PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of Council of ICPAU

CPA(U) EXAMINATIONS
LEVEL TWO
TAXATION - PAPER 11

MONDAY, 2 JUNE 2014

INSTRUCTIONS TO CANDIDATES

1.

Time allowed:

3 hours 15 minutes.

The first 15 minutes of this examination have been designated for

reading time. You may not start to write your answer during this time.
2.

Section A has one compulsory question carrying 30 marks.

3.

Section B has three questions and only two questions are to be

attempted. Each question carries 20 marks.

4.

Section C has three questions and only two questions are to be

attempted. Each question carries 15 marks.

5.

Tax rates are provided on page 8.

6.

Write your answer to each question on a fresh page in your answer

booklet.

7.

Please read further instructions on the answer booklet, before

attempting any question.

2014 Public Accountants Examinations Board

Taxation Paper 11

SECTION A
This section has one compulsory question to be attempted
Question 1
United Bank Ltd, a commercial bank incorporated in Uganda, started business
in January 2006. The bank is registered for all taxes and has its head office in
Kampala. The bank has five branches, three of which are located in Kampala,
one in Jinja and the other one in Entebbe. The bank published the following
results of its operations, for the year ended 31 December 2013.
Statement of profit or loss and other comprehensive income:
Note
Interest income
1
Interest expense
Fees and commission income
Income from investments and foreign exchange trading
2
Impairment of loans and advances
3
Operating expenses
4
Profit before income tax

Shs million
87,500
(28,200)
22,900
7,650
(8,560)
(46,500)
34,790

Notes to the financial statements:

1

Interest income:
Shs million
Income from loans and advances for working
capital for customers businesses
Income from loans and advances for
construction and purchase of houses

Income from lease financing

Income from loans and advances to finance
agriculture and agro-business sectors
Total

30,500
33,200
15,200
8,600
87,500

Income from investments and foreign exchange trading:

Shs million
Income from treasury bills
850
Income from government treasury bonds
2,600
Unrealised foreign exchange gains
600
Realised foreign exchange gains
3,600
Total
7,650

Impairment of loans and advances:

Specific impairment of loans and advances
General impairment of loans and advances
Total

2 June 2014

Shs million
7,600
960
8,560
Page 2 of 8

Taxation Paper 11

Amounts included in operating expenses:

Depreciation of plant, property and equipment
Cost of billboards for signage
Life assurance policy for staff
Utilities for the managing director who resides
in the banks house
Penalties for late submission of income tax
return for the year 2012
10% NSSF company contribution
Advertising banks business in local media

Shs million
3,200
60
370
16
20
120
130

Additional information:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

Withholding tax paid on income from treasury bills

Withholding tax paid on income from government
treasury bonds
Expenses related to treasury bills and bonds
Expenses related to agricultural lending
Provisional taxes paid
Output VAT paid on lease financing
Input VAT claimed

Shs million
170
520
10
15
16,500
670
360

Written down value of depreciable assets as at 1 January 2013:

Shs million
Class I
6,260
Class II
320
Class III
Class IV
2,530
Additions during the year:

Computers
Three pickup trucks for distribution of
marketing items (less than 7 tonnes each)
Coaster bus to transport staff (seating
capacity of 29 passengers)
Furniture
Cost of commercial building used for offices
(first put to use on 1 January 2006)

2 June 2014

Shs
million
350
420
120
100
96,000

Page 3 of 8

Taxation Paper 11

Required:
(a)

(b)

(c)

Compute the tax payable by United Bank Ltd for the year ended 31
December 2013.
(21 marks)
State the due dates for payment of provisional tax and final tax for the
company.
(2 marks)
Explain the provisions for eligibility for initial allowance as per the
Income Tax Act, Cap 340.
(7 marks)
Total (30 marks)
SECTION B

Attempt two of the three questions in this section

Question 2
Mr. Mara is a managing director of a manufacturing company in Uganda
having moved from Kenya.
His three-year contract of employment
commenced on 1 January 2013; and the following are part of his entitlement:
1
2
3
4
5
6
7
8

9
10

11

12

Monthly salary Shs 40 million.

Reimbursement of cost of passage to Uganda to take up the job Shs 10
million.
Monthly housekeeping allowance Shs 500,000.
Annual gratuity of Shs 40 million payable at the end of each year of the
contract.
Club membership at Kampala Club of Shs 5 million per annum.
Allowance for a security guard of Shs 300,000 per month.
Medical allowance of Shs 2 million per month over and above the
medical scheme provisions for the entire staff.
Loan facility offered at a rate of 10% per annum of Shs 200 million
taken effective 1 June 2013. The statutory rate as at 1 July 2012 was
12%.
Travel allowance for spouse Shs 4 million.
Residential accommodation at Kololo provided by employer where he
pays a monthly nominal rate of Shs 1,500,000. The open market rate
of similar houses is Shs 10 million per month.
A Mitsubishi Pajero station wagon provided by employer for both duty
and private use. The vehicle was acquired at Shs 150 million on 1 July
2013. Mr. Mara pays a nominal Shs 200,000 per month towards fuel.
Mr. Mara made a gain on disposal of a right to acquire shares under an
employee share acquisition scheme of Shs 5,000,000.

2 June 2014

Page 4 of 8

Taxation Paper 11

Required:
(a) Compute the tax payable by Mara for the year ended 31 December
2013.
(18 marks)
(b) Explain any four factors that determine employer/ employee
relationship.
(2 marks)
(Total 20 marks)
Question 3
Fine Interiors Ltd. deals in the sale of home products, all of which are
standard rated. The company was incorporated in Uganda and commenced
business in April 2013. The company registered for all taxes including value
added tax (VAT) on 1 September 2013. By the close of the year on 31
December 2013, the company recorded the following transactions:
Cash purchase transactions:
1 April 2013
5 April 2013
10 April 2013

stationery
furniture
computers

Shs 000
2,000
12,000
15,000

Purchase invoice transactions:

10
14
16
20

April 2013
May 2013
June 2013
Sept. 2013

stock
stock
stock
stock

for
for
for
for

resale
resale
resale
resale

Shs 000
20,000
85,000
55,000
105,000

Payment date
20 May 2013
15 July 2013
20 August 2013
25 November 2013

Monthly sales:

April 2013
May 2013
June 2013
July 2013
August 2013
Sept 2013

Invoices issued
Shs 000
15,000
56,000
43,000
64,000
32,000
33,000

Cash receipts (current sales & debtors)

Shs 000
17,000
19,000
25,000
16,000
12,000

Additional information:
1
2
3
4

VAT inclusive transactions include sales invoice values, cash receipts

from current sales and debtors.
VAT exclusive transactions include purchase prices.
The company uses the first in first out (FIFO) method when selling
stock.
The standard gross markup is 20% on sales.

2 June 2014

Page 5 of 8

Taxation Paper 11

The company paid wages to casual labourers amounting to Shs

2,000,000 for the month of September 2013.

Required:
(a)

Compute the input VAT claim on stock and capital goods at registration.
(15 marks)
(b) Compute the companys VAT liability for the month of September 2013
using the invoice basis accounting.
(5 marks)
(Total 20 marks)
Question 4
(a)

Zee Ltd is controlled by a foreign entity based in Ireland, which holds a

60% of shareholding in Zee Ltd. During the year ended 31 December
2013, Zee Ltd. took an additional loan from the foreign controller to the
tune of Shs 500 million. The statement of comprehensive income for
Zee Ltd shows interest expenses claimed of Shs 60 million.
The following additional information is also relevant:
Shs 000
Outstanding loan balance from foreign
controller as at 1 January 2013
125,000
Paid up capital 1 January 2013
250,000
Unpaid up capital 1 January 2013
50,000
Share premium
20,000
Accumulated profits
65,000
Revaluation reserves
12,000
Required:

(b)

Compute the allowable interest under the concept of thin capitalisation.

(10 marks)
State the provisions of tax on international payments in respect to a
non-resident person as provided for under Section 83 of the Income
Tax Act, Cap 340.
(10 marks)
(Total 20 marks)

2 June 2014

Page 6 of 8

Taxation Paper 11

SECTION C
Attempt two of the three questions in this section
Question 5
(a)

(b)

Explain what makes up the value of goods for export under the East
African Community Customs Management Act.
(3 marks)
State the provisions under the following as per the East African
Community Customs Management Act:
(i)
Community tariff treatment.
(2 marks)
(ii)
Preferential tariff treatment under COMESA, SADC.
(3 marks)

(c)

Under the East African Community Customs Management Act, state the
circumstances under which a person may commit the offence to make
or use false documents to customs.
(6 marks)
(d)
State the penalty upon conviction under the above offence. (1 mark)
(Total 15 marks)
Question 6
(a)

(b)

State the procedure under which a taxpayer may be granted an

extension of time to furnish a return of income under the Income Tax
Act.
(5 marks)
Define the term tax avoidance scheme.
(1 mark)

(c)

Explain the circumstances that may lead to a re-characterisation of

income and deductions by the commissioner for purposes of
determining liability to tax under the Income Tax Act.
(3 marks)
(d) Explain the provisions of income splitting under the Income Tax Act.
(4 marks)
(e)
Briefly differentiate between a normal year of income
and a substituted year of income.
(2 marks)
(Total 15 marks)
Question 7
(a)

(b)
(c)

Explain the term capital gains and the basis of computation of capital
gains tax as per the Income Tax Act.
(4 marks)
Identify cases where capital gains tax can be avoided.
(5 marks)
Define the term indirect tax and discuss pros and cons of an indirect
tax system.
(6 marks)
(Total 15 marks)

2 June 2014

Page 7 of 8

Taxation Paper 11

TAX RATES
Resident Individual Income Tax Rates
Monthly chargeable income
Not exceeding Shs 2,820,000 (Shs 235,000 pm)
Exceeding Shs 2,820,000 (235,000 pm) but
not exceeding Shs 4,020,000 (Shs 335,000 pm)
Exceeding Shs 4,020,000 (335,000 pm) but not
exceeding Shs 4,920,000 (410,000 pm)
Exceeding Shs 4,920,000 (410,000 pm)

Non-resident Individuals Income Tax Rates

Monthly chargeable income
Not exceeding Shs Shs 4,020,000 (335,000 pm)
Exceeding Shs 4,020,000 (335,000 pm) but not
exceeding Shs 4,920,000 (410,000 pm)
Exceeding Shs 4,920,000 (410,000 pm)

Rate of tax
Nil
10% of the amount by which chargeable income
exceeds Shs 2,820,000 (Shs 235,000 pm)
Shs 120,000 (10,000 pm) plus 20% of the
amount by which chargeable income exceeds Shs
4,020,000 (335,000 pm).
(a) Shs 300,000 (25,000pm) plus 30% of the
amount by which chargeable income exceeds
Shs 4,920,000 (410,000 pm) and
(b) Where the chargeable income of an individual
exceeds Shs 120,000,000 (10,000,000 pm) an
additional 10% charged on the amount by
which chargeable income exceeds Shs
120,000,000 (10,000,000 pm).

Rate of tax
10%
Shs 402,000 (33,500 pm) plus 20% of the
amount by which chargeable income exceeds
4,020,000 (335,000 pm).
(a) Shs 582,000 (48,500 pm) plus 30% of the
amount by which chargeable income exceeds
Shs 4,920,000 (410,000 pm)and
(b) Where the chargeable income of an individual
exceeds Shs 120,000,000 (10,000,000 pm) an
additional 10% charged on the amount by
which chargeable income exceeds Shs Shs
120,000,000 (10,000,000 pm).

Small Business Taxpayers Tax Rates

Gross Turnover
Where gross turnover of a taxpayer exceeds Shs
5,000,000 but does not exceed Shs 20,000,000
per annum.
Where gross turnover of a taxpayer exceeds Shs
20,000,000 on but does not exceed Shs
30,000,000 per annum.
Where gross turnover of a taxpayer exceeds Shs
30,000,000 but does not exceed Shs 40,000,000
a year.
Where gross turnover of a taxpayer exceeds Shs
40,000,000 but does not exceed Shs 50,000,000
a year.

2 June 2014

Tax Payable
Shs 100,000.

Shs 250,000 plus 1%

whichever is the lower.

of

gross

turnover,

Shs 350,000 or 1% of gross turnover, whichever

is the lower.
Shs 450,000 or 1% of gross turnover, whichever
is the lower.

Page 8 of 8