CHARTERED ACCOUNTANTS EXAMINATIONS

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LICENTIATE LEVEL
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L3: INTEGRATED TAXATION
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THURSDAY 6 MARCH 2014
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TOTAL MARKS 100 TIME ALLOWED: THREE (3) HOURS
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INSTRUCTIONS TO CANDIDATES
1.

You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2.

This paper is divided into TWO sections:

Section A:

Two Compulsory Questions.

Section B:

Three Optional Questions. Attempt any two (2).

3.

Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

6.

All workings must be done in the answer booklet.

7.

Present legible and tidy work.

8.

Graph paper (if required) is provided at the end of the answer booklet.

Taxation Table for March 2014 Examination

Income Tax
Standard personal income tax rates
Income band
K1 to K26,400
K26,400 to 36,000
K36,000 to K70,800
Over K70,800

Taxable amount
first K26,400
next K9,600
next K34,800

Rate
0%
25%
30%
35%

Income from farming for individuals

K1 to K26,400
Over K26,400

first K26,400

0%
10%

Gratuity
K1 to K26,400
Over K26,400

first K26,400

0%
25%

Terminal benefits
K1 to K35,000
Over K35,000

first K35,000

0%
10%

Company Income Tax rates

On income from manufacturing and other
On income from farming
On income of Banks and other Financial Institutions
On income from mining operations
(Variable profit tax)
y = 30% + [a - (ab/c)]
Where:
y = the tax rate to be applied per
annum
a = 15%
b = 8%
c = Assessable Income x 100%
Gross sales

35%
10%
35%
30%

Capital Allowances
Implements, plant and machinery and commercial vehicles:
Wear and Tear Allowance
Plant used normally
Used in Manufacturing, Farming, Leasing

25%
50%

Non- commercial vehicles

Wear and Tear Allowance

20%

Industrial Buildings:
Wear and Tear Allowance
Initial Allowance
Investment Allowance

5%
10%
10%
2

Low Cost Housing

Wear and Tear Allowance
Initial Allowance

(Cost up to K20,000)

10%
10%

Commercial Buildings
Wear and Tear Allowance

2%

Farming Allowances
Development Allowance
Farm Works Allowance
Farm
Improvement
Allowance

10%
100%
100%
Presumptive Taxes

Turnover Tax

3%

Presumptive tax for transporters

Seating capacity

Tax per
annum
K

Less than 12 passengers and taxis

From 12 to 17 passengers
From 18 to 21 passengers
From 22 to 35 passengers
From 36 to 49 passengers
From 50 to 63 passengers
From 64 passengers and over

600
1,200
2,400
3,600
4,800
6,000
7,200

Tax per
day
K
1.60
3.30
6.60
10.00
13.00
16.40
19.70

Property Transfer Tax

Rate of Tax on Realised Value of property other than mining rights
Rate of Tax on Realised Value on a transfer or sale of a mining right

5%
10%

Value Added Tax

Registration threshold
Standard Value Added Tax Rate (on VAT exclusive turnover)

K800,000
16%

Duty rates on:

1.

Customs and Excise

Motor cars and other motor vehicles (including station wagons)

principally designed for the transport of less than ten persons,
including the driver:
Customs Duty:
25%
Excise Duty:
Cylinder capacity of 1500 cc and less
Cylinder Capacity of more than 1500 cc

20%
30%

2.

Pick-ups and trucks/lorries with gross weight not exceeding 20 tones:

Customs Duty
Excise Duty

15%
10%

3.

Buses/coaches for the transport of more than ten persons

Customs Duty:
Excise Duty:
Seating Capacity of 16 persons and less
Seating Capacity of 16 persons and more

4.

Trucks/lorries with gross weight exceeding 20 tonnes

Customs Duty:
Excise Duty:

15%
25%
0%
15%
0%

The minimum amount of Customs Duty on Motor Vehicles in categories from 1 up

to 3 above is K2,000

SECTION A
Attempt both questions in this section.
QUESTION ONE
Alfred Mabula had been employed as an audiologist at HealthCare Hospital an institution
funded by international non-governmental organisations on a three year contract which
commenced on 1 June 2011. On 31 December 2012, he was declared redundant following
erratic funding to the hospital. He was paid his full benefits plus legal awards for the
premature termination of his contract.
Using his redundancy package and personal savings, Mabula set up his own practice and
started trading under the name of Mabula Specialist Ear Clinic on 1 February 2013
preparing his first accounts to 31 December 2013 and annually thereafter. He leased
business premises on 1 February 2013 at K5,500, per month and purchased furniture and
fittings at a cost of K60,000 and equipment at a cost of K170,000. He hired five clinic
personnel and purchased a motor car at a cost of K80,000, to be used both for business and
private purposes. He estimates his private use in the motor car to be 30%. His tax adjusted
business profits before capital allowances for the period to 31 December 2013 was
K1,650,000.
HealthCare Hospital engaged Alfred from 1 February 2013 as a self-employed contractor on
an eleven month contract ending on 31 December 2013. Under this contract, he was
required to report at HealthCare Hospital for three days a week, 6 hours per day. He
continued to occupy the office which he had used when he was an employee of HealthCare
Hospital. He also continued to use equipment and other facilities of the hospital when
attending to the hospitals clients. In performing his duties at the institution, he was assisted
by the hospitals staff whenever necessary. He charged HealthCare Hospital an agreed
contract price of K132,000 payable in monthly instalments of K12,000. HealthCare Hospital
was to charge Mabula K3,000 per month as agreed payments for use of the hospitals
facilities.
HealthCare Hospital was recently subjected to a Pay As You Earn tax audit and PAYE
inspectors from the Zambia Revenue Authority queried Mabulas self-employed status in
respect of his contract with Healthcare Hospital.
Required:
(a)

Discuss the criteria that will be used in determining whether Mabula will be classified
as employed or self-employed in respect of his contract with HealthCare Hospital.
Your answer should include an explanation of:
(i)

Four (4) factors that led to the Zambia Revenue Authoritys Tax Auditors to
question Mabulas self-employed status.
(4 marks)

(ii)

Three (3) factors HealthCare Hospital and Mabula can put forward to justify
Mabulas self- employed status.
(3 marks)

(b)

Assuming that Mabula is held to be an employee in relation to the contract he has

with Healthcare Hospital, compute his income tax payable for the tax year 2013.
(4 marks)

For the purpose of this part of the question you should assume that todays date is 20
December 2013 and the earnings ceiling for the purposes of NAPSA contributions should be
taken to be K160,715 per annum.
Lungowe Sikazwe who recently completed her course at the University of Zambia has been
offered two alternative offers of employment from two Zambian resident companies, Celcom
Zambia Limited and Zedcom plc. Regardless of which offer is chosen, she will commence
employment on 1 January 2013. The conditions of service under each offer of employment
are as follows:
Offer from Celcom Zambia Limited
Her annual salary will be K180,000. The company will rent an apartment on her behalf and
will pay annual rentals amounting to K54,000 for the apartment from 1 January 2013 and
annual utility expenses in connection with the apartment amounting to K12,000. The
company will also pay her monthly medical insurance premiums amounting to K600.
On 1 January 2013, she will be provided with a personal to holder motor car with a cylinder
capacity of 3000cc which the company will purchase at a cost of K90,000. Her business use
of the car is estimated to be 60%. The company will pay all the running costs associated
with the car which will amount to K30,000 per year. Lungowe will be required to pay K1,500
per month for use of the motor car.
She will contribute 5% of her basic salary as NAPSA contribution and Celcom Zambia Limited
will also contribute 5% of her basic salary as NAPSA contribution on her behalf.
Offer from Zedcom plc
Her annual salary will be K180,000. She will be accommodated in a company house
commencing from 1 January 2013, which has a market value of K550,000. If the house was
let out on a commercial basis, the company would have charged monthly rentals of K4,500.
The company will pay all expenses in connection with the house which will amount to
K12,000 per year.
From 1 January 2013, Lungowe will use her own personal motor car with a cylinder
capacity of 3000cc, which she will acquire at a cost of K90,000 for the duties of her
employment. The business use of the motor car is estimated to be 60%. She will incur total
annual motor car running expenses amounting to K30,000 which the company will refund to
her in full. She will pay annual medical insurance premiums of K6,000.
Under the offer from Zedcom plc, she will contribute 5% of her basic salary as NAPSA
contribution and Zedcom plc will also contribute 5% of her basic salary as NAPSA
contribution on her behalf.

Required:
(c)

Calculate Lungowes income tax payable for the tax year 2013 if she:
(i)
Accepts the offer of employment from Celcom Zambia Limited.
(ii)
Accepts the offer of employment from Zedcom plc.

(4 marks)
(4 marks)

(d)

Advise Lungowe as to which offer is better from a taxation point of view. Your
answer should be supported by appropriate calculations of the total amount of
income receivable and net income after tax for the tax year 2013, under each
alternative offer of employment.
(6 marks)

(e)

State the income tax implications for Celcom Zambia Limited and Zedcom plc arising
as a result of their offers of employment to Lungowe.
(5 marks)
(Total: 30 marks)

QUESTION TWO
(a)

Multinational companies operating in Zambia through subsidiaries such may use their
Zambian resident subsidiaries to reduce the tax liabilities of the group as a whole by
using a wide range of practices. Such practices may include the following:
(i)

A Zambian resident subsidiary obtaining excessive debt finance from foreign

members of the group.

(ii)

A Zambian resident subsidiary making cheap loans (low interest loans) to

foreign members of the group.

(iii)

Transfer pricing policies designed to reduce the tax liability of the group.

Required:
Describe how a Zambian resident subsidiary of a foreign multinational company may
use each one of the above practices to reduce its tax liability and discuss how antiavoidance tax legislation attempt to prevent such practices.
(9 marks)
MNQ Zambia plc is a Zambian resident company engaged in the mining of copper in
Zambia. It is a 90% owned subsidiary of FNQ Mining International, a Canadian based
multinational company engaged in mining activities in different parts of the world as
well as in the manufacture of ammunition and explosives. The group maintains its
accounts in the United States dollars. The following summarised statement of profit
or loss has been extracted from the financial statements of MNQ Zambia plc.
MNQ ZAMBIA PLC
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2013
K
Revenue
11,744,000
Cost of sales
(5,344,000)
Gross profit
6,400,000
Operating expenses
(3,990,000)
Other income
70,000
Profit before interest and tax
2,480,000
7

Interest paid
Profit before tax
Income tax expense
Profit for the period

(600,000)
1,880,000
(593,000)
1,287,000

The following additional information is available:

1.

The figure for revenue in the income statement represents the gross sales of
copper based on the average London Metal Exchange copper price per metric
tonne.

2.

The depreciation charge for the year included in cost of sales was K115,000.

3.

Included in operating expenses is capital expenditure which accounts for 40%

of the total operating expenses. 10% of this capital expenditure does not
qualify for any tax relief and the remainder is only eligible for tax relief at the
rate of 25% as mining capital expenditure.

4.

Income generated from hedging foreign currency transactions during the tax
year 2013 amounted to K50,000. This has been included in the income
statement shown above under other income. There were no hedging losses
brought forward at 1 January 2013.

5.

Also included in other income is loan note interest received amounting to

K8,000 (gross) and dividend income of K12,000 (gross) from non-mining
companies listed on the Lusaka Stock Exchange.

6.

The company has debt: Equity ratio of 11:2.

7.

The income tax values of imported mining equipment at 1 January 2013 was
K262,500. The equipment was acquired in the tax year 2012 at a cost of
K350,000. All other implements, plant and machinery qualifying for capital
allowances were completely written down to zero at 1 January 2013.

8.

The income tax expense in the income statement represents the provisional
income tax paid by the company in the tax year 2013.

9.

Mineral royalty paid during the year has not been accounted for in the income
statement shown above.

10.

The company has had the following results in the past three years.

Year ended 31 December

Sales
Tax adjusted mining
profits/(losses)

2010
K
4,697,600

2011
2012
K
K
5872,000 9,395,200

(1,750,000)

644,000 1,005,350

11.

The following exchange rates have been provided by the Bank of Zambia and
approved by the Commissioner General:
31
31
31
31

12.

Date
December
December
December
December

2010
2011
2012
2013

ZMW/ US Dollar rate

4.00
4.60
5.06
5.56

The indexation formula is provided below:

1+

R1
Required:
(b)

Show how the mining loss incurred in the year ended 31 December
2010 will be relieved in each of the relevant years and state the
amount of any loss remaining unrelieved at 31 December 2012.
(6 marks)

(c)

Compute the taxable business profit for MNQ Zambia plc for the tax
year 2013.
(10 marks)

(d)

Compute the total taxes paid by MNQ Zambia plc in the tax year 2013.
(5 marks)
(Total: 30 marks)

SECTION B
Attempt any TWO (2) out of the THREE (3) questions in this section.
QUESTION THREE
(a)

In the context of tax audits and investigations explain, giving examples, the meaning
of the following types of defaults that may be discovered during a tax audit.
(i)
(ii)
(iii)

(b)

Deliberate behaviour
Careless behaviour with significant consequences
Careless behaviour without significant consequences

(2marks)
(2 marks)
(2 marks)

For the purpose of this part of the question assume that todays date is 1
June 2013.
Monde Chimuka who recently completed a course in entrepreneurship intends to
commence business on 1 September 2013, selling computer accessories and
stationery. He plans to purchase, shop fittings at a cost of K60,000 (VAT exclusive),
computers at a cost of K25,000 (VAT exclusive) and a motor car at a cost of K95,000
(VAT inclusive) on 30 July 2013. He estimates that his private use in the motor car
will be 40%.

He will lease business premises on 1 September 2013 at K4,500 per month (VAT
exclusive) and will commence trading on the same date preparing his first accounts
to 31 December 2013 and annually thereafter.
He expects his VAT exclusive sales, and VAT exclusive standard rated purchases and
business expenses (including lease rentals) for the first four months to 31 December
2013 to be as follows:

Sales
Purchases and business expenses

September October
K
K
62,000
85,000
27,200
41,000

November December
K
K
110,000
135,000
56,000
71,000

(Including lease rentals)

From January 2014 he expects his VAT exclusive sales to average K175,000 per
month, while VAT exclusive standard rated purchases and business expenses
including lease rentals will average K97,600 per month. Monde does not have any
other sources of income apart from this proposed business. He is not sure as to
whether he will be required to register for Value Added Tax in respect of this
business and has approached you for advice.
Required:
(i)

Write a letter advising Monde of the Value Added Tax (VAT) registration
requirements and how these will be applied to his proposed business to
determine whether or not he will be required to register for VAT. You should
further advise Monde as to whether he will be able to claim any input VAT on
the capital assets he will acquire on 30 July 2013 once he registers for VAT.
(9 marks)

(ii)

Assuming Monde registers for Value Added Tax in respect of his proposed
business with effect from 1 September 2013 and assuming that he had no
other income in the tax year 2013, calculate his income tax payable for the
tax year 2013.
(5 marks)
(Total: 20 marks)

QUESTION FOUR
(a)

Distinguish inward investment from outward investment and explain the tax
treatment of each of these types of foreign direct investment.
(4 marks)

(b)

BGH Limited a newly established company which registered for Value Added Tax
under the voluntary VAT registration provisions is considering investing in the
manufacturing sector. The company is planning to set up a production factory to be
used in the manufacture of detergent soaps. The directors of the company are
considering the following acquisition options for the production factory.

10

Option 1
Purchase an existing second hand factory at an estimated cost of K1,995,200
including Value Added Tax from a VAT registered vendor on 1 January 2013, which
will be brought into use on that date.
Option 2
Contract a local construction company to construct the production factory building at
a total cost of K4,168,000 which will be made up of the following items:

Cost of land
Ventilation and heating system
Staff facilities
Quality control facilities
Factory
General offices
VAT on building materials

K
1,500,000
130,000
350,000
120,000
1,250,000
450,000
368,000
4,168,000

Construction is expected to be completed by 1 January 2013 and the factory will

immediately be brought into use.
Option 3
The company can obtain a medium sized factory on an arranged lease for 20 years
starting on 1 January 2013. This arrangement will entail a monthly rental of K20,000
excluding VAT and the lease premium will be K200,000 excluding VAT.
The directors have approached you to provide an outline of the taxation implication
associated with each option being considered before a final decision can be made.
Required:
Advise the directors of BGH Limited of the Income Tax and Value Added Tax
implications of each of the above options being considered for the production
factory.
(16 marks)
(Total: 20 marks)
QUESTION FIVE
For the purpose of this question, you should assume that todays date is
20December 2013 and the earnings ceiling for the purposes of NAPSA
contributions should be taken to be K160,715 per annum.
Mwiza and Lukonde set up an unquoted trading company known as Mwiko Limited two
years ago preparing accounts to 31 December each year. Mwiza and Lukonde each own
50% of the issued ordinary share capital of the company. Mwiza is both a director and is
employed by Mwiko Limited whereas Lukonde is neither an employee nor a director of this
11

company. Mwiza has always drawn an annual salary of K350,000 and this also applies to
the year ending 31 December 2013. The company has had an exceptionally successful year
for the period ending 31 December 2013.
Throughout the tax year 2013, Mwiza and Lukonde were provided with new motor cars
acquired by Mwiko Limited on 1 January at a cost of K120,000 each. Both cars use petrol
and each car has a cylinder capacity of 3000cc. The company additionally paid for fuel for
the two motor cars which amounted to K18,000 for Mwiza and K12,000 for Lukonde. Mwiza
is accommodated in a company house which was acquired by Mwiko Limited on 1 January
2013 at a cost of K650,000. Lukonde rents her own apartment and in the tax year 2013, the
company paid annual rentals amounting to K78,000 in relation to the apartment on her
behalf.
On 31 December 2013, Lukonde was additionally provided with an interest free loan of
K650,000 by Mwiko Limited which is repayable in two years time to enable her purchase
her own house.
Lukonde and Mwiza have agreed that in view of the exceptional performance of the
company in the year ending 31 December 2013, Mwiza should in addition to her normal
annual salary be given a lump sum payment of K150,000 on 31 December 2013. They would
like this additional lump sum payment to take the form of either a cash bonus payment or a
dividend payment but are not sure of the taxation implications associated with each option.
Required:
(a)

Advise Mwiza and Lukonde of the taxation implications for both themselves
individually and for Mwiko Limited arising from:
(i)
(ii)
(iii)

The provision of motor cars to Mwiza and Lukonde.

(6 marks)
The provision of accommodation to Mwiza and payment of rentals for
Lukondes apartment.
(3 marks)
Provision of an interest free loan to Lukonde.
(3 marks)

Your answer in each case must be supported by appropriate calculations of

additional income tax payable or the reduction in income tax payable.
(b)

Using appropriate calculations, show the income tax and NAPSA implications for both
Mwiza individually and for Mwiko Limited if the additional lump sum payment of
K150,000 were to take the form of:
(i)

A cash bonus payment

( 4 marks)

(ii)

Dividend payment

(4 marks)
(Total: 20 marks)

END OF PAPER

12

L3: INTEGRATED TAX SUGGESTED SOLUTIONS

L3: INTEGRATED TAX
SUGGESTED SOLUTIONS
MARCH 2014

13

SOLUTION ONE
(a)

(i)

The primary test used to identify whether employment exist is to determine

whether the type of contract in question constitutes a contract of service
which indicates employment, or a contract for services which indicates selfemployment. However, the distinction is not always easy to make and
therefore additional factors are also considered in determining whether or not
there is employment.
In the particular circumstances of the contract between Mabula and
HealthCare Hospital the following factors may have led the ZRA to query his
self-employed status:
1.

It seems that Healthcare Hospital has control over when and how
many times Mabula has to report for work at the institution, that is
three days a week for 6 hours each day.
An employee is controlled by the employer who will normally stipulate
the working hours, the place at which duties are to be performed and
other such conditions.

2.

In the performance of his duties at HealthCare Hospital, Mabula uses

the equipment and facilities of the Hospital and is additionally assisted
by hospital staff whenever necessary.
This indicates employment, as employees are normally provided with
tools and equipment by their employer.

3.

It appears that Mabula has to perform the duties at Healthcare

Hospital personally and cannot use other people or use his own clinic
staff to help him perform those duties.

4.

Mabula has to attend to the hospitals patients at the premises of

HealthCare Hospital and does not have the liberty to attend to those
patients at his own clinic or any other place he may choose.
Employees work under such conditions as they are normally told
where to perform their duties which is normally their employers
premises.

5.

Mabula had recently been an employee of Healthcare Hospital and it

could be that an agreement had been reached to let Mabula to
continue working for the institution whilst also running his own private
clinic.
(1 mark for each valid point up to a maximum of 4 marks)

14

(ii)

Factors HealthCare Hospital and Mabula may use to justify his selfemployed status.
1. Mabula does not does not exclusively work for HealthCare
Hospital. He spends part of his time attending to his own patients
at his own clinic.
2. Mabula is engaged on a contract with a specified limited duration
which runs from 1 February 2013 to 31 December 2013. There
appears to be no assurance that the contract will be renewed once
it expires. Self-employed individuals work under such conditions.
Employees on the other hand sign a contract with the employer
where the employer has the right to terminate the contract after
giving the employees an appropriate period of notice. Clearly this
is not the case in the circumstances of the contract Mabula has
with HealthCare Hospital.
3. Mabula is paid an agreed contract price even though it is paid in
monthly instalments. Additionally he is not entitled to any other
benefits associated with employment such as leave pay, sick
leave, pension rights or gratuity on expiry of the contract etc.
4. Although he uses Healthcare Hospitals equipment and other
facilities when performing his duties of employment, the institution
charges a fee of K3,000 for use of those facilities.
An employee is not normally charged a fee for use of the
employers equipment and facilities.
(1 mark for each valid point up to a maximum of 3 marks)

(b)

MABULA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2013
K

Emoluments from employment

Salary
Less payment for use of facilities
Assessable emoluments

132,000
(33,000)

99,000

Business profits
Profit before capital allowances
Less capital allowances on:
- Furniture (K60,000 x 25%)
- Equipment (K170,000 x 25%)
- Motor car (K80,000 x 20%)

1,650,000

(15,000)
(42,500)
(16,000)

1,576,500
1,675,500

15

Income tax
K70,800
K1,604,700 x 35%
(c)

(i)

12,840
561,645
574,485

OFFER FROM CELCOM (Z) LIMITED

Annual salary
Rentals for apartment
Utility expenses
Medical insurance (K600 x 12)
Gross income
Less:
Motor car expenses (K1,500 x 12) x 60%
NAPSA contribution (restricted to maximum)

K
180,000
54,000
12,000
7,200
253,200

(10,800)
(3,060)
239,340

12,840
58,989
71,829

Income tax
K70,800
K168,540 x 35%

(ii)

OFFER FROM ZEDCOM PLC

Annual salary
Refund of motor car expenses
Utility expenses
Gross income
Less:
Motor car expenses (K30,000 x 60%)
NAPSA contribution (restricted to maximum)
Capital allowances (K90,000 x 20%) x 60%

Income tax
K70,800
K119,340 x 35%

16

K
180,000
30,000
12,000
222,000

(18,000)
(3,060)
(10,800)
190,140

12,840
41,769
54,309

(d)

COMPUTATION OF NET INCOME UNDER EACH OFFER OF EMPLOYMENT

OFFER FROM CELCOM (Z) LIMITED
K
180,000
54,000
12,000
7,200
253,200 1

Annual salary
Rentals for apartment
Utility expenses
Medical insurance (K600 x 12)
Gross income
Less:
Motor car expenses (K1,500 x12)
NAPSA 5% x 160,715
Income tax payable
Net income

(18,000)
(8,036)
(71,829)
155,335

OFFER FROM ZEDCOM PLC

K
180,000
30,000
12,000
222,000 1

Annual salary
Refund of motor car expenses
Utility expenses
Gross income
Less:
Motor car expenses
Medical insurance
NAPSA 5% x 160,715
Income tax payable
Net income

(30,000)
(6,000)
(8,036)
(54,309)
123,655

The offer from Celcom (Z) limited is more beneficial as it gives a higher net income
after all deductions.

(c)

Tax implications for Celcom Zambia Limited

1. The annual salary, rentals for apartment, utility expenses and medical insurance
paid by the company will be allowable when computing taxable business profits.
2. Motor car running expenses incurred in connection with the car provided to
Lungowe will be deductible when computing taxable profits.
3. Provision of a personal motor car will give rise to a taxable benefit on the
company. The car provided has a cylinder capacity of 3000cc and therefore and
K20,000 will be disallowed when computing the taxable business profit for the
business.
4. The company will be able to claim capital allowances at the rate of 20% on the
cost of the motor car.

17

5. The NAPSA contribution made on behalf of Lungowe will be allowable when

computing taxable business profits.
6. The amount paid by Lungowe to the company of K1,500 per month will be
taxable on the company.
( a mark for each valid point stated up to a maximum of 2 marks)
Tax implications for Zedcom plc
1. The annual salary and utility expenses in connection with accommodation will be
allowable when computing taxable business profits.
2. The refund of motor car expenses by the company will be allowable when
computing taxable business employers
3. NAPSA contribution paid by the company on behalf of Lungowe will be an
allowable deduction when computing taxable profit.
4. Provision company accommodation will give rise to a taxable benefit on the
company calculated as 30% of Lungowes assessable emoluments.
5. No assessable benefit will arise on use of Lungowe personal for business
purposes, neither will capital allowances be claimable by the company on the car.
( a mark for each valid point stated up to a maximum of 2 marks)
SOLUTION TWO
(a)

(i)

Excessive debt finance from foreign members of the group

Multinational companies such are motivated to finance their foreign
subsidiaries through loans rather than share capital because in many
jurisdictions including Zambia, interest paid on loan finance is allowable,
whereas, dividends paid to equity providers are not. As a result, when a
Zambian resident subsidiary of a foreign multinational is heavily financed by
debt obtained from foreign members of the group, its taxable profit will be
substantially reduced by interest payments made on such loans.
To prevent huge reductions of taxable profit by way of interest deductions,
thin capitalisation rules are put in place. These rules limit the amount of
interest that would be allowed as a deduction when computing taxable
business profits. This is done by not allowing as an expense, the amount of
interest paid when the companys debt equity ratio exceeds a certain limit.
In Zambia, some mining companies are subsidiaries of foreign companies.
These foreign companies may finance the subsidiaries through high level of
debt. Interest on such loans will only be allowable as an expense when the
debt equity ratio does not exceed the ratio 3:1. When the amount of debt
obtained results in this ratio being exceeded, then interest on the excess debt
is not an allowable deduction.
(1 mark for each valid point up to a maximum of 3 marks)

18

(ii)

Cheap loans to foreign members of the group

Making loans at an interest rate which is lower than the commercial rate has
the effect of reducing the taxable profits for the company receiving the
interest. This is because the taxable profits will be lower than they should
have been if the higher interest or commercial rate had been used.
A Zambian resident subsidiary can therefore substantially reduce its tax
liabilities by making loans to foreign members of the group and charging a
reduced rate of interest on such loans.
When a Zambian resident company makes a loan to a foreign related
company, it must charge interest on such a loan at a commercial rate. When
the interest rate charged on such a loan is less than the commercial rate, the
company receiving the interest is deemed to have received the interest at the
commercial rate.
(1 mark for each valid point up to a maximum of 3 marks)

(iii)

Transfer pricing policies

Multinational companies may produce goods in one country which are then
transferred for sale to other countries. The price at which such goods are
transferred from the country where they are produced to the country in
which they are sold is a transfer price. Multinational companies may
manipulate the transfer price so that profits arise in a country where the rates
of taxation are lower so that the overall tax position of the group is
minimised.
A Zambian resident subsidiary may therefore transfer or sale goods to a
foreign member of the group at a price which is lower than the market value
of those goods therefore reducing the taxable profit of the Zambian resident
company. This will normally be in a situation where the tax rates that apply in
the country in which the foreign company operates are lower than those
applying to the Zambian resident company.
Anti-avoidance legislation attempts to prevent a company from transferring
goods out of the country at a price which is lower than the market price of
those goods. As such, when a Zambian company is required to transfer goods
produced in Zambia to a company that is resident abroad, then the transfer
price should be equal to at least, the market value of the goods. When the
transfer price is lower than the actual market value of the the goods being
transferred, then the profit element must be added when computing taxable
profits.
(1 mark for each valid point up to a maximum of 3 marks)

19

(b)

COMPUTATION OF LOSS RELIEF

2010
K
Nil
Nil
Nil

Tax adjusted mining profits

Loss relief (W)
Taxable profits

2,011
2012
K
K
644,000 1,005,350
(644,000) 1,005,350
Nil
Nil

1
1

Loss relief in 2011

Indexed loss b/f
K1,750,000 x [1+ ((4.60 - 4.00)/4.00))]
Amount of loss relieved in year ended 31 December 2011
Unrelieved loss c/f at 31 December 2011

2,012,500 1
(644,000)
1,368,500

Loss relief in 2012

Indexed loss b/f
K1,368,500 x [1+ ((5.06 - 4.60)/4.60))]
Amount of loss relieved in year ended 31 December 2012
Unrelieved loss c/f at 31 December 2012
(c)

1,505,350 1
(1,005,350)
500,000

COMPUTATION OF TAXABLE BUSINESS PROFITS

K
Profit before tax

K
1,880,000

Add
Depreciation
Disallowed capital expenditure in operating expenses
(40% x K3,990,000 = K1,596,000 x 10%)
Excess deduction on qualifying mining expenditure
included in operating (30% x K1,596,000 ) x 75%
Disallowed excessive interest
(2.5/3 x K600,000)

115,000
159,600
359,100

500,000

1
1,133,700
3,013,700

Less
Mineral royalty (6%x K11,744,0000)
Indexed capital allowances
(25% x K350,000) = K87,500 x [1+ ((5.56 5.06)/5.06))]
Loan note interest received
Dividends received

Less indexed loss K500,000 x [1+ ((5.56 5.06)/5.06))]

Tax adjusted mining profit
Interest income
Taxable business profits

20

704,640

96,146
8,000
12,000

820,786
2,192,914
(549,407)
1,643,507
8,000
1,651,507

1
1

(d)

COMPUTATION OF TOTAL INCOME TAX PAYABLE

Mineral royalty
Company income tax on interest income (K8,000 x 35%)
Company income tax on mining profit( K1,643,507 x 36.43%(W))
Less
WHT- on loan interest (15% x K8,000)
Provisional income tax

704,640
2,800 1
598,730 2
1,306,170
(1,200)
(593,000)
711,970

Workings
1. Assessable mining profit as a percentage of sales:
K1643,507/11,744,000 x 100%
= 14%
2. The variable profit tax rate will therefore apply:
y = 30% + [a - (ab/c)]
= 30 + [15 - (15 x 8/14)]
= 36.43%
SOLUTION THREE
(a)

(i)

Deliberate behaviour
This refers to breach of tax obligations/ regulations where there is intent on
the part of the tax payer.
Examples include failure to maintain books and records, omissions of
transactions from books, providing false or misleading information etc.
(2 marks)

(ii)

Careless behaviour with significant consequences

This refers to a failure by a tax payer to take reasonable care in meeting tax
obligations or complying with tax regulations resulting in a significant amount
of tax being underpaid with reference to the correct amount of tax that
should have been paid for the relevant period.
Examples include neglecting to categorise expenditure into allowable and
disallowable types for taxation purposes.
(2 marks)

21

(iii)

Careless behaviour without significant consequences

This refers to a failure by a tax payer to take reasonable care in meeting tax
obligations or complying with tax regulations. However the amount of tax
underpaid in this case is not significant when compared to the amount of tax
liability due for that relevant period.
Examples include computational errors and inadequate adjustments for
personal expenditure in the profit or loss account. (2 marks)

(b)

(i)

Tax Consultant
P O Box 1000
LUSAKA
1 June 2013
Monde Chimuka
P O Box 2000
NDOLA
Dear Monde
VAT REGISTRATION REQUIREMENTS
I am writing to explain to you the Value Added Tax (VAT) registration matters
relating to the business you plan to start and other aspects of VAT which will
be relevant to your business.

VAT Registration
VAT registration is compulsory once the VAT exclusive value of taxable
supplies exceed K800,000 for any period of twelve months or K200,000 for
any period of three months. These figures are based on the value of
cumulative taxable supplies in the previous twelve months ,or three months
as the case may be.
You will have the obligation to inform the ZRA within 30 days of the end of
the month in which the limit is exceeded. Registration will become effective
on the first day of the following month.
VAT registration is also required if there is reasonable grounds to believe that
the taxable supplies in the following twelve months will exceed K800,000 or
for the following three months to exceed K200,000.
Based on the estimates of your taxable supplies, the sales of the business
will be as follows:

22

Month

Monthly sales
Cumulative sales
K
K
September 2013
62,000
62,000
October 2013
85,000
147,000
November 2013
110,000
257,000
December 2013
135,000
392,000
January 2014
175,000
567,000
February 2014
175,000
742,000
March 2014
175,000
917,000
The annual VAT registration threshold will therefore be exceeded in March
2014, when the cumulative turnover will be K917,000. You will therefore be
required to inform the ZRA by the end of April 2014. Your registration will be
effective as of 1 May 2014 or an agreed earlier date.
Alternatively the quarterly VAT registration threshold of K200,000 will be
exceeded in in November 2013, when the cumulative turnover for a period
of three months will be will be K257,000. In this case the ZRA will have to be
notified by the end of December 2013.
You also have an option of voluntary registration prior to the above dates, in
which case you will normally become registered from the date you applied for
registration. This is quite useful where your sales are to VAT registered
customers for whom the extra VAT would not be a cost. You would then be
required to recover input VAT on your expenses. You will however have to
comply with VAT administrative requirements.

Recovery of input VAT

Pre-registration input VAT can be recovered provided that the VAT was
incurred within three months prior to the effective date of registration and
the goods are still in stock on the effective registration date. You therefore
have 3 months from the effective registration date to recover VAT on the
fixture and fittings and computers. VAT incurred on motor cars is
irrecoverable and therefore you will not able to recover VAT incurred on the
motor.
You must therefore apply for voluntary registration as soon as possible
because registering after 31 October 2013 will mean that you will not be able
to recover the input VAT on the fixtures and fitting and computer.
I hope the information I have provided will be helpful.
Yours sincerely
A Consultant

(1 mark for each relevant valid point up to a maximum of 7 marks plus up to

2 marks for structure and presentation of the letter giving a total of 9 marks)

23

(c)

COMPUTATION OF INCOME TAX PAYABLE

Revenue (K62,000 +K85,000 + 110,000 + 135,000)

Purchases (K27,000 + K41,000 + K56,000 +71,000)

K
392,000
(195,000)

1
1

Less allowable deductions

Capital allowances
- on computers 25%x K25,000
- Motor car (20% x K95,000) x 60%
- Shop fittings (25%x K60,000)
Taxable business profits
Income tax
K70,800
K93,350 x 35%

(6,250)
(11,400)
(15,000)
164,350

12,440
32,743
45,183

SOLUTION FOUR
(a)

Inward Investment
Inward investment is the foreign direct investment a foreign enterprise makes when
that entity invests in Zambia.
(1 mark)
When a foreign enterprise invests in Zambia, it is liable to Zambian income tax if the
entity sets up a permanent establishment in Zambia. The whole amount of profits
arising from the operations of the permanent establishment would then be liable to
Zambian income tax subject to any double taxation relief which may be available
under double taxation conventions.
(1 mark)
Outward Investment
Outward investment on the other hand is the foreign direct investment which occurs
when a Zambian enterprise makes an investment in a foreign country.
(1 mark)
A Zambian resident taxable person making an investment abroad is liable to Zambia
income tax on any income generated from the foreign investment as long as the
person remains resident in Zambia. The amount of income taxable on the foreign
investment will be subject to any double taxation relief which may be available under
double taxation agreements.
(1 mark)

(b)

Option 1-Purchase an existing second hand factory

The tax implications will be:
1. The company will be able to claim input VAT on the cost of the factory. The
amount of the recoverable input VAT will be;
K1,995,200 x 4/29 = K275,200

(1 mark)

24

2. The company will be able to claim industrial buildings allowances at the rate of
5% on the VAT exclusive cost of the building. The annual wear and tear
allowance which will be given as an allowable deduction when computing taxable
business profits will amount to:
5% x (K1,955,200 x 25/29) = K1,651,200

(1 mark)

3. Under this option the 10% initial allowance and the 10% investment allowance
will not be available as these allowances are only available on new buildings upon
their first construction.
(1 mark)
Option 2-Construct factory
The tax implications will be:
1.

The company will be able to claim recovery of input VAT on the building
materials which will amount to K368,000.
(1 mark)

2.

If a contractor is hired to construct the factory, the factory will be new and
will be brought will be brought into business use for the first time after
construction and will therefore qualify for the initial allowance at the rate of
10%, the investment allowance at the rate of 10% and the annual wear and
tear allowance at the rate of 5% on the qualifying expenditure.
The qualifying expenditure will be calculated as follows:
K
4,168,000

Total construction cost

Less
Cost of land
Ventilation and heating system
VAT on building materials

(1,500,000)
(130,000)
(368,000)
2,170,000

10% x K2,170,000 = K217,000

Since the cost attributed to the general offices of K450,000 exceeds this amount,
it will not be treated as part of the qualifying cost for industrial building
allowances purposes. The qualifying cost will therefore be:
K2,170,000 K450,000 = K1,720,000
(1 mark)
The general offices will instead qualify for annual wear and tear allowances at
the rate of 2% as commercial buildings. The allowance will be given as allowable
deduction when computing taxable business profits and will amount to:
2% x K450,000 = K9,000
(1 mark)
3. The staff facilities, quality control facilities, and factory will each rank for the
initial allowance at the rate of 10%, the investment allowance at the rate of 10%
and the annual wear and tear allowance at the rate of 5% as qualifying
expenditure. The initial allowance and investment allowance will only be available
in the first year the building is brought into use.
The allowances which will be given as allowable deductions when computing
taxable business profits on each structure will be computed as follows:

25

4. Expenditure on the ventilation and heating system will qualify for annual wear
and tear allowances at the rate of 25% as expenditure on implements plant and
machinery which will be given as allowable deductions when computing taxable
business profits.
The amount of the annual wear and tear allowance will be:
25% x K130,000 = K32,500
(1 mark)
Option 3-Lease factory
The implications will be:
1.

The company will be able to claim input VAT on the lease rental. (1 mark)

2.

The lease rentals will be given as allowable deductions when computing the
taxable business profits. The total allowable deductions claimable in the tax
year 2013 will therefore be:
K20,000 x 12 = K240,000
K

Staff facilities
Initial allowance (10% x K350,000)
Investment allowance (10% x K350,000)
Wear and tear allowance( 5% x K350,000)

35,000
35,000
17,500
87,500

12,000
12,000
6,500
30,500

125,000
125,000
62,500
312,500
430,500

Quality control facilities

Initial allowance (10% x K120,000)
Investment allowance (10% x K120,000)
Wear and tear allowance( 5% x K120,000)

Factory
Initial allowance (10% x K1,250,000)
Investment allowance (10% x K1,250,000)
Wear and tear allowance( 5% x K1,250,000)
Total Allowances

The company will however, not be able to claim capital allowances on the
building, instead the owner of the factory will claim the allowances as the title of
ownership will remain with the lessor.
(1 mark)
3.

The proportion of the of the premium assessed as income on the owner will
additionally be an allowable deduction over the lease term and will be
computed as follows;
P- [2%x P (n-1)]
[K200,000 (K200,000 x 2% x (20-1)) = K124,000
K124,000/20 = K6,200 per annum
(1 mark)

26

SOLUTION FIVE
(a)

(i)

Tax implications:
Provision of motor car to Mwiza:

Implications for Mwiko Limited:

1. Mwiko limited will be assessed to income tax on the car depending on the
cylinder capacity of the car. As the cylinder capacity of the car is 3000cc
the annual taxable benefit assessed on the company will be K20,000.
(1 mark)
2. The company will be able to claim capital allowances on the car at the
rate of 20% which will be an allowable deduction when computing
taxable business profits. The capital allowance will amount to:
20% x K120,0000 = K24,000

(1mark)

3. The company will also be able to claim as an allowable deduction the fuel
expenses incurred on the car.
4. As the result of providing the car to Mwiza the additional tax payable by
the company will be:
K
20,000
(24,000)
(12,000)
16,000

Motor car benefit

Capital allowance
Fuel expenses
Reduction in taxable profit

The net company income tax saving as result will therefore be:
35% x K16,000 = K5,600

(1 mark)

Implications for Mwiza:

There will be no implications for Mwiza in respect of the car provided for her
use.
Provision of motor car to Lukonde:
1. The provision of a motor car to Lukonde who is not a director or an
employee of Mwiza Limited will be treated as a payment of a dividend to
the shareholder as Lukonde is an effective shareholder in Mwiko Limited.
(1 mark)
2. The company will not be able to claim any capital allowances on the
motor car used by Lukonde as the car will not have been in business use.
(1 mark)

27

3. The company will be required to pay tax on the fuel expenses paid on
Lukondes car. The amount of income tax will be:
35/65 x K8,000 = K4,308
(ii)

(1 mark)

Tax implications of the provision of accommodation to Mwiza.

1. Provision of free residential accommodation will give rise to a taxable
benefit of 30% of Mwizas taxable emoluments on the company which will
be added back when computing taxable profits resulting in additional tax
being paid on the amount by the company.
2. There will be no tax implications for Mwiza.

(1 mark)

Tax implications of the rentals for Lukondes apartment

1. The payment of rentals for Lukonde who is not a director or an employee
of Mwiza Limited will be treated as a payment of a dividend to the
shareholder as Lukonde is an effective shareholder in Mwiko Limited.
(1 mark)
2. The company will be required to pay tax on the total rentals paid on
Lukondes apartment. The amount of income tax will be:
35/65 x K78,000 = K42,000
(iii)

(1 mark)

Tax implications of provision of interest free loan to Lukonde:

1. Mwiko Limited will be deemed to have made a loan to an effective
shareholder as Lukonde has a shareholding of more than 5% in the
company.
(1 mark)
2. The company will be required to pay income tax at the rate of 35% on
the grossed up equivalent amount of the loan, not later than 14 days
following the end of month (December 2013) when the loan was made
available to Mwiza.
(1 mark)
3. The income tax payable on the loan will amount to;
35/65 x K650,000 = K350,000.

(b)

(1 mark)

The taxation implications if payment takes the form of a cash bonus

payment:
1. A bonus payment will be an allowable deduction when computing taxable
business profits. The company will therefore save tax at the rate of 35%. The
amount of tax saved will amount to: 35% x K150,000 = K52,500
2. The bonus salary will be assessed as a taxable emolument for Mwiza and will be
subjected to income tax at the rate of 35% as her existing income is already
above K70,800 for the tax year 2013. The additional income tax that she will pay
will therefore be: 35% x K150,000 = K52,500.
3. No additional NAPSA contributions will be payable by either Mwiko Limited or
Mwiza because, her existing salary is already in excess of the NAPSA contribution
earnings ceiling of K160,715.
28

4. As a result of taking the lump sum payment of K150,000 as a bonus salary,

Mwizas personal income tax will increase by K52,500, but there will be a
reduction of K52,500 in the company income tax for Mwiko limited.
(1 mark for each valid point up to a maximum of 4 marks)
Tax implications if payment were to take the form of a divided:
1. The dividend payment will not be an allowable deduction when computing the
companys taxable income. The dividend will instead be paid out of profits
already subjected to company income tax.
2. The dividend will be subjected to withholding tax at the rate of 15%. This will
amount to:
K15% x K150,000.
The withholding tax will be final tax and therefor Mwiza will not be subjected to
further tax on the dividend.
3. NAPSA contributions will not be payable by both Mwiza and Mwiko Limited as
dividends do not attract NAPSA contributions as they do not qualify as earnings
for the purposes of NAPSA contributions.
4. The dividend payment will result in additional tax of 15% payable by Mwiza but
will not result in any tax saving for the Mwiko limited.
(1 mark for each valid point up to a maximum of 4 marks)

END

29