CPA Intermediate Level

Public Finance and Taxation flashcards

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Complete Flashcard Reference

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How does the Controller of Budget's role differ from the Auditor-General's?

Controller of Budget (Article 228): authorises each withdrawal from public funds before it is spent, only if it is authorised by law, and reports on budget implementation every four months. An ex ante and in-year check. Auditor-General (Article 229): audits the financial statements after the financial year has closed and reports to Parliament or the county assembly. An ex post check. Only the Controller is positioned to stop an overspend before it happens.

What is the difference between tax avoidance and tax evasion?

Avoidance: lawful use of the law's own provisions (reliefs, exemptions, timing) to reduce tax. No penalty, but an arrangement with no genuine commercial purpose beyond a tax advantage can be challenged under anti-avoidance rules. Evasion: unlawful misrepresentation or concealment of facts, such as understating sales, inventing expenses or failing to register. Penalties, interest and prosecution under the Tax Procedures Act, 2015. The test: did the taxpayer misstate the facts, or arrange genuine facts within the law?

How do an exemption, a deduction and a relief differ in an income tax computation?

Exemption: takes specific income out of the charge entirely. Deduction: reduces the income figure the tax is computed on (for example the employee's NSSF contribution). Relief: reduces the tax computed on income that stays chargeable (for example personal relief). Conflating them loses marks even when the final figure comes out the same.

What is the general test for deducting a business expense, and which items are always added back?

Deductible: expenditure incurred wholly and exclusively in the production of income. Added back: capital expenditure, depreciation, private or domestic expenses, a general provision for doubtful debts, legal costs on capital assets, improvements, income tax itself, fines and penalties, and donations other than those the Act permits. Repairs that do not improve the asset and specific bad debts written off are allowable.

How is the net gain on a transfer of property computed for capital gains tax?

Net gain = transfer value - adjusted cost - incidental costs of transfer. Transfer value: the consideration received, or market value where the transfer is not at arm's length. Adjusted cost: original cost + qualifying improvements - capital allowances already claimed on the asset. Incidental costs: legal fees, valuation fees, agent's commission.

When an asset is disposed of, when does a balancing charge arise and when a balancing allowance?

Compare the amount realised with the residual value not yet claimed. Proceeds above the residual value: the excess, up to the total allowances previously claimed, is brought back into income as a balancing charge. Proceeds below the residual value: the shortfall is a balancing allowance, deducted in the year of disposal. Over the asset's life, total allowances then equal its true economic cost.

What is the route for a taxpayer who disputes a tax decision?

1. Notice of objection to the Commissioner within thirty days of the decision, stating the grounds. 2. If the objection decision is unsatisfactory, appeal to the Tax Appeals Tribunal within thirty days. 3. Appeal to the High Court on a question of law. 4. Appeal to the Court of Appeal. The parties may settle by agreement at any stage.

What is the key difference between a zero-rated supply and an exempt supply?

Zero-rated: inside the VAT system, charged at nil, and input tax on related purchases is fully recoverable. Used to keep exports free of local VAT costs. Exempt: outside the VAT system, no VAT charged, and input tax on related purchases cannot be recovered, so it becomes a hidden cost in the supplier's prices. A zero-rated supplier charges nothing and claims everything; an exempt supplier charges nothing and claims nothing.

What does a bonded warehouse allow an importer to do, and what is the bond security for?

Dutiable goods are stored on first importation without paying duty. Duty becomes payable only when they are removed for home consumption, and none is paid if they are re-exported directly from the warehouse. This defers the cash cost of duty until the goods are actually sold locally. The bond security (a bank guarantee or insurance bond) protects the Commissioner's revenue if goods are improperly removed or go missing.

Why can company profit paid out as a dividend bear two layers of tax?

A company is a separate taxable person, so it pays corporate tax on its own adjusted profit, with no personal relief or graduated bands. When it distributes the after-tax profit as a dividend, withholding tax is charged again in the shareholder's hands. A sole proprietor or partner is taxed only once, directly, on their share of business profit.

What principles of public finance does Article 201 of the Constitution set out?