CPA Advanced Level

Advanced Taxation flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 49 cards are free; the rest come with the subject.

Card 1 of 49

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 39 come with the subject.

How is a partnership's profit shared for tax when a partner joins or retires during the year?

Split the accounting period at the exact date of the change and apportion the profit to each sub-period on a time basis. Share each sub-period's profit in the profit-sharing ratio in force during it. A retiring partner shares only in the period before retirement; a new partner only in the period after admission.

Why has minimum tax under section 12D of the Income Tax Act never been collected?

In Kenya Association of Manufacturers and others v Cabinet Secretary, National Treasury and KRA, the High Court (upheld by the Court of Appeal in 2022) declared section 12D unconstitutional. Taxing turnover rather than gains or profits could tax a genuinely loss-making business, contrary to Article 201(b) of the Constitution.

How is shared input tax treated when a business makes both taxable and exempt supplies?

Input tax attributable to exempt supplies cannot be claimed, so shared input tax is apportioned. Recoverable proportion = taxable supplies / total supplies. The irrecoverable part is treated as a cost. A business making only taxable supplies has nothing to apportion.

How does a civil tax investigation differ from a criminal one?

Civil: recovers the unpaid tax plus civil penalties and interest; the standard track for most compliance issues. Criminal: seeks prosecution for tax offences, is reserved for the most serious deliberate evasion, and must meet the criminal standard of proof, beyond reasonable doubt. Both can arise from the same conduct.

What are the stages of a formal tax dispute, in order?

1. Notice of the disputed tax decision. 2. Objection to KRA. 3. KRA's determination of the objection. 4. Appeal to the Tax Appeals Tribunal if unresolved. 5. Further appeal to the High Court and beyond if necessary.

What is the arm's length principle, and what does it prevent?

Transactions between related parties across borders must be priced as if the parties were independent and dealing at arm's length. It prevents profit being shifted to lower-tax jurisdictions through artificially set prices. The OECD Transfer Pricing Guidelines are the reference framework Kenya draws on to apply it.

Where does legitimate tax avoidance end and anti-avoidance begin?

Avoidance, the legal minimisation of tax using the law as enacted, is legitimate. Anti-avoidance provisions target artificial arrangements designed primarily to avoid tax, which cross from legitimate planning into abusive avoidance. Evasion is never planning: planning stays within the bounds of legitimate avoidance.

On what criteria is a tax system evaluated?

Adequacy of the revenue raised relative to government needs. Fairness across different taxpayer groups. Administrative and compliance cost efficiency. Neutrality: minimal distortion of economic behaviour. Flexibility to adapt to changing economic conditions.

What is the central ethical tension in tax practice?

The duty to serve the client's legitimate interest in minimising tax, against the duty not to facilitate evasion or abusive avoidance. The practitioner keeps integrity and objectivity even when a client pushes for an aggressive position, and must never knowingly assist in filing a materially false return.

Who accounts for VAT on services imported into Kenya, and why?

The Kenyan recipient, under a reverse-charge mechanism. The foreign supplier is outside Kenya's direct VAT jurisdiction, so the charge is shifted to the customer in Kenya.

What are the tax consequences of converting a partnership into a limited company?