STUDY MANUAL

Paper L.3 ADVANCED TAXATION

ZICA ACCOUNTANCY PROGRAMME PROFESSIONAL (Final Draft)

L.3 Advanced Taxation Amendment Act 2006/07

Published by the Zambia Institute of Chartered Accountants (ZICA) 24 Joseph Mwilwa Road RhodesPark P.o Box 32005 Lusaka Zambia 2007

Acknowledgements We are grateful to the Zambian Government through the Ministry of Finance and National Planning under PEMFA project for funding the printing of these books. Furthermore we are grateful to the Professionals and specialists for undertaking the process of writing these study materials. Finally, we also acknowledge the Association of Chartered Certified Accountants, the Chartered Institute of Management Accountants, and the Institute of Chartered Accountants of England & Wales and Other Accountant Professional bodies for permission to reproduce some of the past Examination questions. All rights reserved. No past of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the Zambia Institute of Chartered Accountants (ZICA).

(Detailed) PAG E UNIT 1 INCOME TAX Chapter 1- Principles of Income Tax Taxation as a source of revenue for government1 Performance of tax revenue collection..3 Sources of tax law in Zambia..4 Review of cannons of taxation6 Properties of good taxation.7 Residence and ordinary residence8 The role of the direct taxes division.20 Problems of the Zambian tax system..28 Tax reforms basic concepts.............36 Chapter 2 Personal Business Taxation An evaluation of the badges of trade.41 Computation of trading taxable profits44 Computation of capital allowances.46 Accounting dates..............71 Turnover tax79 Chapter 3- Taxation of income from employment Deemed Income.92 Employed or self employment..94 Payments in addition to salary ..101 Lump Sum Payments..103 Operation of the PAYE System.108 Share Option Schemes...110 Chapter 4- Taxation of Investment income Introduction..118 Kinds of investment...........119 Taxation of Income from Letting of Property..121 Taxation of Income from Royalties..126 L.3 Advanced Taxation Amendment Act 2006/07

Taxation of Interest Income...128 Taxation of Dividends from Zambian companies130 Taxation of Investments in Pension Funds135 Chapter 5- Personal Income Tax Computations and payment of tax Amalgamation of income.153 Source of Income..156 Receipt of Income..158 Independent taxation for married couples..163 Computation of Income Tax Payable by Individuals.163 Computation of Income Tax Payable by Partnerships..167 Taxation of Income from Foreign Sources..171 Double Taxation Relief171 Chapter 6- Company Income Taxation Introduction..180 What is business?......................................................................................181 Treatment of Employee benefits in Kind.188 Loans to effective shareholders.193 Investment Income for Companies194 Relief for Trading Losses.195 Double Taxation Relief.198 Foreign Exchange Gains and Losses.200 Chapter 7- Taxation of Mining Operations Brief history of Zambian Mining224 Mining Policy226 Why Mining Companies are taxed differently..227 Rights to Minerals vested in the president..229 Large Scale mining operations.230 Small Scale mining operations..230 Mineral Royalty Tax.231 Income Tax Deductions for Mining Investments.239 Expenditure on community services.240 International Aspects of Mining Taxation.247 Carry forward of losses in United States Dollars.250 Indexation of Mining Losses and Capital Allowances260

L.3 Advanced Taxation Amendment Act 2006/07

Chapter 8 Taxation of farming enterprises Introduction267 Definition of Farming...269 IAS 41 Agriculture.270 Farming Deductions and Capital Allowances..274 Stock Valuation.278 Valuation of Livestock..285 Fish Farming Activities291 Averaging of Farming and Fishing Income..292 Chapter 9 Taxation of deceased estates and trusts Deceased persons estate.301 Taxation of Income of an Estate306 Taxation of Trusts 309 UNIT 2 PROPERTY TRANSFER TAX Chapter 10 Property Transfer Tax The meaning of Transfer and Realized value325 Transfers within Groups of companies328 Transfers to members of the immediate family..328 Exemptions..329 Transfer of property held in a Trust.330 Taxation of Inherited property..330 Transfer of property by agents.331 UNIT 3 VALUE ADDED TAX Chapter 11 Value Added Tax Meaning of supply...343 VAT Registration.346 Accounting for Output Tax.350 Deduction of Input Tax354 VAT Implications of leasing transactions........364 Administration of VAT.371

L.3 Advanced Taxation Amendment Act 2006/07

UNIT 4 CUSTOMS AND EXCISE DUTIES Chapter 12 Customs and excise duties Introduction..386 Globalization and International Trade.388 Protectionism and Trade quotas..390 Tariffs and trade quotas.392 The Customs and Excise Division396 Clearance procedures404 Customs acquittal documents and export procedures.408 Determination of customs and excise values.411 Chapter 13 Export Concessions Introduction413 Duty Drawback System...416 Basis of Payment.. .418 Challenges of the duty drawback system.420 Chapter 14 International Aspects World Trade Organisation..428 The World Customs Organisation.435 Common Market for Eastern and Southern Africa (COMESA).438 The Free Trade Area...447 UNIT 5 FINANCIAL PLANNING Chapter 15 Financial Planning Meaning of financial planning452 Sources of finance for individuals and companies.454 Deposit based Investments463 Collective Investment products..463 Pension Products.467

L.3 Advanced Taxation Amendment Act 2006/07

UNIT 6 TAX PLANNING Chapter 16 Tax Planning Part I Meaning of Tax Planning481 Objectives of Tax Planning.482 Acceptable Limits of Tax Planning484 Tax Avoidance..486 Source based taxation system...495 Anti Avoidance Legislation in Zambia...496 Tax Evasion..499 Options for dealing with tax evasion.502 Chapter 17 Tax Planning Part II Employment versus Self employment..507 Remuneration packages 509 Choice of Business Medium..513 Extracting Profits from a Company523 Disposal of a Business524 UNIT 7 REVENUE APPEALS TRIBUNAL Chapter 18 Revenue Appeals Tribunal The Revenue Appeals Tribunal.527 Composition and Structure of the RAT.528 Appeals Procedures.530

Bibliography.. 536

L.3 Advanced Taxation Amendment Act 2006/07

PURPOSE This paper will enable students apply judgement and technique in the provision of taxation services to clients. The paper is intended to equip students with the ability to resolve proplems involving the computation of tax payable and tax planning drawing upon the interaction of a wide range of taxes. General Learning Objectives: On completion of this paper, the student should be able to: 1. Prepare computations for and advise clients on issues relating to the taxation liabilities of individuals arising from income receipts, imports and exports and capital disposals. 2. Carry out computations for and advise clients on issues relating to taxation liabilities of corporate tax payers arising from income generation, imports, exports and capital disposals. 3. Provide advice on minimizing or deferring tax liabilities for individuals or corporate tax payers by utilizing exemptions, reliefs and allowances 4. Evaluate the Zambian Taxation system

LEARNING CONTENTS
1 2 3 4 5 6 Income Tax - (40%) Property Transfer Tax - (5%) Value Added Tax - (10%) Financial Planning - (15%) Tax Planning - (20%) Role and Functions of the Revenue Appeals Tribunal - (10%)

UNIT 1.0: INCOME TAX (40%) Element 1.1 Principles of Income Tax Review of the Canons of taxation, progressive and regressive tax Meaning of residence for individuals and other types of tax payers L.3 Advanced Taxation Amendment Act 2006/07

Collection of income tax by deduction at source, standard assessment and self assessment, including turnover tax. Payment of Income tax, submission of income tax returns and penalties and interest on overdue tax. Role and functions of the Direct taxes division of the Zambia Revenue Authority.

Element 1.2 Personal Business Taxation Evaluation of the badges of trade Computation of tax adjusted profits for sole traders and partnerships Capital Allowances on implements, plant and machinery, industrial buildings and commercial buildings; Basis periods, including the rules applicable on commencement, cessation and change of accounting date. Trading losses, strengths and weaknesses of the currently available reliefs for trading losses. Rules relating to small businesses with annual turnover that is less than the Value Added Tax registration threshold. Element 1.3 Income from Employment Factors used to distinguish between employment and self employment Allowable expenses and basis of assessment Taxable and exempt emoluments, other than payments on termination of employment Lump sum payments on termination of employment Share Option Schemes. Operation of the Pay As You Earn System Element 1.4 Investment Income Income from letting of Property Royalties Bank Interest, Building society interest and treasury bill discounts Interest on Government bonds Other Interest receivable Dividends from Zambian companies Element 1.5 Personal Income tax computations and payment of Income tax Independent taxation system for married couples and joint property Computation of income tax payable by individuals Taxation of Income from foreign sources and Double taxation relief.

L.3 Advanced Taxation Amendment Act 2006/07

Element 1.6 Company Income taxation Taxable business profits of companies, including the treatment of benefits in kind Loans to effective shareholders and computation of company income tax payable Capital allowance for companies Investment income for companies Relief for trading losses and its strengths and weaknesses Taxation of Mining operations Overseas aspects of company income taxation, including foreign exchange gains and losses and double taxation relief Payment of Company income tax and submission of returns. Element 1.7 Taxation of Farming Enterprises Qualifying Farming activities Farm improvements allowance, farm works allowance, Development allowance and Capital allowances on implements, plant and machinery Averaging of Farming and fishing income. Element 1.8 Taxation of Estates, Settlements (Trusts) and Miscellaneous Income Types of Trusts Administrators of Estates Payment of tax chargeable on estates and trustees UNIT 2.0 Element 2.1 Element 2.2 Element 2.3 Element 2.4 Element 2.5 Element 2.6 Element 2.7 UNIT 3.0 Element 3.1 Element 3.2 Element 3.3 Element 3.4 PROPERTY TRANSFER TAX (5%) Meaning of transfer and realized value Transfers within groups of companies Transfers to members of the immediate family Computation of Property transfer tax and its payment Transfer of property held in a trust Penalties Exemptions VALUE ADDED TAX (10%) Types of Supplies Registration and Deregistration for Value Added Tax (including group registration and businesses with Branches) Accounting for Input and Output Tax Implications of Sale and Leaseback and Repurchase agreements

L.3 Advanced Taxation Amendment Act 2006/07

Element 3.5 Element 3.6 UNIT 4.0 Element 4.1

Trading within the COMESA Free Trade Area Administration of Value Added Tax FINANCIAL PLANNING (15%) Sources of finance for individuals and companies Leasing, Hire purchase, Outright purchase, Equity finance Loan finance Personal Financial Planning Deposit based investments Collective investment products Pension products covering distinctions defined contributory schemes and defined benefit schemes. TAX PLANNING (20%) Employment compared to Self employment Remuneration packages Choice of Business medium Incorporation of a business Extracting profit from a company Tax implications arising from disposal of a business. ROLE AND FUNCTIONS OF THE REVENUE APPEALS TRIBUNAL (10%)

Element 4.2 Element 4.3 Element 4.4 Element 4.5

UNIT 5.0 Element 5.1 Element 5.2 Element 5.3 Element 5.4 Element 5.5 Element 5.6 UNIT 6.0 Element 6.1

Revenue Appeals Tribunal Regulation 1998 as Amended Administration Proceedings Appeals Procedures Costs Finality of Tribunal Decisions Element 6.2 Members of the Tribunal Element 6.3 Registrar of the Tribunal Element 6.4 Appeals to High Court

L.3 Advanced Taxation Amendment Act 2006/07

STRUCTURE OF THE EXAMINATION PAPER The Examination will be a THREE (3) hours paper. The paper will consist of seven (7) questions out of which candidates will be required to attempt five (5) questions.

L.3 Advanced Taxation Amendment Act 2006/07