Question 1

(a) Makambanawe George is a medical doctor currently employed by Muhenda Hospital, a privately owned hospital located in Fort Portal Kabarole district, as a medical officer. The appointment was effective 1 July, 2015 on a four-year renewable contract. As part of his entitlement, George was availed with a vehicle for both official and private use. The vehicle was a brand new Toyota Prado TX model 2014 purchased from Japan on 1 January, 2015 at Shs 100 million. George is charged a nominal monthly fee of Shs 50,000 by the employer as his contribution towards this benefit.

In accordance with his employment contract, the following took place during the year ended 30 June, 2017:

1. 2.

3.

4. 5. 6.

Monthly basic salary Shs. 8 million.

Accommodation by employer near the hospital. The house has an annual market rent of Shs 12 million.

Employer also provided George with workers' quarters to accommodate his domestic workers within the same compound. The annual market rent for such workers' quarters is Shs 2.4 million. Employer pays his domestic assistant and a gardener a monthly salary of Shs 150,000 each.

George's spouse was paid Shs 500,000 as travel allowance by his employer during the year.

Employer provided George with a phone handset with a sim-card to use during his term of employment which must be returned upon expiry of his employment contract in 2019. The cost of the handset including the sim-card was Shs 3.5 million. The employer will replace it with a similar phone in the event it is lost or spoilt. However, the depreciated cost will be deducted from his salary in such circumstances. He was also provided with monthly airtime for both business and personal use Shs 400,000 paid directly to the service provider. He is not required to account for the business usage of the phone.

Was offered a loan by the employer at a rate of 7.5% interest per annum of Shs 40 million during the year which he cleared fully by the year ended 30 June, 2017.

Employer pays school fees for George's 3 children Shs 2 million each per year at Tooro Boarding Primary School in Fort Portal Municipality.

George is paid gratuity Shs 10 million at the end of every one year of service.

Due to insecurity in the area, his employer provided him with 2 security guards, one for his home and the other as his personal escort. Each guard is paid a monthly salary of Shs 450,000 by the employer. He was required to contribute a monthly fee of Shs 50,000 towards this benefit.

Employer provides George with free treatment for himself, spouse and four biological children. However, he is required to pay for any other relatives. During the year, the employer treated his family members for Shs 10 million. The employer also treated his domestic assistant for a total of Shs 2.6 million which he has not yet paid but it has not been deducted from his salary.

His employer paid a life insurance premium to Sanlam Insurance Company Shs 6.5 million.

He borrowed Shs 17 million from a bank in town for private purpose. He, however, was able to pay back only Shs 10 million. The balance was paid by his employer plus the outstanding interest of Shs 3 million when he was about to be imprisoned by the bank for defaulting on installment payments. The employer decided not to recover this money from him in appreciation of the specialised service he provides.

During the year as part of his obligation, the employer deducted Shs 100,000 from his salary as his annual payment for local service tax which was remitted to Fort portal Municipal Council.

During the end of year party, George being the best employee of the year was rewarded by the employer with a brand new vehicle - a Toyota Hilux double cabin valued at Shs 65 million plus a full year's fuel card of Shs 15 million. In addition, he was also given Shs 8 million for him and his family to take a one week's holiday trip to Mombasa.

Note:

The average statutory rate by the central bank as at 1 July, 2016 was 15%.

Required:

(i) Advise George on what constitutes his gross employment income and chargeable income for the year ended 30 June, 2017. Clearly indicate to George, with reasons, why some income may not be included in his gross income.

(23 marks)

(ii) Compute George's tax payable on employment income for the year ended 30 June, 2017.

(2 marks)

(b) Dr. Makambanawe George has been thinking about retiring into his own practice in the near future. During the year ended 30 June, 2017 he took steps towards attaining his goal. He bought land in Kyenjojo district where he embarked on constructing his retirement home and clinic. Both the home and the clinic are located on the same property. About 50% of the property is reserved for agriculture and grazing Friesian cows for domestic purposes in the near future.

He bought the land at Shs 200 million on 1 August, 2016 and embarked on construction of his residential house and clinic at the same time. By 31 December, 2016 the clinic had been completed and it took Shs 180 million to complete. The residential house was not yet complete nd he estimated to have spent Shs 50 million on its construction.

On 1 January, 2017 he started working part-time at the clinic during weekends. Only the out-patient section of the clinic was operational.

On 2 January, 2017 he bought the following for use in the clinic:

Item

Furniture, fittings & equipment 2 hospital examination beds Laboratory equipment Scanning machine

X-ray machine

Ambulance

Total

Note 1

Shs '000' 30,000 20,000 25,000 130,000 140,000 90,000 435,000

George's income and expenditure statement for the clinic for the period January - June, 2017 is as follows:

Income:

Consultation fees

Sale of medicine and drugs Laboratory income

Scanning and x-ray income Total

Expenses:

Salaries and wages

Water & electricity

Rent

Clinic expenses

License fees

Maintenance expense Transport (for clinic supplies) Home expenses

Total

Notes:

Note

Included furniture, fittings

Shs '000' 35,000 12,000 3,500 12,500 63,000

10,000 8,000 4,200 5,300 1,500

65,600 5,000 7,500

107,100

equipment are the following: Shs '000'

10 chairs each at

5 desks each at

Partitioning for

2 computers each at

10 benches for outpatient waiting room

50 100 20,000 3,500 1,500

George's wife is a nurse and has been getting Shs 1 million per month from the clinic as her salary for running the clinic on a daily basis. George withdraws Shs 200,000 every weekend that he works at the clinic and this amount is recorded as salaries. He worked for a total of 20 weekends from January to June, 2017.

30% of the water and electricity are used at the construction site for their residential home.

The family is renting a small house in Kyenjojo town since their residence is yet to be completed.

The maintenance expense includes depreciation of plant, machinery & equipment Shs 60 million.

George thought that the income earned from the clinic business is exempt from tax because his work is to benefit the community and

1 June, 2018

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not profit earning. However, he has been informed that it is not exempt and has requested that you advise him on what tax he has to pay.

Required:

(i)Advise George on his chargeable income and tax payable on the clinic operations, if any.

(9 marks)

(ii)Explain to George the requirements for his clinic to be exempt from tax and the process he will need to go through in order to have the income exempted from tax.

(6 marks) (Total 40 marks)

SECTION B

Attempt three of the four questions in this section

Question 2

In a recent workshop organised by the Institute of Certified Public Accountants of Uganda (ICPAU) in northern Uganda, Mr. Kadwangu, the Chief Administrative Officer of Nwoya district arrived late for the workshop when the presenter was concluding the presentation on taxation of petroleum operations in Uganda. In his concluding remarks, the presenter gave highlights on the petroleum operation value chain in Uganda and the different ways through which international oil companies can acquire rights to oil explorations. He mentioned that there are basically three phases (streams) in the petroleum value chain. However, given the fact that Mr. Kadwangu had limited knowledge on the subject of taxation of petroleum operations in Uganda, he has approached you as a tax adviser to help shed more light on some of the areas discussed by the presenter.

Required:

1. (a)Identify the phases (streams) in the petroleum value chain and explain the related stages and activities in each of the streams in the petroleum value chain.
2. (10 marks)
3. (b)Explain the tax treatment of the following under Section 89 of the Income Tax Act of Uganda:
4. (i)Petroleum exploration expenditure. (3 marks)
5. (ii)Deductions relating to petroleum operations. (2 marks)
6. (c)Bulisa Oil Company, with their head office located in Hoima district, acquired a petroleum exploration license from the Government of Uganda in 2015. However, they were not able to carry out their operations until January, 2017 when they mobilized resources from their foreign funders that operations began. During the month of January, 2017 the following
7. activities took place.

1.

2. 3.

Obtained loan USD 10 million from Norway Oil Company Ltd, their shareholder and funder. The loan will be subject to interest of 5% per annum but the interest will be paid if the company finds oil and proceeds to commercial production phase. In the meantime, it will be accrued but not paid.

Leased an oil rig for three years at a rental of USD 120,000 per annum.

Purchased other exploration equipment USD 500,000.

1. Purchased 3 motor vehicles (double cabin pick-ups) to be used by the engineering staff at Shs 100 million.
2. Paid the local staff Shs 2 million and expatriate staff USD 100,000. The other operational expenses for the year ended 31 December 2017 were Shs 120 million.
3. The average exchange rate was USD 1 = Shs 3,600.
4. Required:
5. Comment on the tax treatment of each of the above expenses for the year ended 31 December, 2017.
6. (5 marks) (Total 20 marks)

Question 3

1. (a)ABBA Enterprises is a small business taxpayer based in the central business district of Kampala, dealing in in general merchandise. During the year ended 30 June, 2016 their turnover amounted to Shs 145 million. The business is not registered for value added tax (VAT). The Managing Director, Mr. Kitooke, was advised by a business associate that he could expand his business opportunities if he registered for VAT but he does not understand the concept of VAT and how it operates. Mr Kitooke has come to you as a knowledgeable person in tax matters to explain to him what VAT is all about.
2. Required:
3. Explain to Mr Kitooke the following issues:
4. (i)Person(s) required to register for VAT as per the provisions of the VAT Act Cap 349.
5. (ii)The obligations a VAT registered person must fulfill upon registration.
6. (iii)The benefits that accrue to a VAT registered person.
7. (iv)Circumstances that may lead to the deregistration of a taxpayer by
8. the Commissioner General.
9. (v)Meaning of the term 'taxable supply'.
10. (10 marks)
11. (b)Mr Kitooke was visited by the revenue officials in January, 2018 who put it to him that he should have been registered for VAT. They asked him to avail his records for the period July to December, 2017 for audit which he agreed to do. For the period that the revenue officials audited, he had mainly sold sugar, blue band, soap, exercise books, and mosquito nets and his turnover was as follows:

The statement of profit or loss and other branch for the year ended 30 June, 2017 is

comprehensive income for the as follows:

Shs '000' 8,000,000 (1,250,000) 6,750,000

(4,900,000) 1,850,000

Revenue

Cost of sales

Gross profit

Less

Depreciation

Selling expenses Administrative expenses Net profit

Note 1

2 3

Shs '000'

350,000 2,550,000 2,000,000

Jul.

Aug.

Sept.

Oct.

Nov.

Dec.

Item

Shs '000'

Shs '000'

Shs '000'

Shs '000'

Shs '000'

Shs '000'

Sugar

2,500

3,500

3,900

4,000

4,200

4,500

Blue band

2,300

2,800

3,500

3,900

4,300

4,700

Soap

1,500

2,300

3,600

4,200

4,600

5,000

Exercise books

2,800

3,500

4,500

5,000

5,800

6,200

Mosquito nets

3,000

4,500

5,000

5,500

6,000

6,800

Total

12,100

16,600

20,500

22,600

24,900

27,200

The revenue officials issued him a VAT assessment on 1 February, 2018. The assessment did not include any penalties but included interest for late payment of the tax.

ABBA Enterprises makes standard rated purchases of Shs 2 million (VAT exclusive) per month.

Required:

Advise ABBA Enterprises on when they were required to have registered for VAT and the VAT payable/ claimable that the tax officials should have assessed them.

(10 marks) (Total 20 marks)

Question 4

(a) Hinata Auto Motors International Limited (HAMIL) based in Japan involved manufactures various types of motor vehicles and motor spare parts. They export a substantial amount of their products on the Ugandan market. In order to take advantage of the increasing market share in Uganda, the company decided to open a branch (Hinata Auto Motors International Limited - Uganda branch) in Kampala in July, 2015. The branch handles all the publicity and marketing for the company in Uganda.

The extract of the statement of the financial affairs of the branch as at 30 June, 2017 is as follows:

Plant, property & equipment Current assets:

Inventory

Receivables

Bank balance

Cash in hand

Current liabilities:

Payables (rent & office supplies)

Head office current account Notes

2017 Shs '000'

950,000

1,050,000 1,200,000 1,500,000

120,000

(620,000) 4,200,000 4,200,000

2016 Shs '000'

1,200,000

1,250,000 1,350,000 950,000 500,000

(850,000) 4,400,000 4,400,000

The cost of sales is made up of the following amounts: Shs '000'

There were no asset additions during the year.

Included in Administrative expenses is Shs 500 million that was charged by the head office to the branch for the services rendered by the head office.

Opening inventory Received from head office Closing inventory

1,250,000

1,050,000 (1,050,000) 1,250,000

2

The head office values the stock of the vehicles they send to Uganda at cost plus 10%.

The branch owns computers and motor vehicles that are mainly used by the marketing staff. The tax written down values for the assets held by the branch were:

Class I

Shs '000' 56,500 450,000 88,500

Required:

Advise Hinata Auto Motors International Limited - Uganda branch on their tax payable for the year ended 30 June, 2017 including tax payable on the branch repatriated income, if any.

(10 marks)

(b) The revenue authority has indicated that they will not allow as a deduction the administrative expenses of Shs 500 million that have been charged to the branch and the 10% mark-up on the inventory. In the view of the revenue authority, the prices have not been determined at 'arm's length'.

Required:

Do the following for the management of Hinata Auto Motors International Limited - Uganda branch:

1. (i)Explain the meaning of 'arm's length' price.
2. (2 marks)
3. (ii)Explain any three transfer pricing methods that they could use to analyse and document the branch's transactions with the head office to prove to the revenue officials that the pricing for both the
4. inventory and administrative costs are at arm's length.
5. (6 marks)
6. (iii)Advise whether they have any other tax obligations regarding the payment of Shs 500 million administrative fees to the head office in Japan.
7. (2 marks) (Total 20 marks)

Question 5

(a) Kazimingi Limited (KL) is an importer of used cars from Japan. During the month of December, 2017 he imported 50 used Toyota Corona cars model 2009. The cars were cleared into Uganda through the Malaba customs office.

The commercial invoice quoted each car at USD 1,300 CIF Mombasa. KL spent Shs 20 million to transport the cars from Mombasa to Malaba.

The exchange rate of the dollar to shillings for the month of December, 2017 was quoted at 3,645.

KL received an assessment from the revenue authority for under declaring his income for the year ended 30 June, 2017 to which he objected. Reconciliation is still ongoing at the authority and as a result, the company was not included on the list of taxpayers that have been exempted from

the payment of 6% withholding tax for the period ended 31 December, 2017.

The following are the ruling rates of import duty:

Raw materials 0% Intermediate goods 10% Finished goods 25% Environmental levy 50% Infrastructure levy 1.5%

Required:

Advise KL on the taxes and duties payable on the clearance of the cars at Malaba customs office.

(14 marks)

(b) According to the Fifth Schedule to the East African Community Customs Management Act, duty shall not be charged on rally drivers on rally cars and parts when imported or purchased before clearance through customs, if they are for use by the rally driver.

Required:

Explain the conditions that must be fulfilled for the exemption above to be applied.