With reference to taxation of non-resident companies in your country, distinguish between a branch and a subsidiary. (6 Marks)

ABC Ltd. was incorporated in Kenya in year 2002. The company subsequently transferred the head office to Tanzania but retained its subsidiary, XYZ Ltd. in Kenya.

For the year ended 31 december2013, the following results of the parent company and the subsidiary have been presented to you in Kenya Shillings.

		ABC Ltd.	XYZ Ltd.
		Kshs. 000	Kshs. 000
Incomes
Gross profit		40,000	15,030
Gain on shares disposed		50	10
Recovery from insurance		150	45
Goods transferred to subsidiary company		2,000	-
Goods transferred to parent company		-	500
Gain on sale of land		-	300
Interest income:
	Commercial bank	-	110
	Treasury bills	-	200
Gain on sale of building		350	-
Loan interest		130	-
Bonus shares		250	-
		42,930	16,195
Expenses
Directors fees		1,200	190
Repairs and renewals		240	98
Preliminary expenses		150	80
Retrenchment cost		4,000	1,000
Rent, rates and insurance		460	210
Goodwill written off		20	-
Legal and accountancy fees		830	170
Depreciation		230	120
Interest on overdue VAT		-	23
Subscriptions		25	9
Donations		180	70
General administration expenses		360	140
Purchase of equipment		3,500	-
Loss of stock		2,200	1,500
Mortgage interest		650	-
Salaries and wages		4,500	2,130
Pension contribution		22,685	10,155
Total expenses		41,230	15,895
Net profit		1,700	300

Additional information:

Goods transferred from the subsidiary or from the head office were marked up by 10% above cost.

The land sold was subject to a legal challenge regarding ownership.

The building sold was donated by a non-governmental organization (NGO), the value of which was Kshs. 3,000,000 at the time of donation. Current value was estimated at Kshs. 3,500,000.

Loan interest income was in respect of a loan obtained from a subsidiary company.

Bonus shares were from a company in which ABC Ltd. has 70% control.

Rent, rates and insurance: The building in which XYZ Ltd operates is owned by ABC Ltd. XYZ Ltd. pays Kshs. 100,000 per year as rent.

Donations were to an orphanage for children.

Part of the equipment purchased valued at Kshs. 1,400,000 was from subsidiary company. The rest of the equipment was imported from abroad and duty was paid amounting to Kshs. 130,000. This duty was omitted from the cost of the equipment.

Retrenchment cost analysis:

	Kshs. 000	Kshs. 000
	ABC Ltd.	XYZ Ltd.
Golden handshake	2,500	800
Pension payments	1,500	200
	4,000	1,000

Loss of stock: Fire razed down a warehouse where goods are stored before they are transported to the parent company as well as the subsidiary. VAT at 16% was not included in the stock which was destroyed by fire.

Mortgage interest was in relation to two houses and one office block.

Ten executive employees rendered their services to both the parent company and the subsidiary and they received salary and pension which was contributed by both companies.

Required:

Adjusted taxable profit or loss for ABC Ltd. and its subsidiary XYZ Ltd. for the year ended 31 December 2013.

Tax payable (if any) by ABC Ltd.