Question 1

(a) Kaawa Uganda Limited (KUL), a private limited liability company registered in Uganda, has been engaged in the business of growing, processing and export of coffee since 1 July 2016. The company owns a large coffee farm in Mubende district but the coffee processing is carried out in Kampala, where the company owns a processing and packaging factory in Nakawa industrial area. The company's shareholding is 90% by Great Coffee Inc, a company incorporated in the United Kingdom and 10% by Mr. Mawanvu, a resident in Uganda. The transportation of the raw coffee from the farm to the factory and the processed coffee to the port of Mombasa in Kenya is done by Kaawa Transporters Limited, which is owned 80% by Great Coffee Inc and 20% by Mr Mawanvu. The company's statement of profit or loss and other comprehensive income for the year ended 30 June, 2020 was as follows: Revenue Cost of sales Gross profit Administrative expenses Selling and distribution expenses Finance costs Other expenses Net profit before tax Tax Net profit after tax Note Shs '000' 1 23,535,220 2 (6,870,900) 16,664,320 3 (7,214,300) 4 (5,895,700) 5 (450,000) 6 (620,000) 2,484,320 (745,296) 1,739,024 The following information is available: 1. Included in the revenue are the following amounts: Exports of coffee Local sales of coffee husks Unrealised foreign exchange gains Shs '000' 19,200,000 4,200,000 135,220 19 March, 2021

2. Included in the cost of sales is: An amount of Shs 150 million that was used for expanding the labour quarters at the farm. This amount was expensed as normal farm expenses. An amount of Shs 15 million paid to purchase farm inputs from Makenke Traders in Mubende town. Makenke Traders do not have a tax identification number (TIN). 3. The administrative expenses include the following amounts: Particular Salaries and wages Depreciation Audit fees Provision for bad and doubtful debts Water and electricity at the farm and factory Water and electricity at the home of the Managing Director's home in Kampala (he does not pay tax on the benefit) Tuition fees ( Farm manager for a 2 year Master's degree in Business Management) Staff party at Sanvura Hotel in Fort Portal (with spouses) Staff lunch at staff canteen Motor vehicle and machine repairs Annual subscriptions to National Agricultural Research organisation Unrealised foreign exchange losses Loss on sale of fixed assets Licence fees Penalties by NEMA imposed at the factory Police express penalties on company drivers Total Shs '000' 3,395,000 1,978,000 60,000 215,460 352,800 22,500 5,380 55,000 302,000 400,000 40,000 168,160 140,000 15,000 40,000 25,000 7,214,300

4. Selling and distribution expenses include: Shs'000' Donation to Uganda Manufacturers Association (the 130,000 association has an exemption certificate from URA) Donation to Makerere University Agriculture Department ( research in new methods of improving coffee) Advertising campaigns Staff field allowances Motor vehicle fuel Total 250,000 2,897,500 1,680,000 938,200 5,895,700 5. Finance costs comprise of the following: Interest of Shs 320 million paid to Great Coffee Inc for the loan advanced to finance working capital. Shs 130 million was paid to Global Commercial Bank to service the ongoing loan. 6. Included in other expenses is an amount of Shs 120 million that was an amount advanced to senior staff members as school fees for their children at Modern International School in Kampala. No taxes are paid on the benefit. 7. Asset additions and disposals: Written down balances as at 30 June, 2019: Class: I II III IV Total The qualifying cost for the factory building when it was first put to use on 1 July, 2016 was Shs 1.8 billion and 20% of the building is used as office space. Assets acquired during the year ended 30 June, 2020. Shs '000' 125,475 230,800 1,342,623 486,980 2,185,878 Asset 10 coffee colour sorters to be used at the farm in Mubende at Shs 50 million each Construction of a green house Extension of water drainage channels 10 lorries of capacity 10 tons at Shs 85 million each Replacement of the coffee processor at Nakawa Industrial Area Shs 'million' 500 180 50 850 1,000 19 March, 20

Disposal of assets during the year ended 30 June, 2020. The old processor was sold for Shs 450 million but the net book value at the time of sale was Shs 590 million. 8. The company paid provisional tax of Shs 592,890,000 on 30 June 2020. The self assessment return of the company indicated that there was a loss carried forward of Shs 901,330,400 as at 30 June 2019. 9. The final income tax was filed on 31 January, 2021 and the company had not requested for an extension of the due date for filing.

Required: (i) Compute KUL's chargeable income and tax payable for the year ended 30 June, 2020. (26 marks) (ii) Advise KUL on any penalties and or interest due on filing the return on 31 January, 2021. (4 marks) (b) Mr. Mawanvu attended a tax awareness seminar organised by Big & Tall Certified Public Accountants (BT CPA). During the seminar, the tax partner of BT CPA mentioned that when a person is trading through many related companies, there are ways one can plan his taxes and be able to minimise taxes payable. Since Mr. Mawanvu is a shareholder in both Kaawa Uganda Limited and Kaawa Transporters Limited, he found the topic useful but did not understand how tax planning could help him in particular. He has approached you as a tax expert to help him out.

Required: Explain to Mr. Mawanvu the meaning of tax planning advising him on the planning ideas that would be of help in his type of business. (Hint: Please limit your comments to income tax only)

SECTION B Question 2 Mr Byakatonda Severino who owns a permanent home in Buwaate, Wakiso district, has been employed as an accountant by Big Trail Limited, a company that deals in the distribution of various imported merchandise since July 2017. The following were his terms of employment on commencement of employment on 1 July, 2017. 1. Monthly gross salary Shs 12 million. 2. Medical insurance card for self, spouse and four dependants for a maximum cover of Shs 10 million per person for both in and outpatient care. 3. Use of a company vehicle for both official and private purposes. He was availed a vehicle that cost Shs 150 million on 30 June, 2017 as the first user. 4. Entitled to bonus payment equivalent to one month's salary payable in June, once the performance target for the year is accomplished. 5. Lunch and entertainment allowances Shs 400,000 and Shs 2 million per month respectively. 6. The company will pay for his health club membership at Shs 1.5 million per month. 7. The company will pay the annual subscription fees to the Institute of Certified Public Accountants, where Mr Byakatonda is a member. Other information: During the year ended 30 June 2020, the company paid annual membership fees to ICPAU of Shs 550,000 and he surpassed his performance target by 15%. Before taking up appointment with Big Trail Limited, Mr. Byakatonda had constructed six rental houses near his home in Buwaate. He acquired a mortgage of Shs 100 million from Popular Commercial Bank in 2018 in order to complete the houses and they were each hired out at Shs 1 million per month with effect from 1 January, 2019.

In addition to payment of mortgage interest of Shs 12.5 million during the year ended 30 June 2020, Mr. Byakatonda also paid the following towards maintaining the rental houses: Details Security guards Property rates Maintenance

Required: Shs '000' 2,840 2,000 10,000 (a) Compute Mr. Byakatonda Severino's chargeable income and tax liability for the year ended 30 June 2020, explaining clearly why some incomes may have been omitted. (13 marks) (b) Explain the circumstances under which an individual taxpayer is considered to be resident under the provisions of the Income Tax Act Cap 340. (4 marks) (c) Differentiate the tax treatment of income earned by a non resident individual from that of a resident individual. (3 marks) (Total 20 marks)

Question 3 (a) Wire Technologies Uganda Limited is a subsidiary of Wire Technologies International Ltd, incorporated in the Netherlands. The company provides services in the telecommunications sector in Uganda and abroad. The company is registered for all the tax heads and has been registered for VAT since June 2010. Beat Telcom Uganda Ltd (Uganda) Stop Telcom Uganda Ltd ( Uganda) Beat Telcom Rwanda Ltd (Rwanda) Stop Telcom Zambia Ltd (Zambia) Total Other sales: An old motor vehicle (Mitsubishi Pajero) was sold for Shs 11,450,000 The transactions for the company for the month of December 2020 are as follows: Revenue from services provided: Customer Amount (USD) 680,000 255,000 123,500 89,700 1,148,200

Purchases and payments: Description: Paid for the supply of telecom installation services by Bemba Limited Paid for the supply of telephone services by Beat Telecom Uganda Ltd Paid for the supply of office consumables (all standard rated) by Good Deal Supermarket Paid for a motor vehicle (Land cruiser Prado) from the car bond at Nakawa Paid staff salaries for the month of September Bought unimproved Land in Luwero district Paid audit fees to Allied CPA Consultants Paid rent for September Total Other payments: Amount Shs '000' 1,253,900 50,980 12,500 85,000 1,560,000 580,000 15,000 330,000 3,887,380 During December 2020, the company paid Wire Technologies International Ltd an amount of USD 50,000 as payment for management services provided by the parent company. The company had a VAT offset brought forward from November 2020 of Shs 124,390,000. Notes: All sales are VAT inclusive where applicable. All purchases are VAT exclusive where applicable. The company trades with only VAT registered entities. The exchange rate of the USD to Shs for the month of December 2020 as posted on the URA portal was Shs 3,650.

Required: Advise the management of Wire Technologies Uganda Limited on the VAT payable or claimable for the month of December 2020. (12 marks) (b) A Uganda Revenue Compliance officer notified the company's accountant that the company was likely to be penalised for the claim of incorrect VAT. On the review of the return filed for November 2020, it was found that included in the purchases claimed were the following invoices, all VAT exclusive:

Shs 120 million for buying a mini bus which will mainly be used to transport staff to the field. Shs 86,790,000 that was paid to Bamu Ltd for providing entertainment at a staff party during the month.

Required: Advise the management of Wire Technologies Uganda Limited on the tax implications of the above transactions quantifying the penalties due, if any. (5 marks)

(c) The management of Wire Technologies Uganda Limited has been advised that they can agree with the Commissioner to compound their offence.

Required: Explain to the management the implication of compounding offences. Question 4 (a) Verger Uganda Limited (VUL), is a private company registered in Uganda and a subsidiary of Verger International Limited (VIL) whose office is located in Mauritius. VUL is engaged in the manufacturing of computer components under license from VIL who is the patent holder. VIL charges VUL royalty fees for allowing them manufacture the components in Uganda. In an effort to cut costs, VIL has set up a shared services centre in Mauritius which is involved in providing services to various subsidiaries across the world. The services provided include: finance and accounting, human resource management, research & development and procurement. VUL has reported a loss before tax of Shs 200 million for the year ended 30 June, 2020 after charging the following amounts below: Item Finance and accounting Human resource management Procurement Research and development Management fees Royalty payment Shs 'million' 80 45 76 120 300 450

The Uganda Revenue Authority is not comfortable with the information and is of the view that the management fee cost paid to Mauritius is a tax avoidance scheme since in their opinion it is a duplication of the other services provided in the country.

Required: (i) Explain to the management of VUL the powers of the Commissioner in the circumstances where he/she suspects a tax payer's transaction to be a tax avoidance scheme. (4 marks) (ii) Explain the likely tax implication of the Commissioner's action. (3 marks) (b) The company has been put on alert to prove to the Uganda Revenue Authority that the management fees charged have been determined at arm's length price.

Required: Provide the documentation that the company is required to provide as evidence that the management fees charged have been determined at an arm's length price. (7 marks) (c) Multinational entities (MNEs) usually plan their taxation policies involving locating most of the group activities in "Tax Havens".

Required: Describe what you understand by "Tax Haven" explaining at least four characteristics of a tax haven.

Question 5 (a) Alpha Oil Limited (AOL) is a licensee in the Albertine Region. On 1 June 2020, AOL entered an agreement with Beta Oil Limited (BOL), also a licensee to farm out a quarter (1/4) of its interest in the exploration area in order to raise capital to participate more meaningfully in the commercial production phase. AOL engaged the services of Oil International Negotiators (OIN), a company resident in the United Kingdom, in order to determine the most efficient consideration for the deal. OIN charged a fee of USD 100,000

that was invoiced in advance on 1 June, 2020. The negotiations between the two parties were concluded two months later on 2 August 2020, on which date AOL transferred the agreed fees to the account of OIN in London. Both AOL and BOL agreed to the consideration for the farm out deal at USD 3 million, which BOL transferred to AOL account on 2 August, 2020. AOL started the oil exploration work in the Albertine Region in 2005 and the total exploration expenditure incurred up to 31 May, 2020 was USD 2.5 million. AOL will continue to hold their interest in three quarters of the exploration area. The average exchange rates of the Shs to the USD were: Shs June 2020 July 2020 August 2020 Required: 3,690 3,685 3,675 Advise the management of AOL agreement. on its tax exposure of the farm out (10 marks) (b) A licensee is required to file his return with the URA in accordance with section 93 of the Income Tax Act and sections 16 and 19 of the Tax Procedures Code Act but with some modifications.

Required: Explain the modifications related to filing of returns that will apply to a licensee in accordance with section 89O of the income Tax Act. (5 marks) (c) Define what is meant by "petroleum development expenditure" and explain the tax provisions relating to "petroleum development expenditure" in accordance with section 89 of the Income Tax Act. (5 marks)