,000 280,000 120,000

Total profits allocation 728,000 608,000 120,000

NKONDE’S
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2018
K
Taxable Business profits 608,000

Income Tax
K39,600 x 0% 0
K568,400 x 10% 56,840
Income tax payable 56,840

CHIKONDE’S
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2018
Total Non farming Farming
income income
K K K
Employment income 72,000 72,000 -
Farming profits 120,000 - 120,000
Taxable income 192,000 72,000 120,000

Income Tax on non-farming income

K39,600 x 0% 0
K9,600 x 25% 2,400
K22,800 x 30% 6,840
9,240
Income Tax on farming profits
K120,000 x10% 12,000
21,240

END OF SOLUTIONS

121
 TAXATION PROGRAMME EXAMINATIONS
_______________________
DIPLOMA LEVEL
_______________________

D4 – PERSONAL TAXATION
_______________________
TUESDAY 12 JUNE 2018
___________________________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading. Use it to study the examination paper carefully
so that you understand what to do in each question.

2. This question paper consists of FOUR (4) questions of twenty Five (25) marks each.
You MUST attempt all the FOUR (4) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A Taxation table is provided on pages 2 and 3

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 Taxation Table

Income Tax

Standard personal income tax rates

Income band Taxable Rate

amount
K1 to K39,600 first K39,600 0%
K39,601 to 49,200 next K9,600 25%
K49,201 to K74,400 next K25,200 30%
Over K74,400 37.5%

Income from farming for individuals

K1 to K39,600 first K39,600 0%
Over K39,600 10%
Capital Allowances

Implements, plant and machinery and commercial vehicles:

Wear and Tear Allowance – Plant used normally 25%
Used in Manufacturing and Leasing 50%
Used in farming and agro-processing 100%
Non- commercial
vehicles
Wear and Tear Allowance 20%

Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%
Low Cost Housing (Cost up to K20,000)
Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%

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 Presumptive Taxes
Turnover Tax

Monthly turnover Turnover Tax per month

K1to K4,200 3% of monthly turnover above K3,000
K4,200.01to K8,300 K225 per month+3% of monthly turnover above K4,200
K8,300.01 to K12,500 K400 per month+3% of monthly turnover above K8,300
K12,500.01 to K16,500 K575 per month+3% of monthly turnover above K12,500
K16,500.01 to K20,800 K800 per month+3% of monthly turnover above K16,500
Above K20,800 K1,025 per month+3% monthly of turnover above K20,800

Turnover Tax per annum

Annual turnover
K1to K50,400 3% of annual turnover above K36,000
K50,400.01to K99,600 K2,700 per annum+3% of annual turnover above K50,400
K99,600.01 to K150,000 K4,800 per annum +3% of annual turnover above K99,600
K150,000.01 to K6,900 per annum+3% of annual turnover above K150,000
K198,000
K198,000.01 to K9,600 per annum+3% of annual turnover above K198,000
K249,600
Above K249,600 K12,300 per annum +3% of annual of turnover above
K249,600

Presumptive Tax for Transporters

Seating capacity Tax per annum Tax per day

K K
Less than 12 passengers and taxis 900 2.40
From 12 to 17 passengers 1,800 4.95
From 18 to 21 passengers 3,600 9.90
From 22 to 35 passengers 5,400 15.00
From 36 to 49 passengers 7,200 19.50
From 50 to 63 passengers 9,000 24.60
From 64 passengers and over 10,800 29.55

Property Transfer Tax

Rate of Tax on Realised Value of Land, Land and Buildings and shares 5%
Rate of Tax on Realised Value on a transfer of Intellectual Property 5%
Rate of Tax on Realised Value on a transfer or sale of a mining right 10%
Value Added Tax

Registration threshold K800,000

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

124
Attempt all FOUR (4) questions

QUESTION ONE
Kabunda has been employed at Eden Ltd, a private limited company on a three year renewable
fixed term contract which commenced on 1 January 2017 at an annual salary of K330,000.
On the day he joined the company he was granted an option to purchase 150,000 ordinary
shares of the company (each with a nominal value of K1) for an exercise price of K4.50 per
share, being the market price per share on that date, under an unapproved share option
scheme. The grant was on condition that the options where only exercisable once he had
been employed for one year, but he was required to hold the shares for at least 6 months
before he sold them.
In the tax year 2018, Kabunda was entitled to a housing allowance of 15% of his basic salary
and a lunch allowance of K2,000 per month.
Other benefits provided to him during the tax year 2018 included the following:
1. Shopping vouchers worth K3,500.
2. A 2200cc Toyota Corolla car on a personal to holder basis, which was acquired by the
company two years ago at a cost of K220,000. The company paid him an annual fuel
allowance of K6,000. He had private use of the car of 60%.
3. Payment of his annual golf club subscriptions of K1,500.
4. Payment of school fees for his school going children totalling K8,000.
On 1 January 2018, Kabunda exercised the 150,000 options when the share price on
that date was determined to be K7.00 per share. On 1 August 2018, he sold the 50,000
shares out of the 150,000 shares for K8.50 per share being the market value of each
share on that date.
Kabunda incurred the following expenses during the tax year 2018:
1. Donation of K1,000 to a Political Party.
2. Donations of K5,500 to approved public benefit organisations
3. House rentals of K3,000 per month.
4. Pension contributions to the National Pension Scheme Authority of K995 per month.
5. Pension contributions to a Private pension scheme of K1,500 per month.
6. Tax paid and deducted from his emoluments by his employer from his employment
earnings the was K155,400 for the tax year 2018.
Other income
Kabunda holds an investment in ordinary shares in a foreign company that is resident in a
country called Bascovia. He received dividends equivalent to K9,600 during the tax year 2018
from the shares. The amount of K9,600 was net of Bascovian withholding tax at the rate of
36%. Kabunda also owns investment property that has been let out to Bascovian tenants over
the last five years. He has always received monthly rentals equivalent to K10,800 in arrears

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net of Bascovian withholding tax deducted at the rate of 10%. When computing the Zambian
income tax payable, credit is available for any foreign tax paid in Bascovia.
Required:
(a) Explain the taxation implications for Kabunda of:

(i) The exercise of the 150,000 share options on 1 January 2018. (2 marks)

(ii) The sale of 50,000 shares in Eden Ltd on 1 August 2018. (2 marks)

(b) Explain how your answer in (a) above would have been different if the share option
scheme was approved for tax purposes. (3 marks)

(c) Explain the criteria that must be met for a share option scheme to be approved for tax
purposes in Zambia. (7 marks)

(d) Compute the income tax payable by Kabunda for the tax year 2018. (11 marks)
[Total: 25 marks]

QUESTION TWO

For the purpose of this question, you should assume that today’s date is 15
November 2018 and the earnings threshold for the purposes of NAPSA
contributions should be taken to be K238,800 per annum.

Mervin motors Ltd is a private company engaged in the assembly of motor cycles and supply
of spare parts for a variety of motor vehicles. The company was set up seven years ago by
two entrepreneurs, Mwanza and Katebe. The share capital of the company is owned equally
by the two entrepreneurs. Mwanza and Katebe have always managed their business jointly
as directors and drawn annual directors emoluments amounting to K200,000 each from the
profits of the company. NAPSA contributions have always been contributed by Mwanza and
Katebe at the rate of 5% of their earnings. The company has also always contributed 5% of
each individual’s earnings as employer’s NAPSA contributions.

The company has experienced success over the years. In the tax year 2018, the company is
expected to report a final taxable profit of K1,865,200. In addition to their emoluments,
Mwanza and Katebe would like to draw a further amount of K180,000 each from the business.
The additional K180,000 that would be drawn by each director would take the form of either
a cash bonus payment or cash dividends. The company’s adjusted business profit of
K1,865,200 is after directors emoluments but before the additional K180,000 to be drawn by
each director.

Mwanza and Katebe would like to know what the taxation implications of the additional
K180,000 would be for them as individuals and for the company.

126
Required:

(a) Ignoring the additional K180,000, calculate the income tax payable by Mwanza and
Katebe for the tax year 2018. (5 marks)

(b) Explain the income tax and NAPSA implications for Mwanza and Katebe for the tax
year 2018, if they draw K180,000 each as a:

(i) Cash bonus payment. (7 marks)

(ii) Cash dividend payment. (3 marks)

Your explanation should be supported by a computation of additional income tax

payable or tax savings and NAPSA contributions where appropriate.

(c) Explain the income tax and NAPSA implications for the company for the tax year 2018
if Mwanza and Katebe each draw K180,000 as a:

(i) Cash bonus payment. (8 marks)

(ii) Cash dividend payment. (2 marks)

Your explanation should be supported by a computation of additional company income tax

payable or tax savings and NAPSA contributions as appropriate.

[Total: 25 marks]

QUESTION THREE

Assume today’s date is 18 December 2017 and the earnings threshold for the
purposes of NAPSA contributions should be taken to be K238,800 per annum.

ABC plc is a farming company engaged in poultry and growing of crops mainly used to
manufacture stock feed. As part of its strategic plan, the company wishes to diversify its
operations and, therefore, intends to venture into aquaculture (fish farming). The company
would need a consultant to guide them on the development of fish ponds and dams. The
company, therefore, wishes to hire the services of Angelina Hamoonga, a fish farming
consultant on a one and half year (18 months) contract to supervise the development of fish
ponds and dams, either as an employee of ABC plc or on a self-employed basis. Regardless
of whether Angelina is engaged as an employee of ABC plc or as a self-employed contractor,
the engagement will commence on 1 January 2018 and end on 30 June 2019.

If Angelina is employed, the following will apply:

(1) Her monthly basic salary will be K74,000.

127
(2) She will drive her own motor car which she will acquire on 1 January 2018 at a cost of
K200,000. Her total mileage for the tax year 2018 is expected to be 15,000 kilometers
out of which 3,000 kilometers will be for personal trips. ABC plc will pay Angelina a
fuel allowance amounting to K12,750 per month. Motor car running expenses during
the tax year 2018, will amount to K9,550 per month which all will be paid by Angelina.

(3) ABC plc will buy equipment on 1 January 2018, at a cost of K75,000. This equipment
will be used by Angelina in designing fish ponds.

(4) She will be required to contribute 5% of her earnings as employee’s NAPSA

contributions and ABC plc will also contribute 5% of Angelina’s earnings as employer’s
NAPSA contributions.

(5) Angelina will be assisted by two other aquaculture staffs who will be employed by ABC
plc on 1 January 2018 at a salary of K54,000 per month each.

If Angelina is engaged on a self-employed basis, the following will apply:

(1) She will charge ABC plc an all-inclusive price of K175,000 per month for the services
to be performed.
(2) She will use her own motor car which she will acquire on 1 January 2018 at a cost of
K200,000 in the performance of her duties. Her total mileage is expected to be 15,000
kilometers out which 3,000 kilometers will be for her personal trips. The motor car
running expenses are expected to be K9,550 per month.

(3) Angelina will purchase equipment on 1 January 2018 at a cost of K75,000 which she
will use to design the fish ponds.

(4) She will employ two (2) aquaculture consultants to assist her in the performance of
the duties over a contract period of 18 months. The total salary payable to these
consultants is expected to be K54,000 per month. Each of these consultants will be
required to contribute 5% of their earnings as NAPSA contributions. Angelina will also
be required to contribute 5% of each employee’s earnings as employer’s NAPSA
contributions.

(5) Other operating expenses to be incurred by Angelina wholly and exclusively for the
contract with ABC plc are expected to be K26,700 per month.

Required:

(a) Compute the income tax payable by Angelina, for the tax year 2018 if she is engaged
by ABC plc as an employee. (7 marks)

(b) Explain how Angelina will be assessed to income tax and compute the income tax
payable for the tax year 2018, if she is engaged by ABC plc as a self-employed
contractor. (11 marks)

128
(c) Advise Angelina on whether it will be beneficial from a taxation point of view to be
engaged by ABC plc as an employee or as a self-employed contractor. Your answer
should be supported by a computation of income net of income tax, NAPSA
contributions and other relevant expenses under each option.
(7 marks)
[Total: 25 marks]
QUESTION FOUR

(a) In an attempt to broaden the tax base, the Zambian Government, through the Zambia
Revenue Authority, introduced presumptive taxes for transporters.

Required:

(i) Explain the types of persons who are required to pay presumptive taxes for
transporters and state the types of persons who are exempt from presumptive
taxes for transporters.
(4 marks)

(ii) Explain five advantages that presumptive taxes for public passenger
transporters have over the regular income tax system.
(5 marks)

(iii) State three weaknesses generally associated with presumptive taxation for
public passenger transporters. (3 marks)

(b) Assume that today's date is 1 February 2018, Choolwe wishes to start running a public
passenger transportation business on 1 March 2018. He will buy three Toyota Hiace
buses, each with a seating capacity of 16 persons including the driver, at a cost of
K90,000 each. The buses will be used for public passenger transportation and will earn
K500 per day each, for six working days per week, for four weeks per month, up to
the end of the tax year.

Choolwe will employ three drivers. The driver’s monthly salaries will be K3,000 each.
The bus running expenses will average K2,000 for each bus per month. Each driver
will make a NAPSA contribution of 5% of their salary and Choolwe will also contribute
5% of each driver’s salary to NAPSA as employer’s contribution. He will incur other
expenses wholly and exclusively for the purposes of the transportation business of
K1,800 per month.
Choolwe’s other income in tax year 2018, will comprise investment income earned
from the following sources:
K
Fixed deposit interest from Bank XY Ltd (gross) 10,000
Interest from government bonds (net) 12,750
Income from letting of property (net) 36,000

129
Dividends from Kwachi plc a LuSE Listed Company (gross) 18,000
Divideds for Zedcom a private Ltd company (net) 17,000

Required:

(i) Explain how Choolwe will be assessed to income tax on the income from the
transportation business in the tax year 2018, commenting on the tax treatment
of the expenses he will incur wholly and exclusively for the purposes of running
the business and computing the total tax that will be paid on the income he
will generate from this business in the tax year 2018.
(7 marks)

(ii) Explain how the investment income will be assessed to tax and compute the
total amount tax the on the investment income. (6 marks)
[Total: 25 marks]

END OF PAPER

130
D4: PERSONAL TAXATION SOLUTION

SOLUTION ONE

(a) (i) Tax implications of the exercise of the options

On the exercise of share options by an employee from a share option scheme

run by an employer in scheme that is not approved for tax purposes, the price
paid is compared with the open market value at that time, and if less, the
difference is charged to income tax.

In Kabunda’s case on exercise, the difference between the market value of the
shares and the price paid for the shares will be taxed as income.

Therefore, K375,000 [150,000 x (K7.00 – K4.50)] will be taxed as income on

as income on Kabunda.

(ii) Tax implication of the sale of the shares

On the sale of shares acquired from a share option scheme that is not approved
for tax purposes in an unlisted company, property transfer tax is payable on
the realised value of the shares sold. The shares have a realised value for
property transfer tax purposes that is equal to the higher of their nominal value
and the open market value.

In Kabunda’s case, the amount of property transfer tax arising on the sale of
the shares is:

(50,000 x K8.50) x 5% = K21,250

(b) Tax implications for Kabunda if the share option scheme was approved

Any gain arising to an individual on allotment of shares under an approved share option
scheme is exempt from income tax. The gain or benefit arises when the market value
per share at the time when the option is being exercised exceed the exercise price.

Therefore, in Kabunda’s case the gain arising on exercise of the options of K375,000
[150,000 x (K7.00 – K4.50)] would have been exempt from income tax if the share
option scheme was approved for tax purposes.

Additionally property transfer tax would not have arisen on the subsequent sale of
50,000 shares on 1 August 2018.

(c) For the Commissioner General to approve a share option scheme, the following
requirements must be met:

1. The scheme must be established in Zambia and the employer must be carrying
on business wholly or partly in Zambia.
2. The scheme should provide for the participation of all eligible employees
(including directors).
3. An employee participating in the scheme should not acquire more than one
fifth (20%) of the shares to be issued under the scheme.

131
 4. Only ordinary shares of the company may participate in the scheme.
5. The scheme entitles an employee to acquire a set number of shares at a fixed
price.
6. The employee must be restricted to a set period of time to use an option to
buy shares.
7. The employees must be citizens or permanent residents of Zambia regardless
of where they perform their duties.

(d) KABUNDA’S
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2018
K K
Income from Zambian Sources
Salary 330,000
Housing allowance (K330,000 x15%) 49,500
Lunch allowance (K2,000 x 12) 24,000
Shopping vouchers 3,500
Fuel allowance 6,000
School fees 8,000
Golf club subscriptions 1,500
Income from Share options
(K7.00 – K4.50) x 150,000 375,000
Total emoluments 797,500
Less allowable deductions
Donations to public benefit organisations (5,500)
792,000
Income from foreign Sources
Dividend income (K9,600 x 100/64) 15,000
807,000

Tax computation:
Tax Tax
rate amount
Income %
1 39,600
st
- -
2nd 9,600 25 2,400
3rd 25,200 30 7,560
Balance 732,600 37.5 274,725
807,000 284,685
Less PAYE (155,4000
Less DTR on
dividends from
foreign sources
(5,292)
Income tax
payable 123,993

132
 WORKINGS:
Double taxation relief on the dividends from foreign sources:
This will be the lower of:
(1) The foreign tax paid on the dividends:

K15,000 x 36% = K5,400; and

(2) The Zambian Tax Charge computed as:

𝐾15,000
( ) 𝑥 𝐾284,685
𝐾807,000

= K5,292

DTR will therefore be K5,292 being the lower amount.

SOLUTION TWO

(a) Mwanza and Katebe

Income tax payable for the tax year 2018

Mwanza Katebe
K K
Salary 200,000 200,000
Income Tax
First K39,600 @0% 0 0
Next K9,600 @25% 2,400 2,400
Next K25,200 @30% 7,560 7,560
Balance K125,600 @37.5% 47,100 47,100
57,060 57,060

(b) The income tax and NAPSA implications of the additional K180,000 will be as follows:

(i) Cash bonus payment.

(1) The bonus will be an additional taxable emolument for both Mwanza and Katebe.
It will therefore be assessed as taxable emoluments at a rate of 37.5% because
their existing income is above K74,400.

(2) The additional income tax payable on the bonus by Mwanza and Katebe will be:
K180,000 x 37.5% = K67,500 each.

(3) The bonus qualifies s earnings for the purposes of NAPSA contributions. Mwanza
and Katebe will therefore be required to contribute NAPSA at 5% of the difference
between their current earnings (K200,000) and the earnings threshold (K238,800).

133
 (4) The additional NAPSA contributions by each individual will be:
(K238,800 – K200,000) x 5%
= K1,940 each

(5) The additional NAPSA contributions will not be an allowable deduction for tax
purposes.

(ii) Cash dividend payment

(1) The dividends will be subjected to withholding tax at the rate of 15%. The
withholding tax deducted at source is the final tax and, therefore, no further
tax will be assessed on dividends.

(2) The amount of withholding tax payable by each individual will amount to:
K180,000 x 15% = K27,000

(3) NAPSA contributions will not be payable by both Mwanza and Katebe as
dividends do not qualify as earnings for NAPSA purposes
(c) The income tax and NAPSA implications for the company of the additional K180,000
will be as follows:

(i) Cash bonus payment

(1) A cash bonus payament will be an allowable deduction when computing

taxable business profits. The company will therefore have tax savings.

(2) The amount of income tax savings will amount to:

K180,000 x 2 x 35% = K126,000

(3) The company will be required to pay additional NAPSA contributions on

behalf of Mwanza and Katebe as employer’s NAPSA contributions. The
amount of NAPSA contributions will be contributed on the difference
between current earnings (K200,000) and earnings threshold (K238,800).

(4) The amount of additional NAPSA contributions will be:

K3,880 (K238,800 – K200,000) X 5%) restricted to the threshold of

K238,800.

(5) The additional NAPSA contributions will be an allowable deduction when

computing the taxable business of the company. This will result in a tax
saving of K1,358 (K3,880 x 35%).
(ii) Cash dividend payment

(1) The dividend payment will not be an allowable deduction when

computing the taxable business profits for the company. Dividends will
be paid out of profits already subjected to income tax.

134
 (2) NAPSA contributions will not be payable by the company as dividends
do not attract NAPSA contributions because they do not qualify as
earnings.

SOLUTION THREE

(a) Angelina

Income tax payable for the tax year 2018

K K

Salary K74,000 x 12 888,000

Fuel allowance (K12,750 x 12) 153,000

1,041,000

Less:

Motor car running expenses (K9,550 x 12 x 12,000/15,000) (91,680)

Capital allowances (K200,000 x 20% x 12,000/15,000) (32,000)

Taxable income 917,320

Income Tax

First K39,600 @0% 0

Next K9,600 @25% 2,400

Next K25,200 @30% 7,560

Balance K842,920 @37.5% 316,095

Income tax payable 326,055

135
(b) Angelina’s annual earnings if she is engaged as a self-employed contractor will be
K2,100,000 (K175,000 x 12 months). This means that she will be assessed to the
normal income tax under self-assessment and provisional income tax as her annual
earnings are more than K800,000.

ANGELINA
INCOME TAX PAYABLE FOR THE TAX YEAR 2018
K K
Revenue (K175,000 x 12) 2,100,000
Less
motor car running expenses
(K9,550 x 12 x12,000/15,000) 91,680
Salaries (K54,000 x 12) 648,000
Employer’s NAPSA (K238,800 x 2 x 5%) 23,880
Other operating expenses (K26,700 x 12) 320,400
Capital allowances:
Motor car (K200,000 x 20% x 12,000/15,000) 32,000
Equipment (K75,000 x 25%) 18,750
(1,134,710)
Taxable business profit 965,290

Computation
First K39,600 @0% 0
Next K9,600 @25% 2,400
Next K25,200 @30% 7,560
Balance K890,890 @37.5% 334,084
Income tax payable 344,044

(c) COMPUTATION OF NET INCOME IF ANGELINA IS:

Self-employed An employee
K K
Total earnings (income) 2,100,000 1,041,000
Less:
Income tax payable (344,044) (326,055)
NAPSA contributions (23,880) (11,940)
Motor car running expenses(K9,550 x 12) (114,600) (114,600)
Employees’ salaries (648,000) -
Other operating expenses (320,400) -
Net income 649,076 588,405

It will be beneficial for Angelina to be engaged as a self-employed contractor

because this option gives a higher net income by K60,671 (K649,076 – K588,405).

136
SOLUTION FOUR
(a) (i) Presumptive taxes for transporters are chargeable on individuals and
partnerships carrying on businesses of transportation of passengers for
reward.
Transporters who are limited companies are exempt from presumptive tax as
they have the capacity to comply fully with all the standard requirements under
the income tax law.
(ii) Advantages of Presumptive Taxes for transporters:
Simplified process
The process of dealing with taxes has been simplified. There is no requirement
to file returns, no requirement to keep proper business and accounting records
and the taxes payable are predictable and therefore ease the cash flow
planning process.
Cash flow friendly
Since operators find it fairly easy to pay a whole range of fees on a daily basis,
such as loading fees, because the amounts look small and do not seriously
disrupt their daily cash flow position, the same principle of small regular
payments of tax has been adopted in the presumptive tax approach.
The levies can be broken down into smaller amounts to be paid more regularly,
for example, on a daily, monthly or even quarterly basis.
No need for professional consultancy services
Paying the levies is as straightforward as paying loading fees or other fees
currently in place. Therefore, there is very little intellectual or professional
effort required. The driver and/or conductor makes arrangements for
presumptive tax to be paid without involving the proprietor.
Equity
As the system is made simpler, all transporters are expected to pay their part
hence there are no 'free riders' as the case was before the introduction of
presumptive tax. As presumptive tax is a levy, there is no longer a need to
keep records for tax purposes and as such no audits will be conducted on a
transporter's business. The only requirement will be for the transporter to pay
his presumptive tax as stated in the law.
Allowance for break-downs
The levies are only charged for vehicles that are on the road during the tax
accounting period.
(iii) Weakness of Presumptive Taxation
A system of presumptive taxation has the following weaknesses:

137
 (1) It may encourage profitable businesses not to maintain proper accounting
records as such entities would be aware that taxation authorities would not at
any time conduct any tax audits to determine whether they are liable to pay
income tax in the normal way.
(2) A system of presumptive taxation allows taxation authorities a great deal of
discretion in estimating tax assessments. This may encourage collusion
between the tax collectors and individuals seeking to have a lower tax
assessment.
(3) The taxes may be too high or too low for certain periods of time if they are
not frequently adjusted to reflect changes in economic activity in the nation.

(b) (i) Tax implications

Choolwe is an individual carrying on businesses for the transportation of

passengers for a reward and as such will be required to pay presumptive taxes
for transporters.The amount of presumptive taxes payable will be fixed
amounts based on the seating capacity of the motor vehicles used in the
transportation business.
Choolwe will not be required to pay income tax on the profit generated by the
transportation business. Therefore, there will be no tax implications in relation
to the drivers' salaries, bus running expenses, employer’s NAPSA contributions
and other expenses he will incur wholly and exclusively for purposes of the
transportation business, because it will not be necessary to compute taxable
profits for the purposes of determining the amount of presumptive tax payable.

No capital allowances will be claimable on the cost of the buses.

The seating capacity of each bus is 15 passengers and the daily tax payable
for each bus is K4.95.

Each bus will operate for 6 days per week for 4 weeks per month giving 24
days per month, starting on 1 March 2018. The total amount of presumptive
tax payable on the three buses for the tax year 2018 will therefore be:

(K4.95  24 days  10 months)  3 buses = K3,564.

138
(ii) Investment income is assessable under the withholding tax system where the
tax is withheld at source The amount of withholding tax paid at source is
shown below:
K
WHT on:
Fixed deposit interest (K850 x 0%) 0
Interest from government bonds (K12,750 x 15/85) 22,50
Income from letting (K36,000 x 10/90) 4,000
Dividends from Kwacha Plc (K17,000 x 0%) 0
Dividends from Zedcom Ltd (K17,000 x 15/85) 3,600
Total 7,600

END OF D4 SOLUTIONS

139
 TAXATION PROGRAMME EXAMINATIONS

DIPLOMA LEVEL
________________________

D5: INTERNATIONAL TAXATION

_______________________
THURSDAY 14 JUNE 2018
_______________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FOUR (4) questions of Twenty Five (25) marks each.
You must attempt all the FOUR (4) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A Taxation table is provided on pages 2, 3 and 4.

140
Taxation table for paper D5 – International Taxation (June and December 2018
Examinations)
Income Tax

Standard personal income tax rates

Income band Taxable Rate

amount
K1 to K39,600 first K39,600 0%
K39,601 to 49,200 next K9,600 25%
K49,201 to K74,400 next K25,200 30%
Over K74,400 37.5%

Income from farming for individuals

K1 to K39,600 first K39,600 0%
Over K39,600 10%

Company Income Tax rates

On income from manufacturing and other 35%

On income from farming 10%
On income of Banks and other Financial Institutions 35%
On income from mineral processing 30%
On income from mining operations 30%

Mineral Royalty

Mineral Royalty on Copper

Range of Norm Price Mineral Royalty Rate

Less than US$4,500 4% of norm value
From US$4,500 to less than US$6,000 5% of norm value
From US$6,000 and above 6% of norm value

Mineral Royalty on other minerals

Type of mineral Mineral Royalty Rate

Base Metals (Other than Copper) 5% on norm value
Energy and Industrial Minerals 5% on gross value
Gemstones 6% on gross value
Precious Metals 6% on norm value

Capital Allowances

Implements, plant and machinery and commercial vehicles:

Wear and Tear Allowance – Plant used normally 25%
Used in Manufacturing and Leasing 50%
Used in farming and agro-processing 100%
Non- commercial
vehicles
Wear and Tear Allowance 20%

141
Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%
Low Cost Housing (Cost up to K20,000)
Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%

Presumptive Taxes

Turnover Tax

Monthly turnover Turnover Tax per month

K1to K4,200 3% of monthly turnover above K3,000
K4,200.01to K8,300 K225 per month+3% of monthly turnover above K4,200
K8,300.01 to K12,500 K400 per month+3% of monthly turnover above K8,300
K12,500.01 to K16,500 K575 per month+3% of monthly turnover above K12,500
K16,500.01 to K20,800 K800 per month+3% of monthly turnover above K16,500
Above K20,800 K1,025 per month+3% monthly of turnover above K20,800

Annual turnover Turnover Tax per annum

K1to K50,400 3% of annual turnover above K36,000
K50,400.01to K99,600 K2,700 per annum+3% of annual turnover above K50,400
K99,600.01 to K150,000 K4,800 per annum +3% of annual turnover above K99,600
K150,000.01 to K198,000 K6,900 per annum+3% of annual turnover above K150,000
K198,000.01 to K249,600 K9,600 per annum+3% of annual turnover above K198,000
Above K249,600 K12,300 per annum +3% of annual of turnover above
K249,600

Presumptive Tax for Transporters

Seating capacity Tax per annum Tax per day

K K
From 64 passengers and over 10,800 29.60
From 50 to 63 passengers 9,000 24.70
From 36 to 49 passengers 7,200 19.70
From 22 to 35 passengers 5,400 14.80
From 18 to 21 passengers 3,600 10
From 12 to 17 passengers 1,800 5.0
Less than 12 passengers and taxis 900 2.50
Property Transfer Tax

Rate of Tax on Realised Value of Land, Land and Buildings and shares 5%
Rate of Tax on Realised Value on a transfer or sale of a mining right 10%

142
Rate of Tax on Realised Value on a transfer of Intellectual Property 5%

Value Added Tax

Registration threshold K800,000

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%
Customs and Excise
Customs and Excise duties on used motor vehicles

Aged 2 to 5 years Aged over 5

years
Motor vehicles for the transport of ten or Customs Excise Customs Excise
more persons, including the driver duty duty duty duty
K K K K
Sitting capacity of 10 but not exceeding 14 17,778 22,223 8,889 11,112
persons including the driver
Sitting capacity exceeding 14 but not exceeding 38,924 0 13,840 0
32 persons
Sitting capacity of 33 but not exceeding 44 86,497 0 19,462 0
persons
Sitting capacity exceeding 44 persons 108,121 0 43,248 0

Aged 2 to 5 years Aged over 5 years

Motor cars and other motor vehicles
principally designed for the transport of Customs Excise Customs Excise
persons including station wagons and duty duty duty duty
racing cars
K K K K
Sedans
cylinder capacity not exceeding 1000 cc 12,490 10,824 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 16,058 13,917 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 16,545 21,508 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 10,528 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 22,561 29,329 12,032 15,642

Hatchbacks
cylinder capacity not exceeding 1000 cc 10,705 9,278 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 14,274 12,371 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 15,041 19,553 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 16,545 21,508 10,523 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 19,553 25,419 12,032 15,642

Station wagons
cylinder capacity not exceeding 2500 cc 16,545 21,508 9,024 11,731

143
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc but not 22,561 29,329 18,049 23,463
exceeding 2500 cc

SUVs
Cylinder capacity not exceeding 2500 cc 21,057 27,374 9,024 11,732
Cylinder capacity exceeding 2500 cc but not 24,065 31,284 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 28,577 37,150 18,049 23,463
Aged 2 to 5 years Aged over 5
years

Motor vehicles for the transport of goods

–with compression-ignitioninternal Customs Excise Customs Excise
combustion piston engine (diesel or semi- duty duty duty duty
diesel):
K K K K

Single cab
GVW exceeding 1.0 tonne but not exceeding 1.5 21,926 9,501 8,770 3,801
tonnes
GVW exceeding 1.5 tonnesbut not exceeding 3.0 26,311 11,402 15,348 6,651
tonnes
GVW exceeding 3.0 tonnesbut not exceeding 5.0 30,697 13,302 17,541 7,601
tonnes
Double cabs GVW exceeding 3 tonnes but not 30,274 0 24,119 10,452
exceeding 5 tonnes
Double cabs GVW exceeding 3.0 tonnes but not 30,697 13,302 24,119 10,452
exceeding 5.0 tonnes, with spark ignition
internal combustion piston engine

Panel Vans
GVW exceeding 1.0 tonne but not exceeding 1.5 15,348 6,651 8,770 3,801
tonnes
GVW exceeding 1.5 tonnesbut not exceeding 3.0 17,541 7,601 15,348 6,651
tonnes
GVW exceeding 3.0 tonnesbut not exceeding 5.0 21,926 9,501 17,541 7,601
tonnes

Trucks
GVW up to 2 tonnes 21,926 9,501 10,963 4,751
GVW exceeding 2.0 tonnes but not exceeding 28,504 12,352 13,156 5,701
5.0 tonnes
GVW exceeding 5.0 tonnesbut not exceeding 24,724 18,955 10,817 8,293
10.0 tonnes
GVW exceeding 10.0 tonnesbut not exceeding 30,905 23,694 11,744 9,004
20.0 tonnes
GVW exceeding 20 tonnes 51,898 0 19,461 0
GVW exceeding 20 tonnes, with spark 37,086 28,432 13,907 10,662
ignition internal combustion piston engine

144
 Customs and excise duty on new vehicles

1 Motor cars and other motor vehicles (including station wagons) principally designed for
the transport of less than ten persons, including the driver:
Customs duty: 30%
Excise duty:
Cylinder capacity of 1500 cc and less 20%
Cylinder capacity of more than 1500 cc 30%
2 Pick-ups and trucks/lorries with gross weight not exceeding 20 tonnes:
Customs duty 15%
Excise duty 10%
3 Buses/coaches for the transport of more than ten persons
Customs duty: 15%
Excise duty:
Seating capacity of 16 persons and less 25%
Seating capacity of 16 persons and more 0%
4 Trucks/lorries with gross weight exceeding 20 tonnes
Customs duty: 15%
Excise duty: 0%
The minimum amount of customs duty on motor vehicles is K6,000.
Import VAT is added to the sum of VDP, customs duty and excise duty. It is determined at
the standard rate of 16%

145
Attempt all FOUR (4) questions

QUESTION ONE

(a) Human rights do not only relate to local cases within a country but also to international
cases and there is an interaction between human rights law and tax law.

Required:

(i) Explain two (2) main areas of interaction between human rights law and tax
law. (3 marks)

(ii) State the major sources of conflict between tax law and human rights law.
(4 marks)
(b) Distinguish between tax evasion and tax avoidance. (3 marks)

(c) One practice used in tax evasion is money laundering.

Required:

(i) Define money laundering. (2 marks)

(ii) Explain various recommendations, legislation and regulations initiated

internationally to combat money laundering. (5 marks)

(d) For the purposes of this part of the question assume that today’s date is 31
December 2018

Blessed was born in Zambia on 1 January 1980 and had always lived in Zambia until 31
December 2016, when she left Zambia for Brazil where she took up employment with
a Brazilian multinational corporation that also has a permanent establishment in
Zambia. The contract of employment was for a period of sixteen (16) months ending
30 April, 2018. Whilst in Brazil, all her emoluments were received there, and credited
to her bank accounts in Brazil. Upon expiry of her contract on 30 April 2018, she
received her gratuity of K450,000 (net of Brazilian tax). The gratuity was credited to
her Zambian bank account on 31 May 2018.

On 1 July 2018, Blessed took up employment with Pazed Limited, a Zambian company,
at an annual salary of K240,000. She also received a general purpose allowance of
K3,000 per month. Income tax paid on emoluments from employment with Pazed
Limited for tax year 2018 was K33,000.

Required:

(i) Explain whether Blessed would be regarded as being resident and ordinary
resident in Zambia for the tax year 2018. (3 marks)

146
 (ii) Assuming that under the double taxation treaty between Zambia and Brazil,
Brazilian emoluments net of Brazilian income tax are chargeable to Zambian
income tax at the rate of 4.5% if remitted (credited) to Zambia, calculate the
final amount of income tax payable by Blessed for the tax year 2018.

(5 marks)

[Total: 25 marks]

QUESTION TWO

(a) Explain what is meant by a tax haven and describe any three (3) features of a tax
haven. (7 marks)

(b) For the purposes of this part of the question assume that today’s date is 31
December 2018

You have been provided with the following information:

(1) RHN Ltd is a company incorporated and resident in China, engaged in construction
and haulage operations. On 10 July 2018, RHN was subcontracted by ACN
Constructions Limited, a Zambian resident company to install ultra-modern lifting,
air conditioning and ventilation systems, in one of its newly constructed buildings
in Lusaka.

RHN Ltd completed the work on 9 November 2018 and invoiced ACN Constructions
Limited K7,600,000 for the work performed by that company on the building. RHN
Ltd does not have a permanent establishment in Zambia.

(2) DCH Promotions Limited is a Zambian resident company in the entertainment

industry. On 10 May 2018, DCH Promotions Limited entered into an agreement
with Coco Malomide, a famous international musician who is neither resident nor
ordinarily resident in Zambia, under which Coco was to perform a series of musical
concerts in Livingstone, Lusaka and on the Copperbelt, starting from 3 July 2018
to 7 July 2018. Coco Malomide invoiced DCH promotions Limited K480,000 for
performing at the concerts.

Required:

Using the information provided above, discuss the tax position of each one of the
following:

(i) RHN Ltd (3 marks)

(ii) Coco Malomide (3 marks)

147
(c) Southern Explosives Limited is a company resident in a country known as Pestonia
which specialises in the manufacture of explosives used in the sinking and extension
of mine shafts. The company wishes to expand its operations into a country known as
Bestonia. The tax rates in Pestonia are much lower than those in Bestonia and the
company is concerned about being exposed to the higher tax rates in Bestonia.
Southern Explosives Ltd is considering the following modes of entry into the Bestonian
market.

(i) Setting up a branch of the company in Bestonia which will carry out the
manufacture and sale of the explosives.

(ii) Exporting the explosives to Bestonia and selling them through independent
agents who are resident in Bestonia whom the company will pay sales
commission.

(iii) Incorporating a 100% owned subsidiary of Southern Explosives Ltd in Bestonia,

which will carry out the manufacture of explosive under a licence from Southern
Explosives Limited.

Required:

Assuming that the Double Taxation Agreement between Pestonia and Bestonia is
identical to the OECD Model, discuss the tax consequences for Southern Explosives
Ltd of each of the above suggested modes of operation in Bestonia. (12 marks)

[Total: 25 Marks]

QUESTION THREE

(a) Transfer pricing is the general term used to refer to the problem of allocating profits
among a corporate group of companies. For a group as a whole, all that matters at
the end of the day is, the after- tax profit of the group, rather than that of its individual
members. Some countries apply their transfer pricing rules in purely domestic cases.

Required:

(i) Explain the application of transfer pricing rules in domestic cases. (2 marks)

(ii) State six (6) problems associated with the arm`s length principle. (6 marks)

(iii) State any two (2) solutions for solving transfer pricing problems. (2 marks)

(b) (i) Explain what is meant by thin capitalisation. (2 marks)

(ii) Explain three (3) different tax treatments of thin capitalisation. (6 marks)

(c) Gabriel Ltd is a Zambian resident copper mining company which is a subsidiary
company of a multinational company. An extract of the income statement (statement
of profit or loss) for Gabriel Ltd for the year-ended 31 December 2018, is given below:

148
 K` million
Gross profit 364
Operating expenses (84)
Finance costs (65)
Net profit before taxation 215
Company income taxation (65)
Net profit after taxation 150
The following additional information available:

1. Included in the operating expenses are non-taxable revenue expenses that account
for 25% of the total operating expenses.
2. Included in the finance costs is K50 million loan interest paid to its holding company
in South Africa.
3. The company has a debt: equity ratio of 5:1.
4. The company income tax shown in the income statement above, represents the
provisional company income tax paid by the company in respect of the tax year
2018.
5. Mineral royalty paid during the year, has already been properly accounted for.

Required:

Calculate the company income tax payable for the tax year 2018. (7 marks)
[Total: 25 marks]

QUESTION FOUR

THG Limited is a Zambian resident manufacturing company which was incorporated in Zambia
in the early 1990s. The company’s effective management and control is exercised from
Zambia. THG Limited has expanded over the years under the leadership of David Mafuleka, a
Zambian resident, who is the Chief Executive Officer (CEO) of the company.
In the year 2016, the company acquired 40% of the ordinary share capital of KTH Ltd a
company incorporated in a country known as Saltovia. The board of directors of KTH Ltd holds
its meetings in Saltovia and David Mafuleka represents THG Ltd on the board of KTH Ltd.
In the year 2017, THG Ltd acquired 30% of the ordinary share capital of JKC Ltd a company
incorporated in a country known as Baltovia. The board of directors of JKC Ltd holds their
meetings in Baltovia and THG is represented on the Board of JKC Ltd by one of its directors
who is resident in Zambia.
The results of KTH Ltd and JKC Ltd (translated into Zambian Kwacha) for the year ended 31
December 2018 were as follows:

KTH JKC
K K
Profit before tax 4,600,000 5,600,000
Company Income Tax (1,150,000) (1,680,000)
Distributable profit 3,450,000 3,920,000

The tax adjusted business profit for THG Ltd for the year ended 31 December 2018 was
K6,900,000. The profit figure does not include the following dividend income received by THG
Ltd during the year ended 31 December 2018:

149
(1) Dividends of K304,000 from KTH Ltd, net of withholding tax deducted in Saltovia. In
Saltovia dividends are subjected to withholding tax at the rate of 20%.

(2) Dividends of K120,000 from JKC Ltd, net of withholding tax deducted in Baltovia. In
Baltovia dividends are subjected to withholding tax at the rate of 40%.

David Mafuleka, the CEO of THG Ltd, receives gross taxable earnings from employment of
K360,000 and makes National Pension Authority (NAPSA) contributions of 5% of his earnings.
PAYE of K111,180 was deducted from his emoluments in the tax year 2018. He made
contributions to approved public benefit organisations amounting to K3,060. Mafuleka has
shareholdings of 5% in each of KTH Ltd and JKC Ltd. He received dividends income of K30,000
and K15,000 from KTH Ltd and JKC Ltd respectively. The dividend income was net of
withholding tax deducted at source at the appropriate rates in both cases.
Double taxation relief in relation to any tax paid on foreign income is given unilaterally in
Zambia as Zambia does not have a double taxation convention with either Saltovia or Baltovia.

Required:

(a) Explain why THG will be treated as being resident in Zambian for taxation purpose and
discuss whether KTH and JKC will be treated as being resident in Zambia for tax
purposes. (5 marks)
(b) Compute the company income tax payable by THG Ltd in the tax year 2018.
(9 marks)
(c) Compute the income tax payable by David Mafuleka in the tax year 2018. (11 marks)
[Total: 25 Marks]

END OF PAPER

150
D5: INTERNATIONAL TAXATION SOLUTIONS

SOLUTION ONE

(a) (i) Tax and human rights have two main areas of interaction:-
1. Taxation may be a tool to enforce the general social and legal values
(including human rights) of a nation beyond its borders

2. Taxation may interfere with international human rights standards i.e.

pursuing taxpayer offenders in their resident or home country.

(ii) The major sources of conflict between tax law and human rights law are:-
1. Transfer pricing
2. Tax incentives
3. Natural resources
4. Off – shore investment activities
5. Secrecy jurisdictions.

(b) Tax evasion refers to the use of illegal means to avoid paying tax by either understating
income, non-disclosure of some income or overstating expenses to reduce the tax
payable or other forms of fraud.
Tax avoidance on the other hand is identifying any tax loopholes in the taxes legislation
in order to reduce the tax burden or defer tax liabilities. However anti-avoidance
legislation aims at sealing the loopholes in the taxes legislation.

(c) (i) Money laundering is the general term used to describe the process by which
criminals disguise the original ownership and control of the proceeds of criminal
conduct by making such proceeds appear to have been derived from a
legitimate source. Therefore, it is the process of transforming the proceeds of
crime into ostensibly legitimate money or other assets.

Various recommendations, legislation and regulations initiated to combat

money laundering include:-

(1) The demand for full transparency from financial institutions to provide all
information concerning their activities in off – shore supervisory authorities. In
this respect financial institutions must be discouraged or, if necessary,
prohibited from operating in territories that feature on the black lists of the
FATF, OECD and the World Bank’s STAR (Stolen Asset Recovery Initiative).
(2) Establish an interconnected and well integrated system of legal shareholder
registries encompassing economic blocs and their member states, which will
feature all necessary information concerning the shareholders of corporations
operating within the economic blocs. This registry may be complemented with
a risk-based index that will factor in some of the most suspicious aspects of a
corporation’s operations. This information on this registry should be available to

151
 authorities on demand and all corporations should be expected to provide
information concerning their beneficial owner, at the moment they are asked or
within a prescribed timeframe.
(3) Create a regularly-updated beneficial owner registry. Information of this kind
should be either exchanged or coordinated across member states without any
obstacle, so that instances of fiscal dumping would be avoided and variances in
national legislation would not offer a window of opportunity to criminals and to
those who make use of legal loopholes in a manner that is sophisticated,
structured and systematic, suggesting that their intention is clearly malevolent,
to abuse the system rather than conduct normal operations.
(4) Strengthen the requirements redarding the function of corporate directors.
Directors should be held accountable for failing to take reasonable steps to
prevent money-laundering, this should apply regardless of whether they are
nominees or not. Information of this sort should, for issues of transparency and
democratic legitimacy be made publicly available to citizens, journalists and
NGO’s among all others, so that an additional layer of social scrutiny may be
placed over corporations.
(5) Reconsider and reinforce the rules regarding the due diligence that corporate
registries and financial institutions should perform, always on accurate risk
based approach, in an attempt to verify that all information pertaining to the
beneficial ownership is correct and that no margin for fraudulent or corrupt
activity is allowed.
(6) Introduce requirements for enhanced due diligence in cases where politically
exposed people are identified, with the option of rendering void or otherwise
limiting the transaction in question.
(7) Formation of Financial Intelligence Unit (FIU) whose role shall be to monitor,
assess and analyze suspicious transaction reports and contracts. This entity
could operate within the context of the Single Supervisory Mechanism that
would be incorporated within the range of responsibilities of the Central Bank.

The above are some general guidelines and certainly do not exhaust the possible
measure that may be considered in efforts to extinguish whatever flaws exist in
present legislation that currently allow for the creation of shell companies, as
well as in the quest to unmask the beneficial owners of corporations operating
within the single market. Eventually this will also give rise to the need for a
better risk-based assessment of clients from the side of private actors.

(d) Blessed
i. An individual is resident in Zambia if he/she is physically present in Zambia for
more than 183 days excluding the date of arrival and departure.

Individuals who come to Zambia and are expected to be in Zambia for more
than twelve (12) months or come to Zambia with the intentions of establishing
permanent residence are regarded as residents from the date of arrival.

152
 For the tax year 2018, Blessed will be regarded as being resident and ordinary
resident as her period of physically staying in Zambia would be of at least 183
days.

(ii) Blessed
Personal Income Computation – Tax year 2017
Marks
Zambian Emoluments: K
Basic salary (6/12 x K240, 000) 120,000
General purpose allowance (K3, 000 x 6) 18,000
138,000
Less: Tax free amount (39,600)
98,400
Income Tax
Next K9, 600 x 25% 2,400
Next K25, 200 x 30% 7560
Balance K63,600 x 37.5% 23,850
33,810
Tax on Brazilian Emoluments
Gratuity (K450, 000 x 4.5%) 20,250
54,060
Less: Zambian PAYE (33,000)
Income Tax Payable 21,060

SOLUTION TWO

(a) Tax Haven

A tax haven refers to a country which imposes a low or no tax, and is used by
corporations to avoid tax which otherwise would be payable in a high-tax country.

Features of Tax Havens

According to OECD report, tax havens have the following key characteristics:

(1) No or nominal taxes

No or only nominal taxes on relevant income usually on capital applied in that
particular jurisdiction. This is the primary factor used in the identification of a
tax haven but is not usually sufficient as a country may be competing fairly or
adopting a preferential regime.

(2) Lack of effective of exchange of information

Tax havens typically have in place laws or administrative practices under which
business and individuals can benefit from strict secrecy rules and other
protections against scrutiny by tax authorities thereby preventing the effective
exchange of information on taxpayers benefiting from the low tax jurisdiction.

(3) Lack of transparency

There is lack of transparency in the operation of the legislative, legal or
administrative provisions. The details of the regime and/ or its application are

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 not apparent, or there is inadequate regulatory supervision or financial
disclosure.

(4) No substantial activities

This identifies a tax haven as a jurisdiction that facilitates the establishment of

foreign owned entities without the need for a local substantive presence.
However, this factor was recently dropped as it was pointed out that it is very
difficult to define whether a country lacks substantial activities and thus only
the “no or only nominal taxes” and the information factors remained as
important to the identification of tax havens.

(b) (i) RHN Limited

RHN Ltd will meet the definition of a non-resident contractor under the Income
Tax Act as the company is neither resident in Zambia nor has a permanent
establishment in Zambia.

Any payment made to a non-resident contractor attracts withholding tax at the

rate of 20% which is a final tax. ACN Constructions Ltd will therefore be
required to deduct withholding tax at the rate of 20% of the invoice price of
the services rendered by RHN and pay the tax to the Zambia Revenue
Authority. RHN Ltd will receive an amount from which the withholding tax has
already been deducted. The amount of the withholding tax will be: K7,600,000
x 20% = K1,520,000.

(ii) Coco Malomide

The fees paid to Coco will meet the definition of public entertainment fees. Any
fees paid to non-resident entertainers for performances within Zambia attract
withholding tax at the rate of 20% which is a final tax.

Since Coco is not resident and ordinarily resident in Zambia, DCH promotions
Ltd will be required to deduct withholding tax at the rate of 20% from the
amount invoiced to them and remit it to the ZRA. Coco will receive the amount
which is net of the withholding tax. The amount of the withholding tax will be:
K480,000 x 20% = K96,000.

(c) (i) Setting a Branch in Bestonia

The branch will meet the definition of a permanent establishment under the
OECD model Tax Convention as the branch will constitute a fixed place of
business through which the operations of Southern Explosives Ltd will be
carried on in Bestonia.

The manufacture and sales of explosives are not activities of a preparatory

nature and therefore profits generated by the branch will be taxable in Bestonia
under the ‘Authorised OECD Approach’ by hypothesizing the branch as a
distinct and separate entity. This approach is therefore likely to produce a
higher tax liability and therefore no opportunity to mitigate tax.

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(ii) Exportation and sale of explosives through agents

In principle, if Southern Explosives Ltd will be dealing through independent

agents, no permanent establishment will be created and no profits of the
company will be taxable in Bestonia under the OECD Model Tax Convention.

However, this will only hold if the agents will be independent both legally and
economically. The principal criteria that will be used to establish that this is the
case, is the number of other parties represented by the agent; the amount of
time spent on the business of Southern Explosives Ltd and whether the agents
will bear the economic risks and rewards of working on behalf of Southern
Explosives Limited.

It will also be important to establish whether the agents will be acting in the
ordinary course of their business in relation to the sales carried out on behalf
of Southern Explosives Ltd. This will involve an examination of the other
businesses being represented by the agents.

So long as the agents will genuinely be independent in relation to the above

tests, Southern Explosives Ltd will not be taxable on sales made through the
agents in Bestonia and could deduct the sales commission paid to the agents
from its profits in Pestonia.

Where the agents fail the test of independence on any of the above criterion,
the agents would be regarded as dependent in relation to the sales for
Southern Explosives Ltd. The company would thus have a dependent agent
Permanent Establishment in Bestonia and be taxable in that country.

(iii) Under the provisions of the OECD Model Tax Convention guidelines (Article 7)
Southern Explosives Ltd will not be taxable on its business profits in Bestonia
unless it has a Permanent Establishment in that state. It will therefore be
important to establish, whether the subsidiary will constitute a Permanent
Establishment.

The subsidiary will be a legally separate entity and as such distinguished from
a branch and therefore the subsidiary will be taxed separately in Bestonia on
its profits and Southern Explosives Ltd will only be taxable in Pestonia.

Sales by the subsidiary of its own products manufactured under licence from
Southern Explosives Ltd will not be sales on behalf of Southern Explosives,
because of the legal separation of parent and subsidiary recognised in the
Model. But if ever the subsidiary acted as a sales outlet for products produced
by Southern Explosives Ltd and not the subsidiary, this would make the
subsidiary an agency Permanent Establishment.

It will also be important to determine if Bestonia will recognize the licence fee
paid by the subsidiary as constituting an arm’s length price. The subsidiary
would need to demonstrate that it had undertaken a transfer pricing study and
complied with documentation formalities in Bestonia.

155
 If this will not be the case, then Bestonia will likely seek to adjust the price
downwards under the OECD Transfer Pricing Guidelines and the result would
be an increased taxable profit for the subsidiary in Bestonia at the higher rates
prevailing there. Consideration should be given to reaching an advance pricing
agreement or other form of informal clearance with the tax authority of
Bestonia.

Hence subject to care being taken not to have a Permanent Establishment in

Bestonia and that country recognizing the licence fee as a correct arm’s length
price, the contract manufacturing and licence operation can be effective to
reduce tax in Bestonia. The licence fee would reduce profits of the subsidiary
and render the fee taxable at the lower rate in Pestonia.

SOLUTION THREE

(a) (i) The application of transfer pricing rules in domestic cases (i.e. within a
country) where there are different tax rates for different kinds of income or
business with lower tax rates.
(ii) The application of the arms length principle in a transfer pricing transaction
has the following problems:

 Lack of comparable prices

 Lack of information
 Risk of effective double taxation through disagreement over transfer price
(& weakness of mutual agreement procedures)
 Huge information demands

Particular problems in modern business:

 Increased fragmentation within multinational businesses
 Growing importance of intellectual property & other intangibles
 Resultant lack of comparable prices

(iii) Solutions

 Advanced pricing arrangements

 Unitary taxation/Formulary apportionment

(b) Thin capitalization

(i) Thin capitalization is the practice of excessively funding a branch or subsidiary
with interest – bearing loans from related parties rather than with share capital.

(ii) Tax treatment of thin capitalization include:-

1. A taxpayer, other than a bank or financial institution, is denied a deduction
for interest in excess of the product of three times the net income –
producing assets of the taxpayer and
1. In the case of a loan denominated in a foreign currency, 110 percent
of the interest rate charged on loans by the central bank of X to
commercial banks on the last day of the preceding tax year; or

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 2. In the case of a loan denominated in a foreign currency, 110 percent
of the interest rate charged by the US dollar loans to US banks on the
last day of the preceding tax year.
3. The net income-producing assets of a taxpayer are assets giving rise to
income that is included in the gross income of the taxpayer less
liabilities relating to those assets, each averaged between the beginning
and end of the tax year.

4. With the prior written permission of the tax administration, a taxpayer

may
 Calculate net income-producing assets on an alternative basis;
or

 In the case of a loan denominated in a foreign currency other

than US dollars, use a different interest rate based on the
interbank rate of the central bank responsible for that currency.
 Any excess interest that is not allowed as a deduction in tax year
solely as result of the application of this provision is treated as
interest expense of the taxpayer in the following year.

(c) Gabriel Inc – Company Income Tax payable for tax year 2017
K million
Net profit before taxation 215
Add back:-
Non – tax allowable operating expenses 21
Excessive interest (K50m x 2/5) 20
Tax adjusted profit 256
Company income tax (30% x K256 million) 76.8
Less: Provisional tax paid 65.0
Company Income Tax payable 11.8

SOLUTION FOUR

(a) Residence of persons other than individuals

THG will be treated as being resident in Zambia because it was incorporated in Zambia
and is effectively managed from Zambia.

KTH will be regarded as being resident in Saltovia and not Zambia because it was
incorporated in that country and it is effectively managed from that country.

JKC will be regarded as being resident in Baltovia and not Zambia because it was
incorporated in that country and it is effectively managed from that country.

(b) THG LIMITED

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COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2018
K K
Business profits 6,900,000
Foreign dividends:
KTH (K304,000 x100/80) 380,000
JKC (K120,000 x 100/60) 200,000
Total taxable profits 580,000
7,480,000
Company Income Tax
(K7,480,000 x 35%) 2,618,000
Double Taxation Relief
on dividend from KTH (W1) 76,000
on Dividend from JKC (W2) 70,000
(146,000)
2,472,000

Workings
(1) Double Taxation Relief on dividends received from KTH Ltd will be the lower of:

The Zambian company income tax on the dividends:

K380,000 x 35% = K133,000 and

The foreign withholding tax paid:

K380,000 x 20% = K76,000

The double taxation relief is therefore K76,000

(2) Double Taxation Relief on dividends received from JKC Ltd will be the lower of:

The Zambian company income tax on the dividends:

K200,000 x 35% = K70,000, and

The foreign withholding tax paid:

K200,000 x 40% = K80,000

The double taxation relief is therefore K70,000

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(c) DAVID MAFULEKA
INCOME TAX COMPUTATION FOR THE TAX YEAR 2017
K K
Annual salary 360,000
Less donations to public benefit organisations (3,060)
356,940
Dividends from foreign sources
From KTH (K30,000 x100/80) 37,500
From JKC (K15,000 x100/60) 25,000
62,500
419,440
Income Tax
on first K74,400 9,960
On Excess (K419,440 -K74,400) x 37.5% 129,390
139,350
Double Taxation relief
Divided from KTH (W1) 7,500
Divided from JKC (W2) 8,306
(15,806)
Less PAYE (111,180)
Income tax payable 12,364

Workings
(1) Double Taxation Relief on dividends received from KTH Ltd will be the lower of:

- The Zambian income tax attributed to the foreign dividends:

K37,500 x K139,350/419,440 = K12,459, and

- The foreign withholding tax paid:

K37,500 x 20% = K7,500

The double taxation relief is therefore K7,500

(2) Double Taxation Relief on dividends received from JKC Ltd will be the lower of:

- The Zambian income tax attributed to the foreign dividends:

K25,000 x K139,350/419,440 = K8,306, and

- The foreign withholding tax paid:

K25,000 x 40% = K10,000

The double taxation relief is therefore K8,306

END OF D5 SOLUTIONS

159
 TAXATION PROGRAMME EXAMINATIONS

DIPLOMA LEVEL
________________________

D6: TAX AUDIT AND INVESTIGATIONS

_______________________
MONDAY 11 JUNE 2018
_______________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This question paper consists of FOUR (4) questions of Twenty Five (25) marks each.
You must attempt all the FOUR (4) questions.

3. Enter your Student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A Taxation table is provided on pages 2, 3 and 4.

160
Attempt all FOUR (4) questions

QUESTION ONE

(a) A tax audit can only be successful when there is an adequate legal framework. This is
because a tax audit is a sensitive contract between the tax payer and ZRA. It involves
an intrusion of the tax payer’s privacy, exploration of private and business issues as
well as the disruption of the tax payer’s day-to-day’s workflow. Further the tax auditor
is expected to use a functional or a segment model.
Required:
Briefly explain FOUR (4) key elements of a tax legal framework that relate to the
function of a tax audit and investigation. (8 marks)

(b) Explain the differences between the functional and a tax payer’s segment model.
(6 marks)
(c) The following details, in a summarised form relate to Jante Limited, a listed firm on
the Lusaka Stock Exchange (LUSE), for the year ended 30 June 2018. The net profit
for the year before taxation was K840,000. This profit was calculated after charging
the following expenses:

(i) Depreciation of computer equipment K 18,000

(ii) Amortisation of intangible non-assets K 20,000
(iii) Sales director’s emoluments amounted to K250,000
(iv) A disabled person was employed throughout the year.
(v) The Sales Director has been accommodated in company house in Kalundu
Township of Lusaka. However, if the house was rented gross rentals payable
would amount to K17, 500.

(vi) The company’s sales director had been provided with a Toyota Prado that was
being used for private and business purposes. The car has a cylinder capacity
of 2,900 cc. The total mileage in the year 2018 was 120,000km and the private
mileage was 70% of the total.
(viii) The amount of capital allowances on Jante Ltd on non-current assets were
agreed at K31, 200 for the tax year 2018.

Required:
Calculate the company’s Income tax payable by Jante Ltd for the charge year 2018.
(11 marks)
[Total: 25 marks]

QUESTION TWO

(a) The collection of taxes by the Zambia Revenue Authority (ZRA), is not only restricted
to traders, manufacturers and workers only but to service industries as well. Some of
these service industries are in the telecommunication sector such as Airtel and Zamtel.
Other services on which taxes are collected include, discounts given to Airtime dealers,
discount subscribers, network switching expenditure and roaming charges and on
income earned.

Required:

Explain briefly how the following services are treated for tax purposes:

161
 (i) Discounts on airtime (3 mark)
(ii) Discounts to subscribers (2 mark)
(iii) Network switching expenditure (2 mark)
(iv) Roaming charges and income (3 marks)

(b) The Zambia Revenue Authority (ZRA) carries out tax audits and investigations into tax
liabilities of business houses from time to time. This involves an examination of a tax
return and its supporting books of accounts and any other related information. A tax
audit and investigation is also an examination of whether a tax payer has correctly
assessed and reported their tax liability and fulfilled other tax obligations. However,
for a tax audit to be comprehensive, it must meet certain qualitative elements for it to
be appreciated by both parties.

Required:

Explain Four (4) elements of a tax audit. (4 marks)

(c) The tax auditor needs to plan the audit so that it is conducted in an orderly and efficient
manner. During the planning meeting, the auditor should consider planned risk
procedures and risk responses to the risk of material misstatements. The essential
matters relating to an investigation depend on the size and complexity of the company
being investigated and the auditor’s exposure and experience. When developing an
audit strategy and a plan, the auditor should evaluate certain important matters in
relation to the financial statements and internal controls over financial reporting.
However, before an evaluation is carried out, an introductory meeting between the
auditor and the client is needed at which certain matters should be communicated to
the business under an investigation in form of a letter.

Required:

State six (6) matters that should be included in the letter for the introductory meeting
between the tax auditor, and the client.
(6 marks)

(d) There are different types of audits and they vary in accordance with the level of scope
and intensity.

Required:

Briefly describe any Five (5) types of tax audits that can be carried out by the tax
auditor. (5 marks)
[Total: 25marks]

QUESTION THREE

You are the Principal Tax Auditor responsible for the audit of Kafeka Ltd, which is a subsidiary
of a multi-national enterprise (MNE) resident overseas. Kafeka Ltd is resident in Zambia while
other subsidiaries are resident in different countries. Two (2) of the subsidiaries are situated
in countries classified as tax havens.

The following issues relating to tax year 2018 are outstanding and have been left for your
attention:

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1. Tax treatment of the following items of expenditure
 Defalcations by cashier of K4,000.

 Cost amounting to K30,000 of preparing income tax returns for tax amnesty and
additional accountancy costs of K12,000 incurred as a result of tax investigation
revealing discrepancies.

 A cost of K22,000 of seconding three (3) accounts clerks to the Ministry of Health
to assist in the disbursement of funds following the cholera outbreak

 A cost of K18,000 on repairs incurred on a newly-acquired asset which was not

usable in its unaltered state. The condition of the asset was confirmed by a
qualified engineer who carried out a detailed inspection.

 Employees NAPSA contributions of K120,000. The Payroll Accountant has made a

monthly deduction of K255 on each employee’s salary when computing Pay As
You (PAYE)

 Staff Christmas party of K37,500.

2. Tax treatment of interest and an adjustment relating to goods sold to one of the
subsidiaries
 Kafeka Ltd’s statement of profit or loss show interest paid of K15,000. The company
has a debt : equity ratio of 10:2. The excess interest disallowed has been computed
as 1/3 x K15,000 = K5,000.

 Kafeka Ltd sold goods to one of the subsidiaries at a cost of K24,000 which did not
include the profit margin of 25% charged to other customers. This was in accordance
with the company policy on transfer pricing. The Financial Controller has made an
adjustment in the computation of the taxable business profits by deducting K8,000
from the accounting profit.

The Financial Controller thinks tax audits are more value adding compared to
financial statement audits since tax audits are simply meant to minimise the ‘tax
gap’.

Required:

(a) Discuss four (4) theories that may explain the demand for financial statement audit
services, according to Hayes et al. (2005). (8 marks)
(b) Explain the tax treatment of each item of expenditure identified during the tax audit
of Kafeka Ltd and state the evidence which you will expect to find in undertaking
your review of work done. (6 marks)
(c) Discuss each of the following rules to Multi-national enterprises (MNES).
(i) Thin capitalization (3 marks)
(ii) Tax havens (3 marks)
(iii) Transfer pricing (3 marks)

(d) Advise whether the tax treatment of the two (2) transactions given in the scenario on
thin capitalisation and transfer pricing are correct. (2 marks)
[Total: 25 marks]

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QUESTION FOUR

Kitewe Ltd which is resident in Zambia provides telecommunications services both nationally
and internationally. Its business has been concerned with mobile phones, telephone calls and
private telecommunication networks. Kitewe Ltd levies inter-connection charges to other
service providers.
The Managing Director has recently attended a seminar on inter-connection charges and their
impact on value added tax (VAT) liability organised by the Ministry of Finance and Zambia
Revenue Authority (ZRA). An official from the Ministry of finance highlighted the impact on
the treasury of the interconnection charges due to the existence of a broad informal economic
sector in the telecommunications industry. An official from the ZRA discussed the technical
details on the taxation of interconnection charges. The management director is worried that
ZRA has notified the company that a tax audit will be carried out next month.
The Finance Director has provided the following details of temporary differences as at 31
March 2018 (there is no balance brought forward on deferred tax):
K’000
1. Accelerated capital allowances 10,000
2. Loss relief being carried forward 4,500
3. General provision (disallowed for tax purposes) 600
Joseph Mwansa a former employee of Kitewe Ltd left employment on 31 May 2018 and is
currently pursuing his PAYE rebate with the Zambia Revenue Authority (ZRA). His all-
inclusive monthly salary was K32,000 and the tax paid to date under PAYE was K52,047. He
remained unemployed for the rest of the tax year.

Required:

(a) Discuss the inter-connection charges and their impact on VAT liability. (7 marks)
(b) Calculate the tax rebate (refund) for Joseph Mwansa for the tax year 2018 (6 marks)
(c) Explain the term deferred tax and how it arises. (6 marks)

(d) Compute the amount of tax deferred by Kitewe Ltd, as at 31 March 2018.
(6 marks)
[Total: 25 marks]

END OF PAPER

164
D6: TAX AUDIT AND INVESTIGATIONS SOLUTIONS

SOLUTION ONE

The following are the five key elements of a tax legal framework
(a) (i) Tax payer’s record keeping obligations-business enterprises are expected
to keep adequate books of accounts and records based on national codes of
commerce to the extent that they do not contravene any tax laws. Where
technology is advanced, obligations may require that they keep electronic
books and accounts. The books and records should be maintained in the
language of the country in which the tax payer resides.

(ii) Giving Tax Inspectors Access to books and records-Company law requires that
that the auditor is given access to records and books of accounts at all times
they are required. This information maybe inform of financial statements,
letters of contracts in order to determine correct amounts of taxes due.
However, the ability to collect taxes is subject to the provisions of the
respective country’s Double Taxation Agreements or Tax Information Exchange
Agreements and Domestic Laws. An auditor should conduct an investigation on
the premises of the client in order to observe work –flow daily and inspect
various assets that are being used by the client.

(iii) Giving Tax officials Access to third party information-All countries have legal
provisions to support the auditor in cases where the tax payer provides
unsatisfactory information or the auditor must verify tax payer’s information
using an independent or third party sources. However the auditor can be
limited due to protection of tax payer’s privacy, Protection of trade industrial
secrets and confidential rules of professional ethics.

(iv) Sanctions for Non-compliance-the voluntary reporting of tax payer’s correct tax
liabilities and the provision of any assistance that may be required verifying tax
payer’s reported liabilities are facilitated by an appropriately structured regime
of sanctions such as penalties, interest and imprisonment. These penalties may
arise when a tax payer fails to answer questions or provide relevant documents.
Sanctions can be Imposed when a tax payer understates tax liabilities resulting
from unintended errors or from careless or reckless acts and from deliberate
and fraudulent acts.

(b) Tax Payer’s functional model, under this model, staff are organised by functional
groupings such as registration, accounting, information processing, audit, collection
of, appeals and generally across taxes.
This model was introduced in order to enhance standardisation of work processes
across taxes, to simplify computerisation and arrangements for tax payers and to
improve operational efficiencies.
The model also helps to integrate direct and indirect taxes especially audit work that
relate to VAT and Income Tax also helps to identify which individuals are responsible
for specific taxes so that they can attend to queries as they arise. It is therefore a
model based on the organisational structure of the company.

Tax payer’s segment model-This a more recent development that was introduced
in order to organise the service and enforcement functions principally around segments
of tax payers such as large businesses, high net worth individuals and SMEs.

165
 The rationale is to organise functions around a tax payer’s segment because each
group of tax payers has different characteristics and tax compliance behaviours and
presents different risks to ZRA.
It is argued that the grouping of key functional activities within a unified and dedicated
management structure increases the prospects of improving Overall compliance levels.

(c) Jante Ltd’s Income tax computation for the charge year 2018
K’000 K’000
Profit before taxation as per accounts 840,000
Add back:
Depreciation 18,000
Amortisation 20,000
38,000
878,000
Accommodation benefits:
Sales director’s (30% x 250,000) 75,000
Personal to holder car benefit : sales director 40,000
993,000

Capital allowances (31,200)

Disabled allowances (1,000)
Taxable profit 960,800

Company Income Tax Payable = (35% x 960,800) =K336,280

SOLUTION TWO

(a) (i) A discount is a deduction either after prompt payments have been made or
when goods and services are bought in bulk. Thus discounts will not form part
and parcel of the gross sales revue that airtime manufacturers give to the
airtime dealers.
(ii) A discount that is given to a subscriber will reduce the cost of his purchases
when submitting tax returns to the Zambia Revenue Authority. This will be at
the time a tax assessment is being made for the tax payable in a given financial
period.
(iii) The network switch expenditure will be treated as part and parcel of the cost
of making an outward bound telephone call when ascertaining the cost of
accessing a telephone service. The caller will be billed as such.
(iv) As for roaming, both the caller and the receiver are charged. However, the tax
treatment of these charges will be determined by establishing where the
income arising from the service facility is recorded or accrued when that income
will be subjected to the Zambian taxation laws regarding VAT and Income Tax.
Otherwise they will not be chargeable.

(b) In order for a tax investigation and audit to be appreciated, it should conform to certain
features that are known as qualitative characteristics. The following are the elements
of a tax audit:
(i) The tax payer’s records and accounts have been reviewed in sufficient details
in order to reach a conclusion regarding all items of material consequences.

166
 (ii) That appropriate income tests have been performed where necessary to ensure
the proper and complete reporting of income has been made regardless of the
sources of that income.
(iii) That the responsibility of tax payer regarding the filling of all tax returns has
been ascertained.
(iii) That the conclusions expressed are documented in sufficient details to enable
the reader to comprehend the process as to what lead to the conclusion.

(c)The following matters must be communicated to the client before an introductory

meeting takes place:

(i) Purpose of the main study

(ii) Time schedule for the main study
(iii) A list of members who will be on the audit team
(iv) The types of methods that will be used by the auditor
(v) The information that will be requested from the auditee
(vi) The need to appoint or confirm the contact person

(d) The following are the types of tax audits that can be carried out by the tax auditor:
● A full audit- this is a type of an audit which encompass all audit issues. It is
a comprehensive examination of all information relevant to the calculation of a
tax payer's tax liability for a given period. The objective is to determine the
correct tax liability for a tax return as a whole.
● Limited scope audit or(issue based audit)- these are confined to specific
issue key potential issues on tax return and/or a particular tax scheme
arrangement employed by the tax payer. The aim to examine key potential risk
areas of non-compliance They consume relatively few resources than full audits
and allow for an increased coverage of the tax payer’s population.

● Single issue audit- these are confined to one potential non-compliance that
may have arisen from an examination of the tax payer’s return. Given there
narrow scope, single issue audits efficient in that less time is spent to perform
and can be used to review large numbers of a payer’s involved in similar
schemes to conceal non-compliance

● Deregistration audits- these are conducted when a business is pending

deregistration from being a VAT registered supplier. The aim is to establish the
final tax liability/refund pension.
 Education audits – these audits are normally done when there is a major
change in the tax law that is complex.

167
SOLUTION THREE

(a) Auditing theories.

Four auditing theories according to Hayes et al. (2005) are as follows:
1. The policeman theory – this theory claims that the auditor is responsible for
searching, discovering and preventing fraud. In the early 20th century this was certainly
the case. However, more recently the main focus of auditors has been to provide
reasonable assurance and verify the truth and fairness of the financial statements.

2. The lending credibility theory – this theory suggests that the primary function of
the audit is to add credibility to the financial statements. In this view the service that
the auditors are selling to the clients is credibility. Audited financial statements are
seen to have elements that increase the financial statement user’s confidence in the
figures presented by the management in the financial statements. The users are
perceived to gain benefits from the increased credibility, these benefits are considered
to be that the quality of investment decisions improve when they are based on reliable
information.

3. The theory of inspired confidence (Theory of rational expectations – Limperg

1932) – this theory addresses both the demand and the supply for the audit services.
The demand for audit services is the direct consequence of the participation of third
parties (interested parties of a company) in the company. These parties demand
accountability from the management, in return for their investments in the company.
Accountability is realised through the issuance of periodic financial reports. However,
since this information provided by the management may be biased, and outside parties
have no direct means of monitoring, an audit is required to assure the reliability of this
information. With regard to the supply of audit assurance, Limperg (1932) suggests
that the auditor should always strive to meet the public expectations.

4. The agency theory – the agency theory (Watts and Zimmerman 1978, 1986a,
1986b) suggests that the auditor is appointed in the interest of both the third parties
as well as the management. A company is viewed as a web of contracts. Suppliers,
bankers, customers, employees etc. make some kind of contribution to the company
for a given price. The task of the management is to coordinate these groups and
contracts and try to optimize them: low price for purchased supplies, high price for
sold goods, low interest rates for loans, high share prices and low wages for
employees. In these relationships, management is the agent, which tries to gain
contributions from principals (bankers, shareholders, employees etc.).
The most prominent and widely used audit theory is the agency theory.

(b) Explanation of tax treatment and evidence expected.

Expenditure Explanation Evidence expected
1. Defalcations by cashier Losses suffered by a - Copy of the relevant
business due to the receipts or vouchers
dishonest of a person who
has some control such as a - Written
proprietor or managing representations from
director are not allowed. management on the
But if the losses are
disciplinary measures
suffered because of the
dishonest of a subordinate taken
(such as cashier in this

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 case) who has no control
are allowed.
2. Preparing income tax Costs of preparing the - Copies of invoices
returns and additional income tax returns are relating to the
accountancy costs incurred allowed. However, preparation of the
as a result of investigation additional accountancy
income tax returns
revealing discrepancies costs incurred as a result of
investigation revealing and additional
discrepancies are not accountancy work
allowed.
- Copies of ZRA
assessments and
investigation report

3. Cost of seconding three Amounts paid for a - Copy of signed

(3) accounts clerks to the charitable purpose which is contract
Ministry of Health in national interest is
allowed. - Copies of the relevant
payment vouchers

4. Repairs to a newly- An asset which requires - Engineer’s inspection

acquired asset which was substantial expenditure to report on acquisition
not usable in its unaltered be incurred on it before it and any invoices
state can be used in the trade
relating to the repairs
basically calls for capital
expenditure and hence is - Copies of relevant
non-deductible.
invoices and payment
vouchers

5. Pay As You Earn (PAYE) The monthly deduction of - Copy of PAYE

treatment of employee K255 was removed effective computations
NAPSA contributions 1 January 2018. This is
because the Constitution
now excludes pension
benefits from taxation.
6. Staff Christmas party Expenditure incurred on - Copy of all relevant
entertaining employees is invoices
allowable.

(c) (i) Thin capitalisation

A company is said to be thinly capitalised if a person funds the business with more
debt than the business could sustain had it been funded as a standalone entity,
borrowing from unconnected persons acting at arm’s length.

Multi-national enterprises (MNEs) use this scheme by excessively funding a branch or

subsidiary with interest bearing loans rather than share capital. This is an attractive
alternative for non-resident investors, as the borrower generally receives a tax
deduction for the interest paid. By contrast, dividends paid on shares are not
deductible so that the underlying profits bear the full rate of company tax.

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 Thin capitalisation is a problem that has troubled most of the major trading Nations
for many years particularly if they receive inward investment, as is the case for Zambia.
Many Countries deal with this problem by rules which deny deductions for interest in
defined cases, and possibly re-characterise the payment of interest as Dividends.
There are many technical and practical issues in implementing such rules.

(ii) Tax havens

Some countries do not charge heavy taxes on MNEs established on their territory either
through a patent or a subsidiary or a permanent establishment. These are known as
tax havens.
Tax havens in tax planning, MNEs may seek to reduce source and residence country
taxation, by profit shifting to tax havens.
For example, a simple transfer pricing, the parent company would sell goods to a
related company in a tax haven for cost plus a small profit, which in turn sells to a
subsidiary in the source country for an inflated price. Consequently, the subsidiary
makes minimal profit, and most profit is in the tax haven.

(iii) Transfer pricing

Transfer pricing is the general term used to refer to the problem of allocating profits
by a multinational enterprise among the parts of a corporate group.
This involves pricing of goods and services supplied within the group between the
parent company and its foreign subsidiary or between two foreign subsidiaries.
Transfer pricing is used by companies with subsidiaries located in countries with lower
tax rates (tax havens) to divert profits in order to lower tax liabilities of the group. It
is necessary to allocate profits among the companies in the group because under
international taxation norms a country will tax a non-resident company only on profits
sourced in that country.

(d) Advice
1. Thin Capitalisation
Interest added back of K5 million in not correct. The correct amount to be added back
is: 2/5 x K15 million = K6 million.
2. Transfer pricing
The amount of the adjustment is correct. However, its treatment is wrong. The amount
is supposed to be added when computing taxable profits.

SOLUTION FOUR

(a) Inter-connection charges and their impact on VAT liability.

An inter-connection charge is a charge levied by network operators on other service
providers to recover the costs of the interconnection facilities (including the hardware
and software for routing, signaling, and other basic service functions) provided by
network operators.
In order to understand the impact that the interconnection charges will have on the
overall VAT liability in the telecommunications sector is to ascertain the variables such
as the incidence of tax avoidance and the cost of collection. The economic structure
of the sector into either formal or informal will be considered. A high tax drives up tax
avoidance and cost of collection. Similarly a broad informal economic sector poises a
very high cost to collect taxes. While it is difficult to get the exact revenue figures
collected in the form of VAT and import duties from handsets, common sense indicates

170
 governments that are with a large formal sector would, in relative terms, generate
more revenue than those with large informal sectors despite having the highest rates
of VAT and import duties.
Another consequence of high VAT and import duties on handsets and other
telecommunication equipment is the emergence of poor quality pirated handsets. This
would mean that the market prices of the handsets do not reflect the VAT and import
duties supposedly paid on them.
However, the impact on revenue if VAT and import duties were lowered would be the
broadening of the formal sector at the expense of the informal sector, the diffusion of
more quality handsets and, more importantly, a fall in the cost of collecting the VAT
and import duties and probably an increase in revenue for the government. It should
also increase the productive efficiency of the mobile sector and its positive spill-over
effects to the wider economy.

Relevant points include:

- Definition of inter-connection charge

- Tax rate
- Quality of product
- Tax avoidance
- Cost of collection
- Informal sector
- Formal sector
- Wider economy

(b) The tax refundable since Joseph Mwansa remained unemployed for the rest of the
tax year is computed as follows:
K
Salary (32,000 x 5) 160,000
Less: Allowable deductions 0
Taxable income 160,000

Income tax
First K39,600 x 0% 0
Next K9,600 x 25% 2,400
Next K25,200 x 30% 7,560
Balance K85,600 x 37.5% 32,100
Income tax payable for 2018 42,060
Less: Income tax already paid – PAYE (52,047)
Excess amount refundable (9,987)

(c) Deferred tax liability represents taxes that a company would have had to pay under
its regular financial accounting but that it has deferred to the future by way of the tax
legislation. Deferred tax normally results in a liability being recognised within the
statement of financial position. IAS 12 Income Taxes defines a deferred tax liability as
being the amount of income tax payable in future periods in respect of taxable
temporary differences. So, deferred tax is tax that is payable in the future.
Temporary differences are defined as being differences between the carrying amount
of an asset (or liability) within the statement of financial position and its tax base i.e.
the amount at which the asset (or liability) is valued for tax purposes by the relevant
tax authority.

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 A deferred tax liability arises when a company’s real-world tax bill is lower than
what its financial statements suggest it should be due to differences between tax
accounting rules and standard accounting practices. The liability signals to observers
that the company remains under a tax obligation.
The tax code allows companies to essentially keep two sets of books: one for their
regular financial accounting – their internal bookkeeping and the financial statements
they make available to investors, regulators and the public – and one for their income
taxes. This is because standard accounting rules and the tax code differ in key areas
such as revenue and expense recognition and asset depreciation. In their regular
accounting, companies aim to maximise the profits they can show to shareholders. In
their tax accounting, though, they benefit by pushing profits into the future, reducing
their tax burden now and allowing them to invest money rather than pay it to the
government. This dual accounting is legal as long as a company is shifting its
responsibilities among years rather than illegally evading them.
Temporary differences are defined as being differences between the carrying amount
of an asset (or liability) within the statement of financial position and its tax base i.e.
the amount at which the asset (or liability) is valued for tax purposes by the relevant
tax authority.
Taxable temporary differences are those on which tax will be charged in the future
when the asset (or liability) is recovered (or settled).

(d) Computation of deferred tax liability as at 31 March 2018

K’000
Accelerated capital allowances 10,000
Loss relief being carried forward (4,500)
General provision (disallowed for tax purposes) (600)
Net temporary differences 4,900

Deferred tax liability = 35% x K4,900,000 = K1,715,000

END OF SOLUTIONS

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