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Required: Draft a response to the UFlA MTO officer for Lydia to forward. fully explaining Lydia's tax obligations under the Income Tax Act for the period under review and whether they have been met. (6 marks) (b) As an incentive, Envirotek offers group shares to its employees in different ways: (i) (ii) Performance shares are offered free of charge to staff who excel as a staff retention mechanism. The employee is given an option to acquire shares which will mature in three years if he is still employed by the group. However. the employee cannot sell them until after another two years. As an example. Peter an employee of Envirotek was given an option to acquire free shares in July 2013 which he did accept. The option matured in July 2016 when he took possession of the shares and started getting dividends but couldn't sell them before July 2018. Peter sold the shares eventually in August 2018. Required: Advise the human resource manager of the tax implications of Peter's share benefit. (5 marks) Employees of Envirotek are also offered group shares at a 20% discount from market price. The staff are offered a company loan to purchase the shares at no interest. The loan is payable in monthly instalments for one year. starting after purchase of the shares. While employed by the company the staff cannot sell the shares until after three years. However. when the staff exits the company. they have the option of selling the shares on the market. Required: Advise the human resource manager on the tax implications of this arrangement. (5 marks) (c) Ms. Agnes Bogere has requested for a meeting with you as a tax consultant to discuss tax compliance for herself and her husband, who are both Ugandan residents and domiciled. They have one child, Ham, who is sixteen years old. In 2017/ 18 Agnes received income from two sources as follows: Mr Jin has approached y0u, as a tax consultant, on the issues raised in the case above. Required: Advise Mr Jin on: (i) the criteria used in the Income Tax Act for a lease of property to be a finance lease. (3 marks) (ii) which option between the loan and the finance lease is better, from a tax perspective. (5 marks) (Total 25 marks) Question 1 (a) Envirotek GmbH, is a German multinational company with specialist knowledge in Environmental and Social Impact Assessments (ESIAs). Through its branch in Uganda, Envirotek won a contract to do an ESIA for a big mining project in Karamoja region. The project which is being executed by Karamoja Mines Limited (KML) will commence on 1 July 2019 and should be completed by 31 August 2020. Envirotek is seeking advice on the Uganda Income Tax treatment of the payments to the work force which include engineers, some expatriate and others local, who will be required to carry out the ESIA. As a tax advisor, the human resource manager at Envirotek approaches you for tax planning advice. (i) For such significant projects Envirotek group relies on the parent company to source for technical personnel whom the branches and subsidiaries contract for the duration of any given project. Using this association Envirotek branch contracts ITP Limited (ITP) of United Kingdom for five engineers. Being residents of UK, the engineers' salaries will be paid in UK by ITP. The contract amount between Envirotek branch and ITP will be composed of the engineers' remuneration, housing, motor vehicle and service fees due to ITP. ITP has no office in Uganda. Required: Discuss the tax implications of the contract between Envirotek branch and ITP and indicate any tax planning opportunities in the execution of this contract. (10 marks) (ii) Lydia Namukasa is a civil engineer, a graduate of Makerere University. She joined Envirotek as an employee in January 2016. In July 2016, she was transferred to Bonn, Germany, as a Management Trainee at Envirotek Group headquarters. In January 2019, an officer of the URA Medium Taxpayers' Office (MTO) sent her an email reminding her to file her Income Tax Returns for periods 2016/17 and 2017/18. She has forwarded this email to you for advice. You find out that during the period she was employed by Envirotek, her PAYE was remitted to the URA diligently every month.Other Notes: (0 (W) (V) (vi) (vii) The tax written down values brought forward from 2017 are: Class Shs 'million' I 20.981 II 573 IV 48,831 Industrial building allowance (IBA) 5,747 On average 40% of all PPE additions are within Kampala. Capital equipment costing less than Shs 1,000,000 bought during the year amounted to Shs. 2.100.000. Included in the transfers from capital work in progress (WIP) is Shs 452,814,000 spent on customer service centres commissioned during the year. Also included in the transfers from capital WIP in 2017 is Shs 8,049,884,000 spent on the customer service centre refurbishment. MUL leased them on long-term, starting 2017. There was no balance on the provision for bad debts account at the end of 2017 while at the end of 2018 it stood at Shs 401,783,000. Inventory write down in 2018 was Shs 242,708,000. Deferred revenue at the end of 2017 and 2018 was Shs 880,541,000 and Shs 2,484,875,000 respectively. Tax losses brought forward If from 2017 amount to Shs 184.839.428.000. You are the tax manager charged with all taxation matters and policies at the company. The auditors have approached your office for information. Required: Prepare a draft income tax computation for MUL for the year ended 31 December 2018 (25 marks) 8. Finance costs Shs 'million' Interest on overdrafts and other finance costs (2,617) Interest on debts and borrowings (3,365) Total interest expense and other finance costs (5,982) Realised foreign exchange gain 2018 1,301 Unrealised foreign exchange gain in 2017 now realised 2,028 Realised foreign exchange loss (4,375) Unrealised foreign exchange loss in 2017 now realised (845) Unrealised foreign exchange gain 12,661 Unrealised foreign exchange loss (23,643) Interest income from deposits held with banks 72 (12,801) (18,783) 11. Property, plant & equipment (PPE) Civil GSM Office work for fixed Computer furniture & Motor Technical assets equipment equipment vehicles Total Shs Shs Shs Shs Shs Shs 'million' "million' 'million' million' 'million' 'million' Cost: At 1 January 2017 287 135 180 198 1,099 1,899 Reclassification (287) 287 Transfers from WIP 26,930 123,641 10,301 6,759 167,630 Disposals (4,775) (4,775) At 31 December 2017 26,930 119,001 10,481 7,244 1,099 164,754 Additions for 2018 1,167 292 2,685 346 28 4,518 Transfers from WIP 24,194 76,412 417 1,435 102,459 Disposals At 31 December 2018 52,292 195,705 13,583 9.025 1.127 271,731 Depreciation: At 1 January 2017 8 16 Reclassification -5 5 Charge for the year 2017 2,224 11,871 2,768 1,027 281 18,171 Eliminated on disposal (350) (350) At 31 December 2017 2,224 11,521 2,776 1,036 281 17,837 Charge for the year 2018 4,487 23,673 3,712 1,359 263 33,494 Eliminated on disposal At 31 December 2018 6,711 35,194 6,488 2,395 544 51,331 Net book value: At 31 December 2018 45,581 160.511 7,095 6,630 582 220,400 At 31 December 2017 24,706 107,480 7,705 6,208 818 146,917('3) Required: Write a memo to the CEO describing: (i) a tax agent and his role. (3 marks) (ii) the registration of tax agents and what the composition of the registration body is. (4 marks) (iii) the person(s) qualified to be CEDRO's tax agent(s) in the circumstances. (2 marks) (iv) who a tax representative is and their role. (2 marks) (v) the person(s) qualified to be GEDHO's tax representative(s) currently. (2 marks) (vi) the liabilities and obligations of a tax representative. (5 marks) Being the newly appointed tax coordinator for CEDRO, you have done a comprehensive tax health check on CEDRO's business affairs for the three years 2015/16 - 2017/18. CEDRO's year of income is the normal year of income. During the health check you came across correspondence between CEDRO and the UHA done in 2017. The correspondence pertains to the findings of a tax audit for the period 2015/16 carried out in 2017. During the audit, URA discovered that CEDRO had made a material and misleading declaration to the URA. The declaration which was done in writing and signed by the company accountant at the time led to a tax under declaration amounting to Shs 30 million. As a result of this under declaration, the accountant was charged by UHA for the offence and convicted. CEDHO went ahead to pay the tax plus penal tax. You have been tasked to analyse how the tax matters are handled at CEDRO and whether they are sorted in accordance with the relevant tax laws. Required: (i) Verify, by computation, the amount of penal tax paid/ payable by CEDRO. (2 marks) (ii) Advise CEDRO on what went wrong and how it can be corrected in the event that in your view, the matter was not settled according to the law. (5 marks) (Total 25 marks) (d) (8) (f) Shs 'million' Salary 180 Rental income 60 The properties are in the same complex and are together currently valued at Shs 500 million. The original costs and capital expenditure on the properties total Shs 300 million. Her husband. Philip Bogere, does voluntary work for a charity and has no taxable income of his own. In January 2016 Ms. Bogere had acquired a mortgage of Shs 200 million from Housing Finance Bank to complete construction of the properties. The term of the mortgage is ten years and the interest on it is 10% per annum, simple interest. Required: Advise Ms. Bogere on her income tax obligations and the income tax payable for the year of income 2017/ 18. (7 marks) Ms. Bogere has approached you and she is not sure whether the arrangement of her tax affairs is illegal or not. She has heard of a number of terms which she wants you to explain before you relate them to her case. Required: Explain the following, in relation to tax, giving examples: (i) evasion (2 marks) (ii) avoidance (2 marks) (iii) planning and aggressive tax planning (2 marks) (iv) arbitrage (2 marks) Explain the general approach. of the Income Tax Act, to the vices in (d) above. (4 marks) You are the tax manager of a subsidiary of a multinational company in Uganda. Your company decides to contract a local land surveyor for a one year period. The land surveyor will be charged with supervision of the setting up of a number of upcountry installations that your company intends to construct. The surveyor is contracted through a local human resource (HR) agency and is not a permanent employee. The monthly invoice amounts to Shs 23.6 million including VAT. The HR agency is not You are the newly appointed independent tax consultant for WUL charged with a broad range of taxation issues. Required: (a) (i) Define what a long-term contract is in regards to the Income Tax Act (2 marks) (ii) Compute the income and deductions to be taken into account to derive WUL's taxable income for the year 2018. (6 marks) ('3) (G) Mr. Jin the Finance Manager of WUL informs you that they have discovered that the estimated budget for the Bwinde Country Inn will be overrun because of some modifications they made on its foundation. This is after the geotechnical report revealed that the area is prone to seismic activity. The project will also take longer than foreseen with the new completion date estimated to be September 2020. For this reason he foresees a loss on the contract yet a profit had originally been estimated for the years 2018 and 2019. Required: Advise Mr. Jin on how the loss will be treated when indeed it happens. (4 marks) In 2018 WUL started on the construction of their new premises using a loan from their parent company. Xi Jiang International has access to cheap financing from EXIM Bank in China. From his experience in China, Mr Jin knows that this arrangement has tax implications. Required: Advise Mr. Jin on the full tax implications of this arrangement on WUL. (5 marks) According to Mr. Jin's analysis, hiring of a tower crane for almost each of the projects undertaken by WUL is an uneconomical cost that would be better done away with by WUL purchasing their own tower crane. He has managed to convince WUL management of this necessity and has been given a go ahead to do due diligence. Mr. Jin has identified DFCU Bank to offer them a financing solution. DFCU is ready to give them a good deal on a loan facility. Alternatively, the DFCU credit manager has advised Mr Jin of a finance lease option from their sister company DFCU Leasing, the option that Mr Jin seems to have liked. Much as Mr. Jin knows that this is a finance lease, he wants to know whether the Income Tax Act recognizes such leases and if so what the tax treatment is. Question 4 Whitestar Uganda Limited (WUL) is a fully owned subsidiary of Xi-Jiang International Corporation in Guangzhou, China. WUL is an established construction company specializing in building construction. Its portfolio of construction projects for the year 2018 stood as follows: Schedule 1: Schedule of completed contracts As at year end 2017, figures in Shs '000': Earned contract Contract Gross Contract Ref Contract description revenue costs profit WUL1701 Lusanja Hospital 33,025 20,353 12,672 WUL1702 WFS stores 482,917 318,568 164,349 WUL1704 Aruu Health Centre IX 114,046 73,939 40, 107 As at year end 2018, figures in Shs '000': Total earned Total Total contract contract gross Contract Ref Contract description revenue costs profit WUL1701 Lusanja Hospital 1, 433,971 1,270,857 163, 114 WUL1702 WFS stores 1,647,065 1,320,474 326,591 WUL1704 Aruu Health Centre IX 708,120 425,337 282,783 Schedule 2: Schedule of Contracts in Progress Contract costs incurred, figures in Shs '000': From commencement of For year contract to date 2018 Contract Contract Contract Contract Ref. Contract description Costs billings Costs WUL1604 Gullu Mixed 1,349,738 1,974,732 727,669 WUL1703 Hall Towers 757,722 1, 115,490 707,254 WUL1801 Bwinde Country Inn 431,262 554, 650 431,262 Estimated contract revenue and costs from commencement to completion, figures in '000s: Contract ref. Contract description Total Estimated Total Estimated Revenue Costs WUL1604 Gullu Mixed 2, 102,063 1,377,284 WUL1703 Hall Towers 1,229,253 921,940 WUL1801 Bwinde Country Inn 1,478,287 1, 108,715exempt from withholding tax. The invoice amount includes the agency fees amounting to Shs 2.0 million. The breakdown of the balance is as follows: Shs National Social Security Fund (NSSF) company 1,636,364 NSSF employee 818, 182 Medical insurance 300,000 Pay as you earn (PAYE) 5,350,000 Net pay 9,895,454 As a gazetted withholding tax (WHT) agent: Required: (i) Compute the withholding tax base on the invoice. (2 marks) (ii) Explain to the HR agency how you come up with the WHT base citing relevant references to the Income Tax Act. (3 marks) (Total 50 marks) SECTION B Attempt any two questions in this section Question 2 Cedro Enterprises (CEDRO) is a Ugandan family owned medium sized business. CEDRO's primary business is fishing and procurement of fish for export to Europe. The chairman and CEO of CEDRO is Phillip Cedro with his son lan as the chief operations officer while daughter Linda is the chief finance officer. You have newly been hired by CEDRO as their tax coordinator charged with handling all CEDRO's tax and Uganda Revenue Authority (URA) related work which mainly includes customs in the export of fish, and the periodic preparation of domestic tax returns. Before you joined CEDRO, the domestic tax work was being done by ZIMCO Associates (ZIMCO) whom CEDRO has decided to maintain as a consultant on a monthly retainer for quick and adhoc consultations. (a) While reviewing CEDRO's tax registration records you discover that CEDRO has not registered, with the URA, a tax agent or a tax representative, something that should be addressed immediately. The CEO has asked you to educate him on various tax matters.Question 3 Mycell Uganda Limited (MUL) is a telecom company that was licensed to carry out telecom services in January 2005. It was issued with both a Public Infrastructure Provider (PIP) and a Public Service Provider (P5P) License, each for 20 years. The company is currently undergoing its annual statutory audit for the year ended 31 December 2018 The following are extracts of the draft financial statements for MUL, for the year ended 31 December, 2018. (i) Statement of comprehensive income Note Shs 'million' Revenue 4 45,978 Cost of Sales 5 {31,3001 Gross Profit 22,078 Other Operating income 6 2.058 Operating expenses 7 (144.2351 Operating Loss (120.099) Finance cost 8 (10.732) Loss before tax (138.881) Income tax expense 10 - Loss for the year (138,881) Other comprehensive income - Total comprehensive income for the year (13.3.3311 (ii) Notes to the financial statements (extract): 7. Operating expenses Shs 'million' Provision for staff bonus 405 Tax penalty 7 Provision bad debts and inventory write down 644