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make payments to URA. Mr. Maxwell has worked for the N00 for the last 10 years earning USD 4.000 per month but has never filed a return. Risk analysis at URA established that MDL had never been audited and thus was earmarked for audit during the financial year 2019l20. After a comprehensive audit covering 5 years, URA raised assessments reflecting penalties imposed under Section 50 of the Tax Procedures Code Act. Mr. Maxwell objected to the taxes but the commissioner upheld the assessments. URA has issued agency notices to MDL bankers, Mr. Maxwell's personal account and to all company debtors. Mr. Maxwell thinks that the URA manager has a problem with him, the reason his company was picked on for audit and included his salary from the NGO yet his colleagues in the same organisation are also not filing tax returns. He wonders where URA gets all the powers to forcefully get money from his bankers including debtors. URA exchange rate is 1USD= Shs 3,700. Required: (a) Address Mr. Maxwell's dilemma and advise him on the next course of action. (10 marks) (b) Confirm to your client that the principle tax liability of She 962,040,000 assessed is correct before he takes the next course of action. (15 marks) (Total 25 marks) Question 4 The Uganda Revenue Authority (URA) risk team carries out analysis of data from the URA legacy databases on a regular basis. This function is done to establish risk indicators that guide the organization to make a plan of taxpayers who are audited or investigated during the year in addition to cases that come in from the general public in form of informants. This year's risk analysis revealed several taxpayers whose data exhibited tax fraud indicators. One among these was Papal Technical Services Ltd (PTSL), a company that provides construction services. Their import data revealed that during the year 2017/18, they imported various construction equipment whose customs value totaled to USD 2.35 million tax free in accordance with the customs law and were also withholding tax (WHT) exempt. Their corporation tax return reflected an addition in class IV of the wear & tear schedule in which they claimed capital allowances for the year of income 2017/18 and 2018/19 and also reflected hefty repair and fuel costs . (20 marks) (b) Discuss the ethical issues relevant to Caleb Associates and recommend any actions which should be taken by the firm. (10 marks) Notes from the meeting with the group finance director and audit committee representative The group has not changed its operations significantly this year. It has completed a modernization program of its warehousing facilities at a cost of Shs 925 million and replacement of a manufacturing line in one of the subsidiaries that cost Shs 1.395 billion. The program was financed with cash raised from two sources: . Shs 1 billion from a debenture issue and . Shs 1.32 billion from the sale of 25% of the share capital of Seredine Trading Ltd with the shares being purchased by an institutional investor. The group fell victim during the year to a significant cyberattack. which fortunately did not adversely affect its operations. It however. resulted in the loss of files containing the contact details of many of the group's employees. A tax investigation into the Seredine Trading Ltd.'s tax affairs started in July 2018. The Uganda Revenue Authority (URA) investigated the possible underpayment of taxes by Seredine Trading Ltd. claiming that the capital gains tax was not remitted by Xhosa Ltd and issued an assessment of Shs 2.35 billion. The group's tax planning was performed by another firm of accountants Xerox CPA but the group's audit committee has asked if our firm will support the group by looking into its tax position and liaising with URA in respect of the tax investigation on its behalf. Xerox CPA has resigned from their engagement to provide tax advice to the group. According to the audit committee representative. the committee had resolved that the group files a case in high court to challenge the URA assessment of Shs 2.35 billion. The group audit committee has also asked whether one of Caleb Associates partners can be appointed as a nonexecutive director and serve on the audit committee. The audit committee lacks a financial reporting expert. and the appointment of a certified tax advisor would bring much needed knowledge and expeence. Below is financial Information provided by the group finance director. does not have a constitution with changing leadership and dissolution follows the normal liquidation process. Required Respond to the instructions in the partner's email and: (c) Explore the possibility of obtaining a tax exempt status for Lucius Agencies Ltd. (12 marks) (if) Compute additional tax arising from supplies by individuals who are not registered for taxes. (8 marks) (Total 50 marks) SECTION B Attempt two of the three questions Question 2 You are a manager in the forensic investigation department of your consulting firm. The directors of a local manufacturing company, Nichodemus Manufacturers Ltd (NML), have contacted your department regarding a suspected fraud, which has recently been discovered operating in the company and you have been asked to look into the matter further. You have held a preliminary discussion with Agutu, the company finance director, and the notes of this conversation are shown below. One year ago Nichodemus Manufacturers Ltd shut down one of its five factories, in response to deteriorating market conditions with all staff employed at the factory made redundant on 1 July. 2018. While preparing for external audit and subsequently filing corporation tax returns, Agutu performs analytical procedures on expense accounts. She found out that the monthly total payroll expense had reduced by 3% in the year following the factory closure- not as much as expected, given that 20% of the total staff of the company had been made redundant. Initial investigations performed last month by Agutu revealed that many of the employees who had been made redundant had actually remained on the payroll records and salary payments in respect of these individuals were still being made every month with all payments going into the same bank account. However, the pay as you earn (PAYE) return had reduced by half including those that are still working. Therefore monthly PAYE actually reduced by Shs. 35,219,300 instead of the anticipated Sh. 14,087,720. As soon as she realized that there could be fraud being conducted within the company, Agutu stopped any further payments in Question 1 You are a tax manager in Caleb Associates, a firm of certified tax advisors. and you are responsible for advising the Xhosa group on their tax matters. The group operates in the supply chain management sector. offering manufacturing. distribution, warehousing. and container handling services. The group comprises of a parent company, Xhosa Ltd. and two subsidiaries. Seredine Trading Ltd and Luscious Agencies Ltd. Both subsidiaries were acquired as wholly owned subsidiaries many years ago. Caleb Associates advises all the three individual companies on their tax matters as well as the group. You are beginning to plan the group tax healthy check for the financial year ended December 2018 and the engagement partner has sent you the following email: To: Tax Manager From: Engagement Partner Subiect: The Xhosa Group- Tax Advisory Dear Gabriel, I held a meeting yesterday with Hannah. the Xhosa group finance director. A representative of the group audit committee was also at the meeting to discuss issues raised for our attention by the committee. Hannah gave me some projected financial information for the group's forth coming year end. along with comparatives and explanatory notes and we discussed some matters relevant to the group this year. i'm preparing for the tax team briefing next week at which there will be a number of recent recruits into the tax department whose first assignment will be the Xhosa group. I have attached some notes from my meeting as well as the financial information provided by Hannah. Required: Using this information. prepare briefing notes for use in the tax team briefing in which you: (a) identify and explain the tax risks which should be considered in planning the tax healthy check. You should ensure that all the information provided is considered to identify the tax exposures. Consolidated statement of financial position as at 31 December Assets Notes Projected Actual 2018 2018 Shs 'Million' Shs 'Million' Non-current assets: Property, plant & equipment 2,300 1,870 Intangible assets - goodwill 300 300 Deferred tax asset 2 100 150 Total non-current assets 2,700 2,320 Current assets: Inventories 350 280 Trade and other receivables 620 450 cash & cash equivalents 100 Total current assets 970 830 Total assets 3,670 3,150 Equity & liabilities: Equity share capital 500 500 Retained earnings 1,260 1,030 Non-controlling interest 3 50 Total equity 1,810 1,530 Non-current liabilities: Debentures 600 550 Provisions 4 60 120 Total non-current liabilities 660 670 Current liabilities: Trade & other payables 1,050 950 Overdraft 150 Total current liabilities 1,200 950 Total liabilities 1,860 1,620 Total equity and Liabilities 3,670 3,150The company had a running loss of Shs 1.2 billion based on low activity during the last two years. Because of the huge recurrent expenditure reflected in the return with low revenue, under cover intelligence officers interviewed some of their field technicians in a bid to confirm existence of the construction equipment and the contracts they were handling. It was established that PTSL owns a branch in Rwanda and all the equipment that were imported were sent as temporary exports to Rwanda where they have huge contracts. It was also revealed that fuel is purchased in bulk and paid for from the head office of a fuel company in Uganda but the company in Rwanda draws the fuel from one of the fuel company's filling station in Rwanda that also issues invoices for purposes of their accounting. The technician further alluded to the fact that the same fuel expense is claimed for in Rwanda and in Uganda contributing to the big loss. Armed with this background information. the manager tax investigation has invited the managing director of PTSL for a comprehensive interview in order to make sense of the information available to him that signifies tax fraud by the company. Required: (a) Advise the manager on how to prepare for the interview before the meeting with the managing director of PTSL. (10 marks) (b) Discuss the interview process from the start to the end that will ensure obtaining useful information to inform decision making. (15 marks) (Total 25 marks) Consolidated statement of profit or loss for the year to 31 December Notes Projected Actual 2018 2018 Shs 'Million' Shs 'Million' Revenue 5 3,750 3, 150 Operating expenses 6 (3,480) (2,770) Operating profit 270 380 Profit on disposal of shares in Seredine 100 Finance costs (40) (30) Profit before tax 330 350 Tax expense (100) (150) Profit for the year 230 200 Notes 1 . Several old warehouses were modernized during the year. The modernization involved the redesign of the layout of each warehouse, the installation of new computer system, and the bigger portion of the costs relate to replacement of the electrical systems 2. The deferred tax asset is in respect of unused tax losses (tax credits) which accumulated when Seredine Trading Lid was loss making for a period of three years from 2013 to 2016. 3. The non-controlling interest has arisen on the disposal of shares in Seredine Trading Ltd. on 1 Jan, 2017; a 5% equity shareholding in Seredine Trading Ltd was sold raising cash of Shs 20 million. The profit made on the disposal is separately recognized in the group statement of profit or loss. 4. The provisions relate to onerous leases in respect of vacant properties which are surplus to the group's requirements. 5 . The group has always recognized distribution revenue when a shipment leaves its distribution centre. 6. 20% of operating expenses are items supplied by individuals who supply good quality products but are not tax registered (have no tax identification numbers). These normally supply and invoice at the end of the month as company policy is that each invoice should not be less than Sh. 10 million. 7. Luscious Agencies Lid is involved in various charity activities in the group catchment area for example, they built 5 houses for the old and poor during the financial year. Based on this, management has asked Caleb Associates to apply for a tax exempt status for the company. Luscious Agencies Lidrespect of the redundant employees. She contacted your firm as she is unsure how to proceed. and would like your firm's specialist department to conduct an investigation. According to Agutu. the senior accountant. John Bosco, has been absent from work since she conducted her initial investigation last week, and it has been impossible to contact him. Agutu believes that he may have been involved in the suspected fraud. During a briefing to the managing director of what had been established by Agutu, the office assistant heard them and ran to the commissioner tax investigation with a copy of the previous month's payroll to report a case of tax fraud by the senior accountant. A preliminary review by URA established that the company had written to the commissioner domestic taxes and indicated the closure of one of their factories. Prominent in the letter was an expected reduction in PAYE of Shs. 14,087,720 following the layoff of 20% of their employees and capital allowances for the production plant which forms 25% of the total allowances claimed for plant & equipment. However. URA noted that the number of employees on their PAYE return from the period of closure had reduced by half as compared to the period before closure but the corporation tax return had not been submitted given that the company still had up to December 2019 to file their return. UFiA immediately sanctioned for a forensic investigation into the tax matters of NML and a search and seizure operation was carried out on the company to obtain primary evidence. On examination of seized data, two sets of records were established and one set with figures for management decisions was obtained reflecting capital allowances of Sh.460. 350.000 as opposed to what is reflected in the draft accounts for purposes of filing corporation tax return of Sh. 575,437,500. The management of NML is now scared as to the implications of the forensic investigation by URA to the company and as a manager in charge of forensic investigation in your firm. Required: (a) Describe to management of NML the objectives of a forensic investigation. (6 marks) (b) Discuss the steps URA will take in carrying out a forensic investigation into the tax matters of NML including procedures that could be used to gather evidence and present matters to court. (15 marks) (c) Compute the tax liability to the company if any that the investigation is likely to establish under the circumstances. Assuming investigations are concluded this November. (2 marks) (d) Explain the likely offences committed and legal defenses available to the company if URA took the matter to courts of law. (2 marks) (Total 25 marks) Question 3 Max Distributers Lid (MDL) was incorporated in Uganda with its head office in Namanve Industrial Area, Mukono. The company's business is distribution of goods on behalf of other companies that have outlets all over the country. The company employs 20 drivers and 20 turn boys, who distribute goods but are not issued with appointment letters. Their entitlements are told to them by the secretary as follows: Category Salary Weekly Allowances Subsistence Drivers 150,000 50,000 When on upcountry trips Turn boys 100,000 50,000 When on upcountry trips At the end of the month, only salary is paid through the payroll but allowances are posted to the general ledger as staff motivation expenses. The managing director, Mr. Maxwell Okalai, is an employee in a Canadian-based non-governmental organisation (NGO) and only attends to company matters in the evening and weekends. Because of time pressure, he employed three expatriate staff in addition to himself forming the senior management. The three managers are paid upkeep of Shs 2 million per month but their salary of USD 3,000 reflected in their contracts is paid direct to their home bank accounts in addition to other benefits that include school fees for one child of Shs 1,000,000 and an air ticket worth USD 800 once a year to enable them take leave. The upkeep is paid through the payroll thus pay as you earn (PAYE) charged and remitted to Uganda Revenue Authority (URA). However, the benefits are claimed every January according to company policy and posted to staff motivation expenses. Mr. Maxwell is not paid a salary in the company but only given a weekly allowance of Shs 1,000,000 to enable him fuel and repair his private car. The NGO's policy is that, they are not mandated to collect taxes for the Ugandan government in form of PAYE, withholding tax (WHT) or any other. Therefore, employees who are not tax exempt should file their own income tax returns and