SUGGESTED ANSWERS

C4 – ADVANCED TAXATION
NOVEMBER 2021

ANSWER 1:

(a) Name of Tax Payers: Elishadai, Elihumbiza and Elizanidho (3Es Partnership)
Nature of Income: Business Income
Type of Business income: Manufacturing Furniture and leasing of Assets.
Residential Status” Resident Person.
Year of Income: 2020 **
TZS.”000” TZS “000”
Profit as per accounts 356,000*
Add back: Non-allowable deductions
Partners salaries (30+25+20) million 75,000*
Brokerage fee to partners (10+5+14) 29,000*
million
Interest on Equity Capital (10+15+21) 46,000*
million
Interest on Debt Capital (15+25) million 40,000*
Utilities – structural alterations (capital 35,000*
nature)
Reserve for Gratuity 124,000*
Bad debts reserve 112,000*
Income Tax 125,000*
Machinery Lease 70,000* 656,000
Less: Allowable deductions
Excise duty (10,000)*
Adjusted partnership business income 1,002,000*

(b) Tax treatment/effects

• The dividends of K Ltd from subsidiary companies owning more than 25% are
taxable in the form of final withholding tax by virtue of section 54(2) of ITA Cap332
(Section 54(2) applies to resident entities only. The assumption is that all entities
are resident entities.
• The K Ltd is no longer a parent company to M Ltd as it may control or benefit less
than 50% by virtue of section 3© or ITA Cap 332.
• There is a change in control in the L Ltd where K Ltd will no longer be a parent
company and the assets owned and liabilities owed will be treated as being realized
by a subsidiary company U Ltd by virtue of section 56(1) of TA Cap 332.

• All items which affect tax will not carried forward or back virtue of section 56(2)
of ITA Cap 332.
• The subsidiary companies have to prepare two sets of accounts as the period before
and after change of ownership are to be treated as separate years of income, one set
from March to June 2021.

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(c) VAT as applied in insurance contract
Insurance brokers and agents account for value added tax in a normal way as traders
does and others. However, taxable supplies provided by the insurer has slight difference
from other businesses.
• An insurer accounts for VAT on net premium amount received in relation with a
contract of insurance. Further, Value Added Tax (General) Regulation defines
net premium amount received as the total premium received in any given ta period
less payment made for settlement of any claim arising from a contract of insurance
and amounts of premium paid for that period to other insurers for the purpose of
reinsurance. Therefore, the VAT tax payable or liability of an insurer or insurance
brokers depends on the net premiums amount they make.
• Similarly, where an insurer subsequent recovers from an insured person part of
the claim paid in relation to a contract of insurance, whether through fraudulent
claim or claim from a third party under the principle of subrogation, the insurer is
required to make an increasing adjustment.
• According to regulation 35(3) of the Value Added tax (General) Regulation 2015,
when a taxable insured receives payment in respect of settlement of claims under
the contract of insurance should account for output tax on that amount but the
same insured person cannot claim input tax credit in relation to a purchase of the
contract of insurance.
• On the same manner, when an insurer makes payments in respect of a claim under
the contract of insurance to an insured person is eligible for input tax credit for the
claim irrespective of whether it has been paid to on-taxable person. It also
important to note that, the insurer is not eligible to claim input tax credit in relation
to a cost of sales, administration and management relating to supply of under the
contract of insurance insurers.
• Lastly as per regulation 35(7) of the Value Added tax (General) Regulation 2015,
the supply of salvage by an insurer attracts value added tax and the term salvage
has been defined as damaged property an insurer takes over to reduce its loss after
paying a claim.
• Treatment of output ta and input tax is also differentiated between Life
Insurance and General Insurance

• To conclude on VAT on insurance business, it can be stated that apart from the
matters mentioned above, other transactions receives same tax implications and
treatments on same manner as to other businesses.

(d) VAT – Dingu suppliers

(i) Computation of Output tax
Amount Output tax (18/118) Exempt
Sales at standard rate 28,420,000 4,335,254
Exempt supplies 7,000,000 - 7,000,000
Exports to Congo 10,000,000 0
45,420,000 4,335,254 7,000,000

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 (ii) Computation of Input tax
Input tax relating to purchases of taxable supplies
VALUES INCLUSIVE VAT input
OF TAX IN TZS. (18/118)
IN TZS
Purchases at standard rate 12,180,000 1,857,966
Imported goods 21,806,400 3,326,400
Total input tax (B) 5,184,366

I: Input tax relating to purchases of both taxable and exempt supplies

VALUES INC VAT TZS VAT
Audit fees 1,044,000 159,254.24
Purchases of printing materials 725,000 110,593.22
Catering for firm employees 2,030,000 309,661.02
Telephone expenses 1,450,000 221,186.44
Payment of water bill 525,000 80,084.75
5,774,000

VAT input 800,780 800,780

(5,774,000*18/118)
Test for T/A 85% 85%
Input tax liability for Partial 680,663 680,663
supplies

Test for T/A

Taxable supplies = (TZS.28, 420,000 + TZS.10, 000,000) = 85%
Total supplies TZS.45, 420,000

Computation of imported goods:

TZS.
Cost 12,500,000
Freight 1,000,000
Insurance 500,000
CIF 14,000,000
Import duty (20% x TZS.14,000,000) 2,800,000
16,800,000
Excise duty (10% x TZS.16,800,000) 1,680,000
18,480,000
VAT (18% x TZS.18,480,000) 3,326,400

(iii) Computation of VAT Payable (Refundable):

VAT Payable (Refundable)= Output tax – Input tax + increasing adjustment –
decreasing adjustment

Where =
Output tax = TZS.4, 335,254
Input tax for taxable supplies and partial taxable supplies = (5,184,366 +800,780 x 85%)
Increasing adjustment = (580,000*18/118)
Decreasing adjustment = (812,000*18/118) + (522,000*18/118)

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 VAT Payable/(Refundable) = TZS 4,335,254 - (5,184,366 +680,663) + 88,474–
123,864.41-79,627.12
VAT Refundable = TZS 1,414,758.05

ANSWER 2:
(a)
(i) Meaning of the Arm’s length principle
The arm’s length principle states that transactions between connected parties should be
treated for tax purposes by reference to the amount of profit that would have arisen if the
same transactions had been executed by unconnected parties. The terms which would be
expected to be seen between independents are referred to as being at arm’s length. The
arm’s length principle is applied to a controlled transaction by replacing hypothetically
the actual terms or price under which a transaction was done with arm’s length terms and
for tax purposes, recalculating the profits accordingly.
(ii) Main objectives of the arms’ length principle
1. To achieve a fair division of taxing profits and to address international double
taxation as the trading arrangements and pricing policies under which multinational
groups operate can result in terms considerably different from those which would
have been seen between independents engaged in the same or similar transactions
for a number of reasons.
2. To make the correct application of the separate entity approach possible and
therefore secure the appropriate tax base in each jurisdiction involved.
3. To eliminate effects and distortions of the associated enterprises’ special
commercial and financial conditions on the levels or profits.
4. To provide broad parity of tax treatment for MNEs and independent enterprises,
that is to provide a tax treatment which is neutral towards the type of entity.
5. To put associated enterprises and independent enterprises an equal footing for tax
purposes.
6. To serve the general principles of equality and neutrality in tax law.

7. To avoid a distortion of the relative competitive positions between associated and

independent enterprises.
8. To promote international trade and investment by removing tax considerations from
economic decisions.

(iii) Approaches used to determine an arm’s length price

1. Comparable Uncontrolled Price Method
This method simply compares the price in the controlled transaction with the price in
a comparable uncontrolled transaction. If there is a difference, then the commercial
and financial relationship between the associated parties may mean the price is not at
arm’s length. The price in the uncontrolled transaction may been to be substituted
for the price in the controlled transaction. However, identifying good reliable
comparable uncontrolled transactions can sometimes be difficult in practice.
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 2. Resale minus
The resale price method begins with the price at which a product that has been
purchased from an associated enterprise is resold to an independent enterprise. This
price known as the resale price is then reduced by an appropriate gross margin on this
price (the “resale price margin”) representing the amount out of which the reseller
would seek to cover its selling and other operating expenses and, in the light of the
functions performed (taking into account assets used and risks assumed), make an
appropriate profit. What is left after subtracting the gross margin can be regarded,
after adjustment for other costs associated with the purchase of the product (e.g.
customs duties), as an arm’s length price for the original transfer of property between
the associated enterprises. This method is probably most useful where it is applied to
marketing operations and is most useful where a company purchases goods for
distribution from a connected party.
3. Cost plus
The starting point of this method is be the costs incurred by the supplier of the goods
or services. A ‘plus’ percentage should be added to this to give the supplier a profit
appropriate to the functions carried out and the market conditions. The profit
elements should be calculated by reference to the profit the supplier earns in
comparable uncontrolled transactions (an “internal comparable”). Failing this
possibility (because the supplier does not enter into comparable uncontrolled
transactions), the mark up that would have been earned in comparable transactions
by an independent enterprise (an “external comparable”) can serve as a guide. The
cost plus method is most useful where semi=finished goods are transferred between
related parties (e.g. a manufacturing company selling to a distribution affiliate), where
joint facility agreements have been concluded, or where the controlled transaction is
the provision of services.
4. Profit split method
The profit split method attempts to eliminate the effect of a control relationship on
profits accruing to each connected party by determining the division of profits that
independent enterprises would have expected to realize from engaging in the tested
transactions using either a contribution analysis profit split or a residual profit split.
This method is recommended for very complex trading relationships involving highly
integrated operations, where it is sometimes genuinely difficult to evaluate those
transactions on a separate basis. The profit split method is therefore a ‘two-sided’.
5. Transactional Net Margin Method
This method begins by comparing the net margin which the tested party makes from
a controlled transaction with the net margin it makes from an uncontrolled one (an
“internal comparable”). Where this proves impossible then the net margin which
would have been made by an independent enterprise in a comparable transaction (an
“external comparable”) may serve as a guide. They concentrate on finding the arm’s
length net profit margin as opposed to the gross profit margin sought by the
‘traditional’ methods of CUP, resale minus and cost plus.

(b) Approaches to prevent Thin Capitalization

No rule approach:
Several tax jurisdictions do not have specific rules to curb thin capitalization. Some
civil law countries rely on their general anti -avoidance provisions, such as the ‘abuse
of law’ or the ‘abuse of rights. ‘The common law countries apply similar judicial
doctrines of substance over from. For example, Austria does not have specific thin
capitalization rules. However, Austria’s Supreme Administrative Court established
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 certain broad and liberal guidelines, which are used to determine whether the equity for
commercial purposes is adequate for tax purposes. If the equity is inadequate, a portion
of the indebtedness to shareholders may be regarded as the equivalent of shareholders’
equity. Other countries with no specific thin capitalization include: Brazil, Colombia,
India, Singapore, Indonesia Israel Sweden, etc. Some countries, as already stated
above, rely on general anti-avoidance provisions rather than specific thin capitalization
rules.

Fixed Debt to Equity Ratio

Several tax jurisdictions specify a maximum debt-equity ratio to restrict the loans
provided by controlling nonresident shareholders. The rules often (but not always)
stipulate the minimum controlling interest that indicates the ability of a shareholder to
influence the financing decisions within the company. Under this method, the resident
borrower cannot deduct the interest on loans from certain nonresident shareholders in
excess of the specified debt-equity ratio. The rations and equity ownership or voting
control limits in different jurisdictions vary widely. For example, (OECD countries
only).

Arm’s length approach

This approach is based on the general principles of transfer pricing. The key
determinant is whether an unrelated party would provide debt funds on the same basis
as the related party loan arrangement. It examines the facts and circumstances to decide
if the loan was unusual, and whether independent parties would grant it under the same
conditions. Thus, the term and nature of financing and the commercial circumstances
in which it is made are reviewed to determine if it is really debt or equity.

Hidden Profits Distribution

Some countries have specific provisions under their tax laws that allow loan interest to
be reclassified as a hidden profit or constructive dividend in certain circumstances. This
would have the same effect as when the shareholder had provided finance in the form
of equity. As a consequence, the reclassified interest (representing a dividend) increases
the corporation’s profit and hence the corporate tax applicable. Further, as the interest
is treated as distribution of profit, the dividend withholding tax rate is applicable. These
rules will usually apply whether the parties to the transaction are related parties or if the
subsidiary company is undercapitalized and a loan from the parent or affiliated
companies is of a permanent nature or is granted on a non-arm’s length basis.

ANSWER 3:
(a) General rule of deduction
For the purposes of calculating a person’s income for a year of income from any
business or investment, there shall be deducted all expenditure incurred during the year
of income, by the person wholly and exclusively in the production of income from the
business or investment.

But except capital nature expenses, excluded expenditure and consumption expenses.

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(b) Taxable income of JK’S Company
TZS.
Reported profit for the year 10,100,000
Adjustments
Dividend received from resident corporation (2,400,000)
(60%*4m)
Profit on sale of investment Nil
Debenture interest receivable Nil
Bank interest Nil
Non-executive directors’ fee Nil
Health insurance to NHIF 2,500,000
Audit fees Nil
Expansion cost 5,500,000
Property tax Nil
Salaries Nil
Finance costs Nil
Income tax 3,780,000
Adjusted taxable profit 19,480,000

ANSWER 4:

(a) Depreciation Allowance

Class 1 Class 2 Class 3 Class 6 Class 8
(37/5%) (25%) (12.5%) (5%) (100%)
Depreciation Basis at 14,600,000 84,000,000 1,960,000 150,000,000 -
1st January
Additions
Saloon car (non- 30,000,000
commercial vehicle)
Building extension 70,000,000
EFD machine 600,000
Less: Incomings
Proceeds from office (400,000)
furniture
Basis for annual 44,600,000 84,000,000 1,560,000 220,000,000 600,000
allowance
Basic for initial 48,000,000
allowance
Initial allowance 12,000,000
Annual allowance 16,725,000 21,000,000 195,000 11,000,000 600,000

Total depreciation allowance is TZS. 61,520,000

Note:
Item (1) and (5) do not entitle the company to depreciation allowances due the to the ownership
and use issues.

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(b) Mitimingi Co. Limited
Taxpayer: Mitimingi Co. Limited
YOI: 2020
Residential Status: Resident corporation
Source of Income: Business
TZS. TZS.
Profit before tax 38,000,000
Add: Disallowed expenditure:
Director’s watchmen salary 400,000
Bank interest by senior manager 400,000
Bank interest on director’s mortgage 600,000
Provision for bad debts 100,000
Tax appeals 300,000
Donations to ruling political party 1,500,000
Installment tax paid for the year 9,000,000 12,300,000
Adjusted business Income 50,300,000

Taxpayer: Mitimingi Co. Limited

Yol: 2020
Residential Status: Resident Corporation
Source of Income: Investment
TZS. TZS.
Dividend from unlisted company 8,495,000
Royalty 500,000
Rental income 3,460,000
Add back: disallowed expenses
Replacing iron sheet roofing 1,800,000 5,260,000
Adjusted Investment Income 14,255,000
Total chargeable Income 64,555,000

Alternative for investment income

Taxpayer: Mitimingi Co. Limited
Yol: 2020
Residential Status: Resident Corporation
Source of Income: Investment√
TZS. TZS.
Total income 12,455,000
Replacing iron sheet roofing 1,800,000
Adjusted Investment Income 14,255,000
Total chargeable Income 64,555,000

Note: Depreciation can be added as it is not specific if it was per Income Tax Act,
2004 though in most cases it is assumed to be as per the Act because it used the tax
language.

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ANSWER 5:
(a) Benefits of international tax planning
(i) To minimize overall effective tax rate of the whole company or group.
(ii) It may also lead to tax deferral and reduction in tax compliance costs. It not
only looks at legal tax-saving opportunities but also at tax risks such as double
taxation and prospects of counteracting tax legislation.

(b)(i) Eiffel Construction (T) Limited

TZS.
Additional capital ($80,000 x TZS.2320)/2 92,800,000
Opening cost of assets 1,180,000,000
Less: Net incoming for liabilities 60,000,000
A, 1,212,800,000
Total income 4,485,840,000
Unrelieved losses 0
Tax payable on Total income 1,345,840,000
B. 3,140,088,000
Closing cost of assets 1,088,000,000
Less: Net incomings for liabilities 40,000,000
C. 1,048,000,000
Repatriated income (A + B – C) 3,304,888,000

Workings:
Cost of Assets

30-June-20 30-June-21
TZS. TZS.
Receivables 220,000,000 240,000,000
Cash in hand 180,000,000 220,000,000
Bank 100,000,000 140,000,000
TWDV 680,000,000 488,000,000
Cost of Assets 1,180,000,000 1,088,000,000

Total Income
Taxpayer: Eiffel Construction (T) Limited
Yol: 2021
Residential Status: Resident Corporation
Source of Income: Business
TZS. TZS.
Profit before tax 4,384,800,000
Add: Disallowed expenditure:
Interest 64,000,000
Withholding taxes 5,440,000
Management fees 36,000,000
Travel expenses 5,200,000 110,640,000
Less: Disallowable income
Investment income from head office 9,600,000
Total Income 4,485,840,000

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Repatriated income should not exceed TZS.3, 140,088,000 + TZS.1, 356,000,000 = TZS.4,
496,088,000. So since it does not exceed TZS.4, 496,088,000 the repatriated income is TZS.3,
304,888,000.
(ii) Tax payable thereon
• On total income = TZS.4, 485,840,000 x 30% = TZS.1,345,752,000
• On repatriated income = TZS. 3,304,888,000 x 10%= TZS.330,488,800

(iii) Accumulated profit account

Dr. Accumulated Profit Account Cr.
Amount Amount
Repatriated 3,424,888,000 Opening balance 1,356,000,000
income
Closing balance 2,416,952,000 Profit and loss 4,485,840,000
5,841,840,000 5,841,840,000

ANSWER 6:
(a)
NAME OF TAXPAYER: MTZ Co. Ltd
ACCOUNTING PERIOD: NOVEMBER 2019 TO MARCH 2020

Part (i)
COMPUTATION FOER TOTAL PENALTY

The penalty is higher

Of: (i) 2.5% of unpaid tax at stats of the month and
(ii) 15 currency points power month for individual and entity respectively,
(1 point currency is equivalent to TZS.15, 000) = 225,000*)
Accounting period Period Amounts due Penalty per Total in TZS.
delayed period (The A*B
(A) higher of) (B)
November, 2019 6 18,000,000 450,000* 2,700,000*
December, 2019 5 15,000,000 375,000* 1,875,000*
January, 2020 4 11,500,000 287,500* 1,150,000*
February, 2020 3 12,000,000 300,000* 900,000*
March, 2020 2 (11,200,000) 225,000* 450,000*
Total 7,075,000
Therefore, total penalty is TZS.7, 185,000
Part (ii)
Interest for failure to pay tax on time.

Accounting Period Formula* Interest

November, 2019 18,000,000 [(1 + 5/12)6 - 1] 454,714*
December, 2019 15,000,000 [(1 + 5/12)5 - 1] 315,115*
January, 2020 11,500,000 [(1 + 5/12)4 - 1] 192,868*
February, 2020 12,000,000 [(1 + 5/12)3 - 1] 150,626*
March, 2020 - -
Total 1,113,323*
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 Therefore, Total interest is TZS.874, 263.01
(b) Circumstances under which the assessment will be treated as final and conclusive
as per the tax Revenue Appeals Act, Cap408.
(i) The assessment is issued but no objection is raised by the taxpayer within 30
days of the assessment;
(ii) An objection is raised by the taxpayer and
• The assessment is amended in complete agreement with the objection;
• The assessment is amended in the light of the objection and the taxpayer
agrees with it;

(iii) The Commissioner rejects it totally and issues a confirming notice and the
taxpayer does not appeal.
(iv) The taxpayers appeal against the confirming notice or non-agreed amended
assessment and the dispute is decided on appeal and the taxpayer agrees;

(v) The taxpayer appeals further to tribunal or Court of Appeal and the dispute is
finally decided (whether agreed or not).

________________ ▲ _______________

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