ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL

L3: INTEGRATED TAXATION

SERIES: DECEMBER 2012

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO sections:

Section A: Two Compulsory Questions.

Section B: Three Optional Questions. Attempt any two (2).

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.

9. A Taxation table is provided from page 2 to page 4 of the question paper.

 Taxation table

Income Tax

Personal Income Tax rates for the charge year 2011/12

Chargeable income Rate

(Kwacha) %
First 12,000,000 0
Next 8,820,000 25
Next 29,580,000 30
Excess over 50,400,000 35

Income from farming(Excess over 15

K12,000,000)

Company Income Tax rates for the charge year 2011/12

Rate
%
On income from manufacturing and other 35
On income from farming 15
On income from mining operations

(Variable profit tax) y = 30% + [a - (ab/c)]

Where: y = the tax rate to be applied per annum
a = 15%
b = 8%
Assessable Income
c= 100%
Gross sales

On income of Banks and Financial Institutions

First K250,000,000 35%

Excess over K250,000,000 40%

Capital Allowances

Implements, plant and machinery and commercial vehicles:

Wear and Tear Allowance – Plant used normally 25%
Used in Manufacturing, Farming, Leasing 50%
Non- commercial vehicles
Wear and Tear Allowance 20%

Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%

2
Low Cost Housing: (Cost up to K20,000,000)

Wear and Tear Allowance 10%

Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%

Presumptive Taxes
Turnover Tax 3.0%

Presumptive tax for transporters

Seating capacity Tax per annum Tax per day
K K
Less than 12 passengers and taxis 600,000 1,600
From 12 to 17 passengers 1,200,000 3,300
From 18 to 21 passengers 2,400,000 6,600
From 22 to 35 passengers 3,600,000 10,000
From 36 to 49 passengers 4,800,000 13,000
From 50 to 63 passengers 6,000,000 16,400
From 64 passengers and over 7,200,000 19,700

Property Transfer Tax

Rate of Tax on Realised Value 5.0%

Value Added Tax

Registration threshold K200,000,000

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

3
Customs and Excise

Duty rates on:

1. Motor cars and other motor vehicles (including station wagons) principally
designed for the transport of less than ten persons, including the driver:
Customs Duty: 25%

Excise Duty:

Cylinder capacity of 1500 cc and less 20%

Cylinder Capacity of more than 1500 cc 30%

2. Pick-ups and trucks/lorries with gross weight not exceeding 20 tones:

Customs Duty 15%
Excise Duty 10%

3. Buses/coaches for the transport of more than ten persons

Customs Duty: 15%

Excise Duty:
Seating Capacity of 16 persons and less 25%
Seating Capacity of 16 persons and more 0%

4. Trucks/lorries with gross weight exceeding 20 tonnes

Customs Duty: 15%
Excise Duty: 0%

The minimum amount of Customs Duty on Motor Vehicles in categories from

1 up to 3 above is K2,000,000

4
SECTION A

Attempt BOTH questions in this section.

QUESTION ONE

For the purposes of this question you should assume that today’s date is 1 March
2011.

You are a tax senior in a firm of Chartered Accountants and you have been approached by
three clients, Mutinta Mahachi, John Kabwe and Isaac Sakala, who are all seeking tax advice
in relation to the business activities they intend to undertake in the tax year 2011/12.
Mutinta, John and Isaac recently completed their training in entrepreneurship from a local
institution with wide acclaim and immediately received lucrative offers of employment from
a large Zambian resident corporation listed on the Lusaka Stock Exchange. They however
feel that with their newly acquired knowledge and skills, they will be better off starting up
their own business ventures. They expect to source finance to start their proposed
businesses from an empowerment program which was recently announced by the
government, which is intended to encourage private sector participation in the economic
development of the country. They have provided you with the following information relating
to the three businesses which they intend to start running on 1 April 2011.

Mutinta Mahachi

Mutinta Mahachi plans to start a retail business selling assorted products. She will rent a
shop in the central business area of the city and will pay rentals of K3 million per month for
the shop. The turnover of the business is estimated to average K14.1 million per month. She
will employ a shop manager and four shop assistants to manage the shop. The total annual
salaries for the five employees including employer’s NAPSA contributions will be K66 million.
Mutinta has estimated that other expenses to be incurred wholly and exclusively for the
purposes of the retail business will average K2 million per month. She will purchase the
following business assets which will be used wholly and exclusively for the purposes of
running the retail business, on 1 April 2011.

Cost
K’000
Computers 30,000
Fixtures and fittings 15,000
Delivery Van 65,000

John Kabwe

John Kabwe intends to set up a transportation business. He will buy five Rosa buses, each
with a seating capacity of twenty-eight passengers, at a cost of K90 million each. He will
hire out three of the buses to three different companies which he has identified at K13
million per month for each bus. The remaining two buses will be used for public passenger
transportation and will earn K600,000 per day each, for six working days per week, for four
weeks per month, throughout the tax year 2011/12.

John Kabwe will employ five drivers who he will be paying monthly salaries of K2.5 million
each. The bus running expenses will average K1.8 million for each bus per month. Each
driver will make a NAPSA contribution of 5% of their salary and Kabwe will also contribute
5% of each driver’s salary to NAPSA as employer’s contribution.

5
Isaac Sakala

Isaac Sakala intends to set up a family business which he will run personally with his wife
Joyce, but is not sure whether to run the business as a partnership or as a private Limited
company. Irrespective of whether he runs the business as a partnership or as a limited
company, the tax adjusted business profits after deduction of salaries but before taking into
account capital allowances are forecast to be K500 million and accounts will be prepared to
31 March each year, in each case. Two motor cars will be bought during the year and Isaac
will use one of the cars 30% for private purposes. The motor cars will cost K45 million each.

If the business is run as a partnership the annual salary for Isaac will be K170 million and
K140 million for Joyce. The profit figure given above is after deducting the salaries. The
balance of profits will be shared equally between Isaac and Joyce.

If the business is run as a private limited company, Isaac and Joyce will still draw annual
salaries of K170 million and K140 million respectively. The profit figure given above is after
these annual salaries. The balance of profits will be paid out as dividends in equal amounts
between Isaac and Joyce.

Required:

(a) Explain, using appropriate calculations, the taxation implications arising from the
level of turnover and the related transactions arising as a result of Mutinta’s
proposed retail business. (6 marks)

(b) Discuss, using appropriate calculations, the taxation implications arising from John
Kabwe’s proposed transportation business. (7 marks)

(c) In relation to the business venture proposed by Isaac Sakala;

(i) Calculate the amounts of income tax payable by Isaac and Joyce for the tax
year 2011/12, if the business is run as a partnership. (6 marks)

(ii) Provide a computation of the company income tax payable, the

withholding tax payable, and the income tax payable by both Isaac and
Joyce for the tax year 2011/12, if the business is run as private limited
company. (7 marks)

(iii) Advise Isaac Sakala whether it will be beneficial to run the business as a
partnership or as a private limited company. (4 marks)

(Total: 30 marks)

6
QUESTION TWO

(a) Describe the nature of the following personal financial planning protection products
and explain the taxation implication arising from each product.

(i) Whole of life Assurance

(ii) Term assurance
(iii) Permanent health insurance
(iv) Critical illness insurance (8 marks)

(b) Konkomalimba Mining Company plc is a copper mining company situated in the
North Western province. The income statement of the company for the year ended
31 March 2012 was as presented below:

Konkomalimba Mining Company plc

Income statement for the year ended 31 March 2012

K’ million
Revenue 53,420
Cost of sales (26,030)
27,390
Marketing costs (11,364)
Administration costs (5,845)
Profit before 10,181
Company income tax (2,200)
Profit before tax 7,981

Additional information:

(1) Cost of sales relates to the direct costs which were incurred in the mining,
processing and refining of the ore into saleable material. Marketing costs are
arrangement costs that the company incurs in finding a suitable buyer for its
metal.

(2) Administration costs include depreciation charges of K962 million, a donation

to an unapproved charity amounting to K136 million and a loss on disposal of
non-current assets of K352 million, loan interest charge of K154 million and a
gift to a customer valued at K4 million.

(3) The company income tax shown in the income statement above represents
the provisional company income tax paid by the company in respect of the
tax year 2011/12 whilst capital allowances on locally acquired assets were
determined to be K636 million.

(4) The company incurred a mining tax adjusted loss of US$200,000 in the year
ended 31 March 2011.

(5) Mineral royalty tax amounting to K1,603 million was paid during the year.

(6) Other expenditure incurred that has been capitalised include K860 million
incurred in constructing a railway line within the mining site, K780 million
incurred in constructing a link road from the mining site which is mainly used

7
 by mine trucks and K650 million incurred on the construction of a Trust
School within the mining township.

(7) Konkomalimba Mining Company has operated a share option scheme for its
employees for a number of years which is not approved for tax purposes. The
directors of the company wish to have the share option scheme approved for
tax purposes by the end of the tax year 2011/12.

(8) The following Zambian Kwacha per US Dollar (ZMK/$) exchange rates have
been provided by the Bank of Zambia and approved by the commissioner
General.

Date Exchange rate (ZMK/$)

31 March 2011 K4,900
31 March 2012 K5,050

(9) The Indexation formula for mining losses is provided below:

1  ( R2  R1 )
R1

Required:

(i) Calculate the company income tax payable on mining profit for the tax year
2011/12. (10 marks)
(ii) Describe the procedure that Konkomalimba mining company should follow to
have its share option scheme approved and outline six conditions the scheme
must meet before it is approved by the Commissioner General. (8 marks)
(iii) Explain the tax benefits that will arise to Konkomalimaba mining company
and its employees as a result of having the share option scheme approved.
(4 marks)
(Total: 30 marks)

8
SECTION B

Attempt any TWO questions in section

QUESTION THREE
(a) The income statement of IBD Bank plc, a rapidly expanding local commercial bank
which is listed on the Lusaka Stock Exchange is provided below:

IBD Bank

Income statement for the year ending 31 March 2012

K’ million
Interest income (note 1) 20,000
Interest expense (8,000)
Net interest income 12,000
Provision for losses on loans(note 2) (1,050)
Net interest income after provision for losses on 10,950
loans
Non-interest income (note 3) 465
Non-interest expenses (note 4) (3,850)
Net income before taxation 7,565
Taxation (note 5) (1,030)
Net income for the financial year 6,535
Additional information:
Note 1- Interest income

40% of the interest income comprises interest income which was subjected to
withholding tax at the rate of 15%. The gross amount is shown.

Note 2- Provision for losses on loans

Provision for losses on loans is comprised of the following items:

K’ million
Increase in general provision for loan losses 650
Increase in specific provision for loan losses 300
Irrecoverable loans written off 475
Loans previously written off now recovered (375)
1,050
Note 3- Non-interest income
Non-interest income comprise of:
K’million
Foreign exchange gains arising from foreign exchange transactions during
635
the year
Foreign exchange losses on translating deposits held with foreign banks (170)
465

9
 Note 4- Non-interest expenses
Non-interest expenses comprises the following items:
K’ million
Depreciation on non-current assets 500
Profit on disposal of non-current assets (850)
Other allowable operating expenses 4,200
3,850

Note 5-Taxation
The figure for taxation in the income statement represents the provisional company
income tax paid by the company in respect of the tax year 2011/12.

Note 6-Capital allowances

Capital allowances have been determined to be K1,200 million for the tax year
2011/2012.

Required:
Calculate IBD Bank’s company income tax payable for the tax year 2011/12.
(8 marks)

(b) The directors of IBD Bank plc are planning to open fifteen new branches of the bank
in different parts of the country and are currently considering financing the
expansion project by either issuing ordinary shares or debentures. They have asked
you to provide an explanation of the taxation implications of using each of the two
types of sources of finance before they make a final decision.

Required:

Advise the directors of IBD Bank plc of the taxation implications of using equity
finance and debt finance, both from the point of view of the company and from the
point of view of an individual investor. (8 marks)

(c) Outline the tax incentives given to enterprises operating in a priority sector declared
under the Zambia Development Agency Act. (4 marks)

(Total: 20 marks)

10
QUESTION FOUR

Joan Burton is a resident engineer with a Zambian resident company. Before her
employment in Zambia, she worked for a company in a country known as Senada. The
currency of Senada is the Senadian dollar (SD$). While in Senada, she used part of her
income from employment to invest in shares in Senadian resident companies and to open a
fixed deposit account with a Senadian Bank. She also owned an apartment in Senada, which
she let out to Senadian resident tenants before she left for Zambia.

Joan has lived in Zambia for two and half years now, during which period she has continued
receiving income from her investments in Senada, through her Zambian bank account, on
the last day of each tax year. On 31 March 2012, she received fixed deposit interest
amounting to SD$9,000 and rentals from letting of her apartment amounting to SD$57,000.
These amounts were net of Senadian withholding tax at the rate of 20%. Dividends from
Senadian resident companies deposited to her account on the same date, amounted to
SD$18,900 net of Senadian withholding tax at the rate of 10%.

Joan’s taxable emoluments for the tax year 2011/12, were K216 million, after all
adjustments. She was recruited under certain expatriate conditions of service which
permitted her to bring to Zambia, her personal chattels exempt of all duty charges. On
arrival in Zambia, she bought a brand new Land Rover car with a cylinder capacity of
2,000cc from Senada at a cost of SD$15,750, which she intended to use during her
employment in Zambia. Incidental costs of importing the car included insurance charges
amounting to SD$2,500 and freight charges amounting to SD$3,500. All duties on the
importation of the car were waived on condition that Joan was to use the car for a period of
5 years before selling it to another person. However, after using the car for a period of
exactly two and a half years, she decided to sell the car on 31 March 2012, to a Zambian
business man who paid her K53.55 million for the car and therefore, part of the duties
initially waived on importation(proportionate to the remaining two and half years) became
chargeable immediately.

(Assume a Kwacha/Senadian dollar exchange rate of K5, 100/ SD$ for all parts
of this question where applicable)

Required:

(a) Explain three different ways in which Double Taxation Relief can be given to a
Zambian resident person receiving income from foreign sources. (6 marks)

(b) Explain how the duty on importation of the car by Joan will be ascertained and
calculate the duty payable on the sale of the motor vehicle on 31 March 2012.
(6 marks)

(c) Calculate the income tax paid by Joan in the tax year 2011/12 assuming that credit is
available for any foreign tax paid in Senada. (8 marks)

(Total: 20 marks)

11
QUESTION FIVE

JPC Trading is a Zambian company situated on the Copperbelt. It was registered in July
2001, but only commenced trading in February 2002. Since then, JPC Trading has
consistently complied with the statutory requirement to submit its tax returns on time.
However, the Zambia Revenue Authority has not carried out any verification reviews of the
company for the past two years.

Mr. Jackson Banda who is the Managing Director of JPC Trading attended one business
workshop at which one of the participants expressed indignation about an upcoming tax
audit at their company. Mr. Banda is a professional marketer and did not quite understand
what was involved in a tax audit. He has since asked you, his tax advisor, to shed some light
on this subject.

Required:

(a) Explain to Mr. Banda the meaning of and the purpose of a tax audit and describe
how it differs from an audit of financial statements performed by external auditors.
(6 marks)

(b) Explain the meaning of a tax investigation and state the circumstances in which it
may be performed. (4 marks)

(c) In relation to quality tax audits, distinguish between a desk audit and a field audit.
(4 marks)

(d) Describe the three main types of tax defaults that may be discovered during a tax
audit, giving examples of circumstances in which they may arise. (6 marks)

(Total: 20 marks)

END OF PAPER

12
L3: INTERGRATED TAX

Suggested Solutions

13
SOLUTION ONE

(a) Taxation implications of Mutinta’s proposed Retail business :

The annual turnover of this business will be K14.1 x 12= K169.2 million which is
below K200 million and therefore Mutinta will be assessed under the turnover tax
system as opposed to normal income tax on the business. She will not be required to
register for VAT as the annual business turnover will be below the annual statutory
VAT registration limit.

The monthly turnover tax payable will be calculated as 3% x K14.1 million

amounting to K423,000. The turnover tax will be payable by the 14th day following
the end of each month and will amount to K5,076,000 for the whole tax year.

Salaries for the five employees including employer’s NAPSA contributions, rentals for
the shop and other expenses incurred wholly and exclusively for business purposes
will not be allowable for the purposes of assessing the turnover tax.

Capital allowances on the assets bought to be used wholly and exclusively for the
purposes of the stationery business will not be claimable against turnover, however,
all the assets held by the business at the end of the tax year will notionally be
written down for the purposes of calculating their income tax values to carry forward
to the following year. The amount of of notional allowances and the income tax
values of the assets at the end of the tax year 2011/12 will be as follows:

Value Notional
allowance
K’000 K’000
Computers
Cost 30,000
Wear & tear allowance
(25% x K30m) (7,500) 7,500
ITV c/f 22,500
Fixtures and fittings
Cost 15,000
Wear & tear allowance
(25% x K15m) (3,750) 3,750
ITV c/f 11,250

Delivery Van
Cost 65,000
Wear & tear allowance
(25% x K65m) (16,250) 16,250
ITV c/f 48,750
Total notional allowances 27,500

14
(b) Taxation implications ofJohn Kabwe’sproposed transportation business:
Hire out of three buses
John Kabwe will receive K13 million each month from hiring each bus from each of
the three companies, throughout the tax year 2011/12. The annual income from
hiring out of the buses will therefore be:
K13m x 3 buses x 12 months = K468 million
The annual revenue from hiring out of the three buses exceeds K200 million for 12
months and therefore Kabwe will be assessed to income tax on profits arising from
the hiring out of the buses as opposed to the turnover tax system. This means that
all expenses incurred wholly and exclusively for the purposes of the hire out of the
buses such as, salaries for bus drivers, bus running expenses and capital allowances
on the busses will be allowable for the purposes of computing the taxable business
profits.
The taxable income arising from this business in respect of the tax year 2011/12 will
be:

K’000 K’000
Gross hiring income 468,000
Less allowable expenses:
Drivers salaries (K2.5m x 3 x12) 90,000 ½
Employer’s NAPSA (5% x K90m) 4,500½
Running expenses ((K1.8 m x 3 x 12) 64,800½
Capital allowances [(25% x K90 m) x3] 67,500½
(226,800)
241,200

Public passenger transportation

The two buses which will be used in public passenger transportation will generate
revenue that will be subjected to presumptive tax. Kabwe will therefore not be
subjected to normal income tax on the income generated by the two buses.

The seating capacity of each bus is 28 passengers and the daily tax payable for each
bus is K10,000. Each bus will operate for 6 days per week for 4 weeks per month
giving 24 days per month, throughout 2011/12. The total presumptive tax payable
on the two buses for the tax year 2011/12 will therefore be:

(K10,000 x 24 days x 12 months) x 2 buses = K5,760,000

Kabwe will not be able claim as allowable deductions, the motor vehicle running
expenses on the two buses and salaries for the two drivers of the buses.

15
(b) (i) Computation of the income tax payable Isaac and Joyce as partners
for the tax year 2011/12
K’000
Taxable adjusted profits 500,000
Add: Isaac’s salary 170,000
Joyce’s salary 140,000
810,000
Capital allowances:

Motorcar (1) (20%xK45m) x70% (6,300)

Motor car (2) (20% x K45m) (9,000)
794,700

Total Isaac Joyce

K’000 K’000 K’000
Salaries 310,000 170,000 140,000
Balance (50:50) 484,700 242,350 242,350
794,700 412,350 382,350
Less tax free (12,000) (12,000)
400,350 370,350
Income tax:
K8,820,000 x 25% 2,205 2,205
K29,580,000 x30% 8,874 8,874
K361,950,000/K331,950,00 x 35% 126,683 116,183
Income tax payable 137,762 127,262

(ii) Company Income tax computation for the year 2011/12

K’000
Adjusted profits before capital allowances 500,000
Capital allowances
Motor car(1) ( 20% x K45m ) (9,000)
Motor car (2) (20% x K45m) (9,000)
Tax adjusted profits 482,000
Company income tax
35% x K482m 168,700
The balance of profits will be:
Taxable profit 482,000
Less company income tax (168,700)
Distributable profits 313,300

16
 Withholding tax payable
The whole of the distributable profits will be paid to Isaac and Joyce in equal
amounts. Withholding tax payable will be:
15% x K313,000,000 = K46,950,000

Personal income tax computations for Isaac and Joyce for the tax
year 2011/2012

Isaac Joyce

K’000 K’000
Emoluments 170,000 140,000
Less tax free (12,000) (12,000)
158,000 128,000
Income tax:
K8,820,000 x 25% 2,205 2,205
K29,580,000 x30% 8,874 8,874
K119,600,000/K99,600,000 x 35% 41,860 31,360
Income tax payable 52,939 42,439

(iii) Partnership Private

Company
K’000 K’000
Total income 500,000 500,000
Less income tax
Isaac’s income tax (137,762) (52,939)
Joyce’s income tax (127,262) (42,439)
Company income tax (168,700)
Withholding tax _______ (46,950)
234,976 188,972

Based on the above analysis it will beneficial to run the business as a

partnership rather than a private limited company as the additional net
income of running the business as a partnership will be:

K 234,976,000 – 188,972,000 = K46,004,000

17
QUESTION TWO

(a) Whole of Life Assurance

A whole life assurance policy pays out the assured as a lump sum on the death of
the person assured to the grantee whenever the death occurs. The policy may be
written on a single or joint lives and on first death or last survivor basis.

The taxation implications are that there is no tax relief on the premiums and the
policy proceeds are tax free if the policy is qualifying. This type of policy may be used
on a last survivor basis to provide funds to meet the taxation liability of the
deceased‘s estate.

Term Assurance

This pays out the assured sum as lump sum on the death of the person assured
provided the life or lives assured die within the policy term. The policy can be
written on a decreasing sum assured basis and used to redeem a repayment
mortgage or other loan which could otherwise be outstanding on the deceased’s
death.

The taxation implications are that where the term of the of the policy is not beyond a
specified number of years and the policy is for trading purposes (for example
assuring the life of key employee’s in respect of profits) the premiums will be tax
deductible but the proceeds would be taxed as trading receipts.

Permanent health insurance

This provides for income replacement which is payable in the event of the person’s
inability to perform own, suited or any occupation or activities of daily living following
the expiration or predetermined deferral period due to illness or disability. It is
usually written to retirement age and payable until retirement or until full or partial
recovery. The premiums and benefits payable can be indexed.

The premiums do not receive any tax relief when paid personally and the benefits
are not taxable. Where the employer insures the cost of his employee’s, the premium
is allowable for tax purposes but the policy proceeds are taxable trading receipts.

Critical illness Insurance

This provides for a lump sum payment on the diagnosis of one the seven core life
threatening conditions, which include cancer, coronary artery bypass surgery, heart
attack, kidney failure, major organ transplant, multiple sclerosis and stroke. The
policy may also cover other serious conditions as well as including permanent or total
disability.

The premiums do not receive any tax relief when paid personally and the benefits
are not taxable. Where the employer insures the cost of his employee’s, the premium
is allowable for tax purposes but the policy proceeds are taxable trading receipts.

18
(b) Computation of taxable business profits for Konkomalimba plc for the year
ended 31 March 2012
K’million K’million
Profit before tax as per accounts 10,181
Add:
Depreciation 962
Donation to unapproved charity 136
Loss on disposal 352
Donation to customer 4
1,454
11,635
Less:

Construction of railway line 860

Construction of link road 780
Constructing a Trust School 650
Capital allowances on local assets 636
(2,926)
Tax adjusted mining profit 8,709
Less indexed mining loss
($200,000 x K4,900) = K980
K980m [1+ (K5,050 - K4,900)/K4,900] (1,010)
7,699
The assessable mining profit as a percentage of gross sales will be:

K 7,699m
= 100%
K 53,420

= 14.41%
The variable profit tax rate will therefore apply
The variable profit tax rate will be:
Y = 30% + [a-(ab/c)]
= 30% +[15%-(15% x 8%)/14.41%]
= 36.67%

Company income tax on mining profits K’million

(36.67% x K7,699m) 2,823.22
Less provisional tax (2,200.00)
Company income tax payable 623.22

19
(ii) Procedure to obtain approval of a share option scheme:

 The company will have to make a written application to the Commissioner

General which should be accompanied by a copy of the instrument
constituting the scheme and the rules of the scheme.
 The Commissioner General will upon receipt of the scheme, consider
whether the scheme has met the necessary conditions for approval and if
so, he will approve the scheme and communicate in writing that the
scheme has been approved.
 If the conditions are not met, the Commissioner General will not approve
the scheme and he will still communicate in writing that the scheme has
not been approved.

Conditions to be met for share option scheme to be approved:

The following requirements must be met for the commissioner General to

approve the scheme:

 The scheme must be registered in the republic of Zambia and the

employer must be carrying on business wholly or partly in Zambia.
 The scheme should provide for the participation of all eligible employees,
including directors.
 An employee participating in the scheme should not acquire more than
one fifth of the shares to be issued under the scheme.
 Only ordinary shares of the company may participate in the scheme.
 The scheme must entitles an employee to acquire a set number of shares
at a fixed price.
 The employee must be restricted to a set period of time to use an option
to buy shares.
 The employees must be citizens or permanent residents of Zambia
regardless of where they perform their duties.
(1 mark for each valid point up to a maximum of 6 marks)

(iii) Tax benefits to the company of operating an approved share option

scheme:

 Costs incurred by the company to set up and administer the scheme will
be allowed as a deduction in computing the company’s profits for tax
purposes.
 Any income from the scheme will be exempt from tax.
 Any transfer of the shares by the company will be exempt from property
transfer tax.

The tax benefit for the employees is that any benefit that arises on the
allotment of the shares will be exempt from tax.

20
SOLUTION THREE
(a)
K’ million K’ million
Net income before taxation as per accounts 7,565
Add:
Increase in general provision on loan losses 650
Depreciation on non-current assets 500
1,150
8,715
Less:
Profit on disposal of non-current assets 850
Capital allowances 1,200
(2,050)
Taxable income 6,665
Company income tax payable
K250m x 35% 87.5
K6,415m x 40% 2,566
Income tax payable 2,653.5
Less: withholding tax on interest income
(40% x K20,000m) x 15% (1,200)
Less: Provisional tax (1,030)
Company income tax payable by the bank 423.5

(b) Taxation implications of equity finance

From the company’s point of view

- Fees incurred in issuing share capital are not allowable for tax purposes.
- The cost of making distributions to shareholders is not allowable for tax
purposes.
- Dividends paid are not allowable for tax purposes.

From the point of view of an individual investor

- The dividends receivable by the investor are subjected to withholding tax at the
rate of 15%, which is a final tax.
- Property transfer tax would arise on transfer of shares by the investor in a
company that is not listed on the Lusaka Stock Exchange.

Taxation implications of debt finance

From the company’s point of view

- Interest on loans taken out to finance the business is allowable provided the
loans are not for capital purposes.
- Incidental costs of obtaining medium or long term business loans are
allowable when computing business profits.

From the point of view of an individual investor

21
 - For an individual, interest received will be subjected to a withholding tax
which is a final tax.
- There are no property transfer tax implications on the transfer of loans
between investors.

(c) The tax incentives for any business enterprise operating in a priority sector declared
under the Zambia Development Act of 2006 are:

(i) Income tax rates of 0% for a period of 5 years starting from the first year
profits are returned.
(ii) The applicable income tax rate shall be reduced by 50% from the 6th to the
8th year after profits have been returned.
(iii) The applicable income tax rate shall be reduced by 25% from the 9 th to the
10th year after profits are returned.
(iv) A 0% tax rate on dividends for a period of 5 years from the date of first
declaration.

22
SOLUTION FOUR

a) Double taxation relief is the relief that is given to person in order to eliminate the
effects of double taxation in cases where income that has had tax laid on it in one
country is also subjected to tax in the receiving (another) country. DTR may be
claimed in one of the following ways:
i) Treaty relief
- A DTA may provide for full recovery of any foreign tax covered by the
agreement, by means of a tax credit to a Zambia resident individual,
against the Zambia income tax, as long as the relief does not exceed the
equivalent Zambian tax charge.
- Where there is a treaty, the treaty may provide that income is only charge
to income tax in one of the two countries, or income is charged to tax in
one country, with the tax being apportioned between the two countries.

ii) Unilateral relief (unilateral credit relief)

- This applies where there is no treaty. Relief is given for foreign tax
unilaterally in the republic of Zambia. Under this relief, the amount of
foreign tax suffered is credited against Zambian income tax on the foreign
income, provided that the amount of foreign tax being credited against
Zambian tax cannot exceed the Zambian tax on that foreign income. As a
result, the amount of foreign tax available for credit is the lower of:

 The actual amount of foreign tax paid to foreign tax authorities, and
 The Zambian tax chargeable on the foreign income calculated using
the formula:

Gross amoung of foreign incime

 Zambian Tax Ch arg e
Total Assessable income

iii) Unilateral expense relief

This relief applies where neither treaty relief nor unilateral relief is available.
Relief is given by deducting the foreign tax from the foreign income before
including it in Zambian tax computation

(b) Ascertaining the chargeable duty

The full duty that would have been paid on importation would be ascertained and
only a proportion of the period that the car had been owned by Joan would be
waived for duty and the difference will be chargeable.

23
 Calculation of duty payable
Cost SD$ 15,750
Insurance SD$ 2,500
Freight SD$ 3,500
21,750
Exchange rate x K 5,100
VDP 110,925,000

Value Taxes
K K
110,925,000
Customs duty @ 25% 27,731,250 27,731,250
138,656,250
Excise duty @ 30% 41,596,875 41,596,875
180,253,125
Value added tax @16% 28,840,500 28,840,500
209,093,625 .
Total import taxes 98,168,625
Duty payable= 2.5 yrs. x K 98,168,625 = K49,084,313
5 yrs

(c) Joan Burton

Personal income tax computation for the charge year 2011/12
K’000 K’000
Emoluments from employment 216,000
Foreign income:
Interest received
(SD$9000 x 100/80) x K5,100 57,375
Dividends
(SD$18,900 x 100/90) x K5,100 107,100
Total foreign income 164,475
380,475
Less tax free (12,000)
368,475
Income tax
K8,820,000 x 25% 2,205
K29,580,000 x 30% 8,874
K330,075,000 x 35% 115,526
126,605
Less: double taxation relief (22,185)
(workings)
104,420
Rental income from foreign sources is exempt from Zambian tax and therefore the
rentals received by Joan amounting to SD$57,000 will not be subjected to Zambian
income tax.

Double taxation relief is the lower of:

(i) Actual foreign tax paid
On Interest (20% x K57,375,000) K11,475,000

24
 On dividends (10% xK107,100,000) K10,710,000
K22,185,000

(ii) The Zambian tax charge on the foreign income calculated as:

Gross amoung of foreign incime

Zambian tax =  Zambian Tax Ch arg e
Total Assessable income
K164,475,000
= x K126,605,000
K 380,475,000
= K54, 729 897

The amount of double taxation relief is therefore K 22,185,000 as this is

lower.

SOLUTION FIVE

(a) A tax audit is an examination of a tax return; a declaration of liability or a repayment

claim; a statement of liability to stamp duty, or the compliance of a company or
business with tax and duty legislation.
The objective of a tax audit is to establish the correct level of tax liability by persons
who may be required to make a tax payment because of having engaged in taxable
transaction.
A tax audit is different from a financial audit because the latter is performed so as to
increase the reliability of the financial statements in the case of an external audit and
to assure management that systems that are in place are being complied with in the
case of an internal audit.
(b) A tax investigation is carried out because some tax evasion or tax fraud has been
reported in connection with a taxpayer. It would be carried out also:
 Where a taxpayer carrying on a business consistently reports losses
 On financial grounds, a business that is in perpetual loss position would not
be a going concern.

(c) A desk audit involves reviewing the accounting records and other records as well as
any returns already submitted by tax payers

A field audit is performed at the tax payers business location and takes the form of a
visit to the premises of the tax payer in order to obtain further knowledge relating to
the business being conducted by the tax payer. The two types of audits would
normally collaborate with one another.

25
(d) The three main types of tax defaults that may be uncovered during a tax audit are:

 Deliberate behavior – this involves a breach of a tax obligation where

there is intent on the part of the taxpayer. For example, failure to maintain
books and records, omission of transactions from the books and transactions,
providing false or misleading information.

 Careless behavior with significant consequences –failure to take

reasonable care and significant consequences apply where the tax underpaid
is significant with reference to the correct tax payable for the relevant period.
Examples, neglecting to categorize expenditure into allowable and
disallowable types for tax purposes.

 Careless behavior without significant consequences – refers to

defaults of a minor nature that are discovered during a tax audit e.g.
computational errors and inadequate adjustments for personal expenditure in
the profit and loss account.

END

26