Question one

Your friend recently learned that you are in a Taxation and business strategy class; he has approached you to assist two of his clients; Mr. Ombati and Mr. Kamar who are both citizens and residents of India. They wish to jointly invest in the processing industry in Kenya.

In your discussions with the two clients, they identified the following issues for which they sought your professional advice.

1. The investment could either be operated in the form of partnership or a registered private limited company.
2. In case of a company, it could either be registered in India (and operate in Kenya as a branch) or be registered in Kenya.
3. Mr. Ombati and Mr. Kamar would be able to raise half of the capital required to commence operations. The balance of the capital could be raised through debt or issue of shares to other investors (in the case of the company). Both Mr. Ombati and Kamar agree that any additional capital would be raised in Kenya.
4. The sugar processing facilities could be acquired in either of the following ways:

• Purchase land in the sugar growing belt, construct a factory and install processing machinery.
• Purchase an idle sugar processing plant, renovate the factorys building and recondition the processing machinery. In this connection, Mr. Ombati and Mr. Kamar had identified a processing plant for possible acquisition. The plant has stalled in 1991 after being in operation for fifteen years.

5. In order to attract and maintain qualified staff, the business entity would offer the following terms of employment, among others:

• Payment of annual bonuses
• Participation in employee share ownership schemes ( in the case of a company)
• Access to loans at below-market interest rates.
• Medical insurance of all staff
• Payment of school fees for employees and their dependents.
• Employees who would not be subject to tax at the rate of more than 20% on their income would be provided with three meals within the factory promises.

6. Processed sugar would be sold entirely in the Kenyan market in the first three years of operation. After this period, the business entity would expand sales to either of the following markets:

• COMESA member countries
• Non-COMESA member countries.

7. In the case of a company being registered in Kenya, it would seek to be listed on the security exchange after the first five years of operation.

Required:

With reference to the Income Tax Act (Cap 470) and Excise Act, adviser. Ombati and Kamar on the tax treatment and implication (if any) of each of the issues raised above on their investment.

NOTE: Your answer should be based on the tax rules regulations and rates applicable for the year 2015.

(Total: 25 marks)