1. EXAMINATION NO._________________
2015 EXAMINATIONS - KNOWLEDGE LEVEL
PAPER P6 : PRINCIPLES OF TAXATION
THURSDAY 4 JUNE 2015 TIME ALLOWED: 3 HOURS
9.00 AM - 12.00 NOON
INSTRUCTIONS:
1. You are allowed 15 minutes reading time before the examination begins during which you should
read the question paper and, if you wish, make annotations on the question paper. However, you are
not allowed, under any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
2. Number of questions on paper – 7.
3. The paper is divided into TWO Sections, A and B. BOTH questions
to be answered in Section A and ANY THREE from Section B.
4. Each question carries 20 marks.
5. Use of non-programmable calculators is allowed.
6. You are provided with the following:
(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
7. Begin each answer on a fresh page.
8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR.
This question paper contains 12 pages
This question paper must not be removed from the examination hall.
2. 1
SECTION A
ANSWER BOTH QUESTIONS IN THIS SECTION
1. Mbobo Resources Limited is a Malawian company and is involved in the mining of
Niobium in Mulanje. The company makes up its accounts to 30 June annually. The
company‟s latest income statement for the year ended 30 June 2014 is as follows:
Turnover
Less
Mining and processing costs
Exports costs
Gross profit
Less
Administration expenses
Finance costs
Marketing costs
Other income
Exchange gain
Interest receivable
Net profit before tax
K
16,300,000
7,450,000
7,900,600
13,175,900
13,809,000
1,642,900
1,760,465
275,000
K
56,500,800
23,750,000
32,750,800
34,885,500
(2,134,700)
3,678,365
1,543,665
The following additional information is available in connection with these financial
results:
(1) Mining and processing costs include:
Depreciation
Amortisation of purchase of mining rights
Salaries and wages
Provision for production losses
Other allowable costs
K
1,265,100
1,138,900
8,600,400
675,900
4,619,700
16,300,000
Salaries and wages include a provision for severance pay of K1,890,000 for the current
year and an additional amount of K265,200 which relates to excess paid over the
provision made in the prior year.
Continued/……
3. 2
(2) Export costs include:
Salaries and wages
VAT on packaging materials
Packaging materials
Other allowable costs
K
2,600,700
75,900
770,500
4,002,900
7,450,000
(3) Administration expenditure includes the following:
Legal fees: K
- Debt collection
- Renewal of lease
- Stamp duty on increase in share capital
775,000
265,700
84,200
1,124,900
Subscription and donations: K
- Mining International magazine
- Donation to Red Cross
- Donation to old people‟s home
- Donation to the University of Malawi Appeal fund
- Other allowable costs
11,500
450
144,500
540,000
7,204,150
7,900,600
(4) Finance costs include the following:
Professional fees: K
- Audit fees
- Property revaluation
Interest payable:
- Bank overdraft
- Late payment of tax
- On loan to finance feasibility study on new processing methods
- Other allowable costs
4,315,000
1,165,000
767,800
222,900
556,500
6,146,700
13,173,900
(5) Marketing costs include the following:
K
- Depreciation
- Fringe benefits tax
- Provision for doubtful debts (1% of debtors)
- Bad debts written off
- Entertainment of customers
- Other allowable costs
1,265,000
675,000
468,000
324,000
442,100
10,634,900
13,809,000
Continued/……
4. 3
(6) Other income consists of the following:
Commissions
Sale of waste
Sale of motor vehicle
K
588,000
279,500
775,400
1,642,900
(7) Exchange gain is from the conversion of year-end debtors to Malawi Kwacha
(8) Interest receivable consists of the following:
Staff Loans
Bank interest
K
115,000
160,000
275,000
Interest received from the bank is stated gross.
(9) During the year, the company paid K4,600,400 for the access to mineral deposits.
This expenditure has been capitalized and is amortized in the mining and processing
costs.
(10) The company purchased the following assets during the year:
Processing machinery
Motor vehicles
Computers
Extension to the factory
Motor lorry
All the assets bought were brought into use during the year
These processing machinery would have no value to the company after the
mine has ceased to be worked. However, the buildings would have
alternative use
K
12,765,800
29,710,000
3,290,800
32,494,000
11,700,000
(11) A motor vehicle which was bought in 2011 for K3,750,000 and has a nil book value
and a tax written down value of K689,100 as at 1 July 2013 was sold for K775,400
which was included in other income.
(12) The tax written down value of the company‟s fixed asset as at 1 July 2013 were:
Industrial buildings
Plant and equipment
Motor vehicles
Motor lorries
Furniture & fittings
Computers
K
12,865,700
3,980,600
4,845,500
7,800,000
765,800
871,300
Continued/……
5. 4
Required:
(a) Calculate capital allowances to be claimed by Mbobo Resources Limited for the year
ended 30 June 2014. 12 Marks
(b) Compute the taxable income of Mbobo Resources Limited for the year ended 30 June
2014. 8 Marks
(TOTAL : 20 MARKS)
Continued/……
6. 5
2. (a) Explain the circumstances or rules of determining when a taxable supply of goods
or services, including supply on a continuous basis or hire purchase arrangement,
is deemed to occur for purposes of charging value added tax (VAT). 8 Marks
(b) Katoni Limited is involved in wholesale business.
The company is registered for value added tax (VAT).In the month of October
2014, the company entered into the following transactions (where applicable, all
income is shown exclusive of VAT and all expenses are shown inclusive of
VAT):
(1) Sold laundry soap worth K4,500,000 to Zonse ndi Moyo shop.
(2) Sold tyres to a customer worth K656,000.
(3) Sold clothing worth K425,000 to Zonse ndi Moyo shop.
(4) The managing director travelled to Lilongwe on business where he stayed at
Kalikuti Hotel for three days. He paid K257,962 for accommodation and
meals.
(5) The amount paid for electricity used in his business was K104,850.
(6) Paid salaries for the month totaling K1,725,000.
(7) Bought motor vehicle spares worth K64,075.
(8) Paid for fuel worth K155,000 for use in company motor vehicles for the month.
Required:
(i) State how each of these transactions will be dealt with for the purpose
of submitting Katoni Limited‟s VAT return for the month of October 2014.
4 Marks
(ii) Calculate the VAT payable or VAT credit for the month of October, 2014.
3 Marks
(iii) State, in general terms, the rules regarding the deductibility of input tax
from output tax charged on taxable supplies and services. 4 Marks
(iv) State the penalties, if any, that are due for the late submission of a VAT
return. 1 Mark
(TOTAL : 20 MARKS)
Continued/……
7. 6
SECTION B
ANSWER THREE QUESTIONS ONLY FROM THIS SECTION
3. Zokoma, Zili and Mtsogolo are in partnership trading as produce merchants. The
partnership agreement provides for the sharing of profits after paying partners‟ salaries in
the ratio of 2:2:1 respectively.
The annual partners‟ salaries for the year ended 30 June 2014 were:
Zokoma
Zili
Mtsogolo
K
2,280,000
1,750,000
1,270,000
The results of the partnership for the year ended 30 June 2014 showed a profit before
taxation of K3,262,000, after charging (crediting) the following items:
Depeciation
Accounting fee
Staff costs
Executive management costs
Repairs and maintenance
Sundry business charges
Exchange gains
K
1,386,100
1,115,000
3,465,000
6,905,000
775,000
545,000
(325,600)
The following additional information is available in connection with the affairs of the
partnership:
(1) All the partners work in the business. Mtsogolo is its general manager. The
executive management costs are made up of the salaries for the partners and
school fees of K1,605,000 paid for Mtsogolos‟s son. No fringe benefits tax has
been paid on this amount.
(2) The partnership rents a warehouse from Zokoma for the storage of produce. The
annual rental for this property is K1,225,000. Withholding tax was duly deducted
on this payment. The rental is included in sundry business charges.
(3) Included in repairs and maintenance is the cost of repairing Zili‟s wife‟s personal
car. The repair costs incurred were K200,600.
(4) Exchange gains are made up of:
Conversion of year end balances
Realised on receipt of sales proceeds
K
254,050
71,550
325,600
Continued/……
8. 7
(5) Capital allowances claimable on the packing machinery and motor vehicles have
been agreed at K480,055.
(6) As the partnership does not have a withholding tax exemption certificate,
withholding tax was deducted from all of its sales proceeds. The total tax withheld
during the year amounted to K658,200.
(7) Provisional tax paid by the partnership during the year amounted to K325,980.
(8) PAYE has been deducted on all salaries paid by the partnership, including those
of the partners and remitted to the Malawi Revenue Authority (MRA) on the due
dates.
The other income of the partners and their wives for the year of assessment ended
30 June 2014, none of which is connected with the partnership in any way, was as
follows:
Director‟s fee
Interest gross (no tax was deducted)
Wive‟s income: Salary
Rental, net of allowable expenses
Zokoma
K
540,000
480,000
800,000
-
Zili
K
-
225,000
-
855,000
Mtsogolo
K
-
125,500
992,000
-
Withholding tax of 10% had been deducted on payment of the director‟s fee. Zili‟s wife
rental income was received without deduction of withholding tax.
Required:
(a) Compute the partnership‟s taxable profits for the year ended 30 June 2014 and
show how these profits will be distributed amongst the partners. 9 Marks
(b) Calculate the tax payable by or refundable to each of the partners and refundable,
if any, to Zokoma for the year ended 30 June 2014. 11 Marks
(TOTAL : 20 MARKS)
Continued/……
9. 8
4. (a) Sections 58 to 64 of the Malawi Taxation Act set out the provisions for the
taxation of „special trades and cases‟.
Required:
(i) List the types of expenditure incurred by taxpayers who are engaged in
pastoral, agricultural or other farming operations which are specifically
allowable in determining their taxable incomes. 3 Marks
(ii) Explain how the taxable income of a consumer cooperative society, other
than those covered under section 59 of the Taxation Act, is computed.
3 Marks
(iii) Gawa Limited is a company that procures and sells produce locally in
Malawi. Recently, the company has been exporting maize and groundnuts
to Mozambique and has, in the process, generated foreign exchange for
the country. For the year ended 31 March 2014, Gawa had the following
results in respect of foreign currency transactions:
Realized gains
Realized losses
Unrealized gains
Unrealized losses
K‟000
14,200
12,945
2,670
1,450
Required:
Compute the amount of foreign exchange gains which are assessable, and
amount of losses which are deducible for Gawa Limited for the year ended
31 March 2014. 4 Marks
(b) The Taxation Act allows a taxpayer to deduct both foreign exchange losses and
capital losses from assessable income in order to arrive at the taxable income.
Required:
(i) Mention the situations where the deductions of each of the losses (foreign
exchange losses and capital losses) are restricted. 3 Marks
(ii) Name the limitations in each of the two losses mentioned in (i) above.
3 Marks
(iii) State the circumstances under which the restrictions or limitations do not
apply in each of the two losses (foreign exchange losses and capital loss).
4 Marks
(TOTAL : 20 MARKS)
10. 9
5. (a) The following transactions relate to Malembo Limited in the year ended 30 June
2013.
(1) Received bank interest totalling K645,000 from which withholding tax
had been deducted.
(2) Paid K860,000 in audit fees from which withholding tax was deducted.
(3) Made several payments to suppliers from which a total of K1,450,500.00
in withholding tax was deducted.
(4) Paid fringe benefits tax on the benefits given to its employees totalling
K454,000.
(5) Paid total provisional tax of K865,400.
(6) Paid value added tax totalling K385,985.
The total tax adjusted profits of Malembo Limited, for the year ended 30 June
2013 were K4,524,000.
Required:
(i) State by which date the various taxes relevant to transactions (1) to (5)
above, would have been due and payable. 3 Marks
(ii) Calculate the income tax payable by Malembo Limited for the year ended
30 June 2013, clearly indicating the effect of the various taxes referred to
in transactions (1) to (6) above, on the amount of corporate tax payable. In
the case of any amounts which you treat as having no effect, state the
reason for treating them in the way you have done. 5 Marks
(b) Kang‟oma Limited is a company involved in the provision of accounting
consultancy services. The company has a Managing Director, a Finance Manager
and a Market Development Manager and also employs five consultants and a
messenger. The monthly salaries payable to its employees are as follows:
Managing Director
Finance manager
Market Development Manager
Chief Accountant
Sales Manager
Human Resources Officer
K
3,200,000
1,200,000
1,000,000
460,000
340,000
470,000
Continued/……
11. 10
The company provided the following benefits to its senior staff in the year ended
31 December 2013:
(1) A furnished house for the Managing Director for which the company paid
a monthly rental of K355,000. Unfurnished houses for the Finance
Manager, Human Resources Manager and the Market Development
Manager. The company paid a monthly rental fee of K125,000 for each of
these managers‟ houses.
(2) The company provided a motor vehicle for the use of its Managing Director,
a Prado which cost the company K25 million when it was bought in the year
2011.
(3) The company paid for utilities (water, electricity and telephone) of K75,000
per month in total for its Managing Director. The company also paid the
Finance Manager, Human Resources Manager and Market Development
Manager an allowance of K40,000 each per month towards their utility bills.
(4) The company paid school fees for the children of the Managing Director
and the Finance Manager. The fees paid during the year were:
January 2013
July 2013
October 2013
K
2,435,000
2,465,000
2,635,000
The fees were paid to Takulandirani International Private School.
Required:
(i) Prepare Kang‟oma Limited‟s fringe benefits tax return for the
quarter ended 31 December 2013. 9 Marks
(ii) State the administrative provisions with regard to the taxation of
fringe benefits provided by an employer to its employees. 3 Marks
(TOTAL : 20 MARKS)
Continued/……
12. 11
6. (a) Chikangawa Farms Limited grows timber for commercial purposes. The timber
takes 20 years to reach maturity. The following information is available in respect
of the timber grown on one of its farms:
Area planted 600 hectares
Year of planting 1992
Cost of planting K11,500,000
Annual maintenance costs from 1992 K765,000
The timber from this farm has never been sold before.
300 hectares were harvested in August 2013.
The yield was 200 cubic metres of timber per hectare and this was sold at a price
of K650 per cubic metre.
The area harvested was replanted in January 2014 at a cost of K15,345,000.
Required:
(i) State the rules governing the alternative method of determining the taxable
income derived from timber growing that Chikangawa Farms Limited can
opt for, in accordance with s.58(4) of the Tax Act; 5 Marks
(ii) In accordance with the provisions of the alternative method mentioned in
(i) above, calculate the taxable income or loss for Chikangawa Farms
Limited for the year to 30 June 2014 (assume the income is only from this
farm). 7 Marks
(b) How is the taxable income of an agricultural producer co-operative society,
registered under Malawi law, which is not exempt from tax, determined? 3 Marks
(c) Define the terms “reorganization” and “qualified reorganization” as stipulated in
the Taxation Act. 5 Marks
(TOTAL : 20 MARKS)
Continued/……
13. 12
7. (a) (i) Mention the term used to describe the levying of income tax by more than
one country on the same income of a taxpayer? 1 Mark
(ii) How does the scenario in (i) above arise? 2 Marks
(b) Niyasu General Dealers are a firm operating in Malawi. In August 2013 the firm
became indebted to a supplier based in Kenya to the tune of $12 million on
account of merchandise supplied. Due to foreign exchange shortages the firm
managed to pay $7 million in January 2014 and $2 million in June 2014. The
balance of $3 million was included in the accounts for 30 June 2014 at K1,
350,000,000 using an exchange rate of $1 =K 450 .
Required:
(i) Using the formula specified in the Taxation Act, calculate the foreign
exchange gains or losses on the transactions given above to be claimed for
the year of assessment to June 2014. Assume the following exchange
rates were in use.
August 2013 : $1 = MK380
January 2014 : $1 = MK400
June 2014 : $1 = MK430
5 Marks
(ii) State whether the foreign exchange loss on the outstanding $3 million
which was converted to K1.350 billion and included in the accounts to 30
June 2014 is an allowable deduction. Give reasons for your answer.
1 Mark
(c) (i) What is the significance of correctly completing a certificate of origin
under the Malawi Customs Tariffs? 3 Marks
(ii) Under the Customs and Excise Act, what are the functions of customs
officers? 2 Marks
(iii) State the six methods of Customs Valuation under the new GATT
valuation system. 6 Marks
(TOTAL : 20 MARKS)
E N D
