Professional Documents
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CHAPTER ONE............................................................................................................................ 1
ADVANCED ASPECTS OF THE TAXATION OF BUSINESS
INCOME........................................ 3
CHAPTER TWO.......................................................................................................................... 39
TAXATION OF SPECIALISED ACTIVITIES................................................................................
41
CHAPTER THREE...................................................................................................................... 81
TAX INVESTIGATIONS ..............................................................................................................
83
CHAPTER FOUR...................................................................................................................... 107
TAXATION OF CROSS BORDER ACTIVITIES........................................................................
109
CHAPTER FIVE........................................................................................................................ 133
TAX PLANNING....................................................................................................................... 131
CHAPTER SIX.......................................................................................................................... 169
TAX SYSTEMS AND POLICIES................................................................................................
171
CHAPTER SEVEN.................................................................................................................... 189
PROFESSIONAL ETHICS IN TAXATION.................................................................................
191
CHAPTER EIGHT .................................................................................................................... 201
EMERGING TRENDS IN TAXATION .......................................................................................
203
CHAPTER NINE........................................................................................................................ 219
REVISION AID ........................................................................................................................ 221
suggested solutions...................................................................................................... 231
Glossary of Terms .......................................................................................................... 273
Index ..................................................................................................................................... 277
v i Advanced TAXATION
STUDYTEXT
1
STUDYTEXT
ADVANCED ASPECTS OF THE
TAXATION OF BUSINESS INCOME
CHAPTER ONE
TAXATION OF
SPECIALISED
ACTIVITIES
S TSUTDUYD YT ETXETX T
2 Advanced TAXATION
STUDYTEXT
3
STUDYTEXT
ADVANCED ASPECTS OF THE
TAXATION OF BUSINESS INCOME
CHAPTER ONE
ADVANCED ASPECTS OF THE TAXATION OF
BUSINESS INCOME
1.1 Objectives
In this chapter, the student should be able to understand tax aspects of partnerships and
Limited companies. To enhance their understanding, various relevant case law examples have
been discussed.
1.2 I ntroduction
In the first taxation paper you were introduced with aspects of taxation of business income. In
this
chapter, you will be introduced with concepts on advanced aspects of the taxation of business
income. Some of the issues to be discussed in this chapter are tax implications of various sources
of income for partnerships, and taxation of group of companies. In the next chapter you will
cover
the taxation of specialized institutions.
1.3 Key Definitions
Partnership: The relationship that subsists between persons carrying on a business in
common with a view to profit.
Company: its an association of persons who contribute capital towards common
stocks for a common aim. Companies are incorporated under the Companies Act and
are legal persons.
1.4 Exam Context
This topic is highly examined. Students will be required to not only remember the content learnt
in their first taxation paper but also apply the knowledge learnt, in answering questions in this
paper.
1.5 I ndustrial Context
This topic will help businesses be able to deal with complicated and advanced aspects of taxation
of their businesses. The major beneficiary of the topic will be the finance manager, tax
practitioners
and accountant who will apply the information in making key management decisions.
4 Advanced TAXATION
STUDYTEXT
1.6 Partnerships
Provisions of the Income Tax Act Cap 470 Laws of Kenya
For purposes of imposing tax a "person" does not include a partnership. The income of a
partnership is assessed on the partners.
Under Section 4(b) of the Act, "the gain or profits of a partner from a partnership shall be the
sum
of i. remuneration payable to him by the partnership together with interest on capital so
payable, less interest on capital payable by him to the partnership; and
ii. his share of the total income of the partnership calculated after deducting the total of
any remuneration and interest on capital payable to any partner by the partnership and
after adding any interest on capital payable by any partner to the partnership".
Where a partnership makes a loss as calculated in (ii) above, the gains or profits shall be the
excess, if any of the amount set out in (i) over his share of that loss.
Determining the existence of a Partnership
Under English and Kenya law a partnership is not a person but "the relationship that subsists
between persons carrying on a business in common with a view to profit".
Whether a partnership exists or not is a question of fact. The basic criterion is whether two or
more persons carry on a business in common with a view to profits.
This suggests that the persons involved bear the attribute of a proprietor and have a profit
motive.
Other useful guidelines include the following:
Usually a partnership deed or written agreement will be drawn up
There is a joint tenancy or tenancy in common
There is sharing of gross receipts or profits
None of these circumstances of itself would constitute conclusive evidence of the existence of a
partnership.
Common situations which pose difficulties in proving a partnership are:
1. Whether joint transactions may constitute a partnership; and
2. Whether the parties concerned are partners or merely employees.
1. Joint transactions - JOHN GARDNER & BOWRING & CO V CIR
G arranged during a coal strike to buy imported coal from B. The coal was invoiced to G at cost
and the net excess of his sales were shared with B.
5
STUDYTEXT
ADVANCED ASPECTS OF THE
TAXATION OF BUSINESS INCOME
Judgement "whereas these cargoes of coal generally had been formally the simple transaction
of purchase and sale between the parties, they immediately became the subject of a transaction
in which both parties were interested, and in which when one of them had sold the coal, the sale
was not on his behalf but on behalf of the two together the net profit, so obtained was equally
divisible between them".
STUDYTEXT
ADVANCED ASPECTS OF THE
TAXATION OF BUSINESS INCOME
Steps in Computing tax on Partnership Income
1. Determine or compute the adjusted income or loss for the partnership in the normal way,
except that: (a) Salary to partners is not allowable expense
(b) Interest paid to partners is not allowable
(c) Interest paid by partners is not taxable
(d) Wifes salary is not allowable
(e) Drawings of commodities dealt with in the partnership are added back at cost. Note
that no profit is to be made from another partner.
2. Allocate the income adjusted to the partner by first isolating salaries to partners, interest on
capital (net) to partners, bonus to partners, commissions, etc. The balance is either profit or
loss to be shared out among partners according to profit sharing ratio or as per partnership
agreement.
Format of Income Tax Computation of a Partnership
Shs Shs
Net profit as per A/C XXX
Add back:
Partnership salaries XX
Interest paid to partners XX
Goods taken by partners XX