10:27 ON. QUESTION ONE 1. The following summarized statement of profit or loss has been extracted from the financial statements of Gwembe Mining Corporation, a Zambian resident company which engaged in open cast mining operations of copper in Zambia Gwembe Mining Corporation is a 100% owned subsidiary of a foreign multinational mining company. The group financial statements are prepared in United States Dollars. Gwembe Mining Corporation Statement of Profit or Loss for the year ended 31 December 2019 Note K 000 Revenue 198,000 Cost of Sales (50,129) Gross Profit 147.871 Operating expenses 2 (48,320) Other income 2.866 Interest expense (195.000) Loss before taxation (922583) 3 The following information is available (1) The figure for sales revenue in the statement of profit or loss above represents the gross sales of copper based on the average London Metal Exchange cash price, which was above US$4.900 per tonne throughout the tax year 2019 Mineral royalty has been accounted for (2) Included in operating expenses is depreciation on non-clurent assets amounting to K958,000 expenditure incurred on constructing clinics in the local mining township of K6,250,000 expenditure incurred on upgrading roads in the local mining township of K10,680,000, expenses incurred in complying with health and safety regulations of K128,000 and mineral royalty tax pad during the year amounting to K9,900,000. The balance represents business expenses wluch are allowable for tax purposes. (3) Other income include company rental income of K2,520,000 (gross) received from investment property the company owns which is let out in Zambia on a commercial basis, fair valne gains on the investment property arising during the year of K220,000, fixed deposit interest of K34,000 (gross) and realised foreign exchange gains of a revenue nature amounting to K92.000 (4) There were no capital assets qualifying for capital allowances at 1 Jamuary 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019 (7) Mining losses may be indexed using the formula III 10:27 (1) There were no capital assets qualifying for capital allowances at 1 January 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019 (7) Mining losses may be indexed using the formula: [1+CR2-R1R1)] x Mining loss brought forward (8) The following information relating to the capital structure of Gwembe Mining Corporation has been extract from the statement of financial position at 31 December 2019 Equity and liabilities K 000 Equity Ki Ordinary shares 142.000 Share premium 38,000 Revaluation reserve 22,500 Retained earnings 97,500 Non-current liabilities 30% Bank loan 75,000 10% Debentures 1,725,000 Current liabilities Trade payables 60,000 Total equity and Liabilities 2.160,000 II Interest on the batik loan and the debentures is payable ammually in arrears and was paid in full as at 31 December 2019 The interest expense in the statement of profit or loss shown above relates entirely to the above loans. The company does not have any other borrowings (9) The following Zambian Kwacha per US Dollar (K_USS) exchange rates have been provided by the Bank of Zambia and approved by the Commissioner General Date Exchange rate ZK/ USS 31 December 2017 9.50 31 December 2018 10.50 Required: (a) Explain what is meant by thrin capitalisation in the context of the taxation of mining operations in Zambia clearly stating the criteria for determining whether a mining company is thinly capitalised, and evaluate whether Gwembe Mining Corporation is thinly capitalised. (6 marks) 6) Compute the taxable business profits for the year ended 31 December 2019. (15 Marks) (e) Caleulate the total amount of tax payable by the company for the tax year 2019 (4 Marks) QUESTION TWO For the purposes of this question assume that today's date is 31 December 2019 10:27 ON. QUESTION ONE 1. The following summarized statement of profit or loss has been extracted from the financial statements of Gwembe Mining Corporation, a Zambian resident company which engaged in open cast mining operations of copper in Zambia Gwembe Mining Corporation is a 100% owned subsidiary of a foreign multinational mining company. The group financial statements are prepared in United States Dollars. Gwembe Mining Corporation Statement of Profit or Loss for the year ended 31 December 2019 Note K 000 Revenue 198,000 Cost of Sales (50,129) Gross Profit 147.871 Operating expenses 2 (48,320) Other income 2.866 Interest expense (195.000) Loss before taxation (922583) 3 The following information is available (1) The figure for sales revenue in the statement of profit or loss above represents the gross sales of copper based on the average London Metal Exchange cash price, which was above US$4.900 per tonne throughout the tax year 2019 Mineral royalty has been accounted for (2) Included in operating expenses is depreciation on non-clurent assets amounting to K958,000 expenditure incurred on constructing clinics in the local mining township of K6,250,000 expenditure incurred on upgrading roads in the local mining township of K10,680,000, expenses incurred in complying with health and safety regulations of K128,000 and mineral royalty tax pad during the year amounting to K9,900,000. The balance represents business expenses wluch are allowable for tax purposes. (3) Other income include company rental income of K2,520,000 (gross) received from investment property the company owns which is let out in Zambia on a commercial basis, fair valne gains on the investment property arising during the year of K220,000, fixed deposit interest of K34,000 (gross) and realised foreign exchange gains of a revenue nature amounting to K92.000 (4) There were no capital assets qualifying for capital allowances at 1 Jamuary 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019 (7) Mining losses may be indexed using the formula III 10:27 (1) There were no capital assets qualifying for capital allowances at 1 January 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019 (7) Mining losses may be indexed using the formula: [1+CR2-R1R1)] x Mining loss brought forward (8) The following information relating to the capital structure of Gwembe Mining Corporation has been extract from the statement of financial position at 31 December 2019 Equity and liabilities K 000 Equity Ki Ordinary shares 142.000 Share premium 38,000 Revaluation reserve 22,500 Retained earnings 97,500 Non-current liabilities 30% Bank loan 75,000 10% Debentures 1,725,000 Current liabilities Trade payables 60,000 Total equity and Liabilities 2.160,000 II Interest on the batik loan and the debentures is payable ammually in arrears and was paid in full as at 31 December 2019 The interest expense in the statement of profit or loss shown above relates entirely to the above loans. The company does not have any other borrowings (9) The following Zambian Kwacha per US Dollar (K_USS) exchange rates have been provided by the Bank of Zambia and approved by the Commissioner General Date Exchange rate ZK/ USS 31 December 2017 9.50 31 December 2018 10.50 Required: (a) Explain what is meant by thrin capitalisation in the context of the taxation of mining operations in Zambia clearly stating the criteria for determining whether a mining company is thinly capitalised, and evaluate whether Gwembe Mining Corporation is thinly capitalised. (6 marks) 6) Compute the taxable business profits for the year ended 31 December 2019. (15 Marks) (e) Caleulate the total amount of tax payable by the company for the tax year 2019 (4 Marks) QUESTION TWO For the purposes of this question assume that today's date is 31 December 2019