ATD Level II
Principles of Taxation flashcards
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Complete Flashcard Reference
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What is a tax, and what sets it apart from a payment for a service?
A compulsory financial charge imposed by government on persons or entities, used to fund public expenditure. It is not given in direct exchange for a specific service: paying it buys the taxpayer nothing in particular.
What is the difference between tax impact and tax incidence?
Impact: the point at which a tax is first levied, on whoever is legally liable to pay it to the authority. Incidence: the point at which it is finally borne, after any shifting. The two coincide only where the tax cannot be shifted.
What are the three tests that make an individual resident in Kenya?
1. A permanent home in Kenya and present in Kenya at any time during the year; or 2. No permanent home, but present in Kenya for 183 days or more in aggregate during the year; or 3. Present for an average of more than 122 days a year in that year and each of the two preceding years. Work through all three: a person can be resident under more than one limb.
What are the five badges that bring an activity into charge as business income?
Trade, profession, vocation, adventure and concern. Each is enough on its own. An adventure is a single, isolated transaction made with a view to profit; a concern is the residual category for an undertaking in the nature of trade.
In what order is PAYE built up from an employee's pay?
Basic salary + taxable cash benefits + taxable non-cash benefits = gross pay. Less allowable deductions = taxable pay. Apply the graduated bands in force = tax charged. Less personal relief and other reliefs, given as a direct credit = PAYE payable.
Why are investment allowances given instead of depreciation, and how are they written off today?
Depreciation follows each entity's own accounting policy, so tax law disallows it and gives an allowance the Second Schedule sets for each class of asset: the same class gets the same allowance in every business. Since the Finance Act, 2021 every class is written off in equal annual instalments on cost (straight line), not on a reducing balance.
How does a zero-rated supply differ from an exempt supply?
Zero-rated: a taxable supply on which no output tax is charged, but the supplier can still reclaim related input tax in full (mainly exports and a specified list). Exempt: outside the VAT system entirely. No output tax, and the related input tax cannot be reclaimed, so it becomes a cost.
What is the difference between a specific duty and an ad valorem duty?
Specific: a fixed amount per physical unit (per litre, per kilogram), regardless of the good's price. Ad valorem: charged on the value of the good, so the duty rises and falls with its price.
Name the types of assessment and when each arises.
Self-assessment: the taxpayer computes and declares their own liability in the return, the normal route. Default assessment: raised by KRA on its best judgement where no return is filed. Advance assessment: raised before the normal deadline where a taxpayer may leave Kenya or become hard to reach. Amendment: a correction of an issued assessment, by KRA or at the taxpayer's request, within the time limits.
How does withholding tax work, and which income is subject to it?
The payer deducts tax at source before paying the recipient and remits it directly to KRA. Covers dividends, interest, royalties, management, professional and training fees, rent for certain landlords, and payments to non-residents. For some income it is a final tax; for other income only an advance credit against the final liability.
What are the purposes of taxation?
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How are taxes classified by rate?
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What distinguishes a direct tax from an indirect tax?
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What are forward and backward shifting, and what decides how far a tax can be shifted?
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List the canons of a good tax.
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How does tax evasion differ from tax avoidance?
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What is the default rule for taxing income in Kenya, and why does residence still matter?
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When is a company resident in Kenya?
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What separates employment from self-employment for income tax?
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What does taxable employment pay include besides basic salary?
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Which employment benefits are not taxable?
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Which statutory deductions come off an employee's pay, and how do they relate to PAYE?
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What conditions must be met for business income to be taxed?
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How is taxable business income worked out from accounting profit?
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What is capital gains tax charged on, and who pays it?
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How is rental income computed?
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What is hobby farming, and what happens to its losses?
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What expenses are allowed against farming income?
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When is an investment allowance available on an asset?
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Classify each for investment allowances: a lorry, a factory press, an office printer, an unnamed item of plant.
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Which classes are incentivised with a larger allowance in the first year of use?
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How do input tax and output tax produce the VAT payable?
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What is the time of supply (tax point), and why does it matter?
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When must a business register for VAT, and when can it deregister?
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What are a VAT-registered person's rights and obligations?
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Distinguish VAT remission, rebate and refund.
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How does excise duty differ from customs duty?
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What is the difference between a bonded warehouse and a customs warehouse?
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When is customs duty refunded?
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What is dumping, and how can government counter it?
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What is a pseudo tax? Give examples.
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What charges can a county government levy under devolution?
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What is a PIN, and why is registration for one effectively universal?
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Who is a tax representative, and what are they liable for?
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What route does a taxpayer follow to dispute a tax decision?
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How can KRA recover tax that is not paid on time?
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What did the courts decide in Kenya Association of Manufacturers v Cabinet Secretary, National Treasury and KRA?
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What was digital service tax, and what replaced it?
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What do the Electronic Tax Register, electronic tax invoices and iTax each do?
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What are advance tax and instalment tax?
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How to revise with these cards
- Answer out loud or on paper before you turn the card: recalling is what fixes it.
- Go through the deck in short sessions of ten to fifteen minutes, every day.
- Shuffle once you know the order, so you are not answering from memory of the sequence.
- When a card catches you out, read the chapter it links to, then try the topic in a past paper.