TAX MANAGEMENT

QUESTION ONE

1. a) Briefly explain the meaning of the following terms

i)Tax planning is the tactful analysis and consequent arrangement of the affairs of a taxpayer in such a way as to minimize tax liability at the lowest cost possible to him/her all without contravening any tax law or regulations.

1. Tax avoidance is the legitimate minimizing of taxes and maximize after-tax income, using methods included in the tax code. Businesses avoid taxes by taking all legitimate deductions and tax credits and sheltering income from taxes by setting up employee retirement plans and other means, all legal and under the Internal Revenue Code or state tax codes.

iii. Tax evasion is using illegal means to avoid paying taxes. Usually, tax evasion involves hiding or misrepresenting income. This might be underreporting income, inflating deductions without proof, hiding or not reporting cash transactions, or hiding money in offshore accounts

1. b) Many revenue authorities in a region have embarked on various tax modernization programs. Discuss five goals of such modernization programs.
2. To promote voluntary compliance and use of risk management techniques in providing the most cost-effective outcome.
3. To facilitate effective use of automated systems to gather, collate, and share information using reliable databases and a common identification number to facilitate selective audits based on risk analysis.
4. To facilitate the implementation of simple, up-to-date procedures to reduce the burden on taxpayers and traders.
5. Provision of adequate, timely information to support various management decisions and to aid in tax policy formulation
6. To improve the effectiveness of controls and to promote integrity and transparency in the tax process.
7. c) The Cost-Benefit Analysis (CBA) is a systematic process for calculating and comparing benefits and costs of a project, decision, or government policy. Discuss the cost-benefit analysis of tax management.

The cost-benefit analysis in tax management is a process by which tax decisions are analyzed. The benefits of a given tax-related action are summed, and then the costs associated with taking that action are subtracted. The benefits of tax management include;

1) Minimizing tax liability. The main objective of tax management is to minimize the tax liability of the taxpayer.

2) By knowing one’s tax liabilities, one can reinvest funds that would otherwise have been earmarked for tax back into his/her business.

3) Tax planning is an excellent opportunity to look at the options open to one’s business and fine-tuning its strategies in all areas while analyzing its data carefully.

4) Working through the process of tax management allows business owners to increase their knowledge about compliance and how it works, learn strategies for minimizing tax, and take a more hands-on role in the overall management of their business.

The various costs associated with tax management are;

i)Hiring of tax consultants to help look into the individual’s tax affairs.

1. Costs incurred in establishing and maintain a tax control framework and other necessary instruments that aid in monitoring tax either for individuals or businesses.

QUESTION TWO

a)A tax control framework is a system (process) to identify, mitigate, control, and report tax risks. Explain any five control elements of the tax control framework.

A tax control framework is an internal control instrument specifically aimed at the tax function within a company. The various control elements of a tax control framework include;

1) Control environment. The control environment refers to the boundary within which the tax control framework works; it also sets the tone of the top of an organization and provides discipline and structure.

2) Control activities. These are the various measures enforced that make it possible to identify, mitigate, control, and report tax risks.

3) System controls. These are controls put in place to manage the tax control framework.

4) Information and communication. It relates to identifying and transferring pertinent information on the time that permits personnel to perform their responsibilities.

5) Monitoring .it is an element of management responsibilities when it comes to internal control; top management is responsible for monitoring all controls and for determining if the controls are relating as they were intended.

1. b) Briefly explain the strategies against tax avoidance and tax evasion.

1) Require public disclosure of tax affairs. It would increase tax transparency by requiring tax paid in different countries by project and require. This will make it difficult for companies to hide their tax affairs.

2) Create a register of who benefits. To set up a public register, beneficial ownership. Improving transparency around who owns, controls, and benefits from the company will help prevent tax evasions.

3) Limit source financial products. This will be done by shifting profit between subsidiaries of profits between subsidiaries in different countries will help curb such problems.

4) Reducing tax rules. By providing an incentive for people with fewer tax rates perhaps relates to tax evasion.

5) Maintaining a proper level of taxation by the government, which accounts for tax revenue under total income.

QUESTION THREE

1. a) Tax consultants are, therefore, financial experts who assist clients with tax issues. Identify and explain any five consultancy services offered by tax consultants.

1) Preparation and filing tax returns. Tax consultants help in filing tax returns documents with the taxing authority. Such documents report income, expenses, and other relevant financial information.

2) Tax planning and advisory. This function entails analyzing financial and tax problems, formulating solutions, and making recommendations designed to provide advice on taxation for clients

3) Payroll processing. Tax consultants also help in payroll processing, i.e., managing the payment of wages by a company to its employees, taking into account the taxes.

4) Representing the client in dealing with tax collection agencies such as KRA. The consultant will be working as an agent to the taxpayer. He/ she thus has to represent the client in all these dealings.

5) Processing tax refunds and set-offs of taxes. Consultants also help in processing tax refunds if one paid excess tax and processing set-offs of taxes. If one paid tax in excess in this financial year, the extra is carried forward to cater to the next period’s tax.

1. b) i. Distinguish between single and multiple tax systems.

A single tax system is a system that applies only one form of tax on the income of a person. In contrast, a multiple tax system is a tax system that comprises a variety of taxes applicable to a person’s income.

1. Explain four reasons why a country might prefer a multiple tax system over a single tax system.

1) A multiple tax system generally results in an inequitable tax burden since it comprises both direct and indirect taxes, proportional and progressive taxes.

2) A multiple tax system is more useful in achieving social and political objectives. This is because the government can generate more revenue to be used in funding its various projects.

3) A multiple tax system is broad-based and even covers every sector in the country as the taxes applied range from income tax, Value Added Tax, Customs, and Exercise tax.

4) When it comes to a multiple tax system, it is difficult for individuals to evade tax altogether. This is because the system includes a variety of taxes that are applied. Some like VAT is almost inevitable.

QUESTION FOUR

1. a) Briefly explain the steps involved in the tax consulting process.
2. Entry and contracting. This first phase deals with the initial contact with the client about the project. Tasks include: Setting up the first meeting, exploring what the problem is, determining if you’re the right consultant for the work, listing the client’s expectations, specifying what expectations you have, and figuring out how to get started.
3. Data Collection and Diagnosis. Tax consultants come up with their sense of the problem. Out of this phase, the consultant needs to know who will be involved in defining the problem, what methods will be used, what kind of data should be collected, and how long it will take.

iii)Feedback and the Decision to Act. A tax consultant needs to report the findings from phase 2 to the client. This phase includes setting the goals for the project and selecting the best action steps.

1. Implementation. This step involves taking everything that has been decided previously and implementing the solution agreed upon.
2. Termination. This is an essential step in the consultation process. If the implementation phase was a success, then termination may be in the offing. Here, the contract is ended, and the consultant paid his/her fees.
3. Explain how an online-based integrated tax management system operates and identify the returns that can be filed on the system.

A secure online tax management system allows one to register, file tax returns, process payments, and make status inquiries with real time monitoring of their tax ledger. The returns that can be filed on the system are;

i)Monthly PAYE returns

1. Value Added Tax and Excise returns

iii. Quarterly and annual income tax individual returns

1. Turnover tax returns
2. Corporation tax returns
3. Partnership returns

QUESTION FIVE

1. a) Briefly explain the principles of the global taxation policy.
2. Equity. A sound tax system should be based on the ability to pay. As a result of the uneven income distribution, those with high incomes should be taxed more while those who earn low incomes should be taxed less.
3. Convenience. The method and frequency of tax payment should be convenient for the tax payer. To ensure this, tax payment should be at the source, for example, PAYE.

iii)Simplicity. A tax system should be simple to produce a high yield. The taxpayer should easily understand it to enable him/her to compute his/her tax liability with ease.

1. Flexibility. There should be no rigidity in taxation. The tax system, tax rate, and structure of taxes should be flexible enough to be changed to meet the state’s revenue requirements.
2. Productivity. A tax should be productive because it should bring in considerable revenue, which should be adequate for the government.
3. Certainty. The tax should be formulated such that taxpayers are certain of the amount of tax they pay and where to pay. Certainty is essential in tax planning both for the taxpayers and the revenue authorities.

vii. Diversity. The government should impose a wide variety of taxes on people of all classes for public welfare. This will help the government raise more revenue, and the tax burden will be evenly distributed among the taxpayers.

viii. Taxable capacity. This refers to the maximum tax collected from a taxpayer without producing undesirable effects on him/her. A sound tax system should ensure that people pay taxes to the extent that they can afford it.

1. Administrative efficiency. A sound tax system should be capable of being administered efficiently. It should produce the highest possible yield at the lowest possible cost, both to the taxpayer and the tax authorities.
2. b) Explain any five tax avoidance techniques that a corporate entity may use to minimize its tax liability.
3. Capital deductions- This involves choosing to hold capital assets for more than one year, to take advantage of lower long-term capital gains tax rates and capital allowances.
4. Tax deferral-If tax avoidance is about lowering your overall tax liability; tax deferral focuses on shifting your income into future years. The presumption is you’re moving income from the present — when your income is being taxed at high rates — to sometime in the future when you will be taxed at much lower rates.

iii. Tax deductions and allowances- Taking deductions for things such as mortgage interest, property taxes, medical expenses, and charitable contributions can also be a better technique to minimize tax liability

1. Choosing an appropriate form of business-The various business forms have different tax implications. This means what may be charged to a company as a non-allowable expense for tax purposes may not be charged to a sole proprietorship or partnership.
2. Claiming tax credits and refunds offered by KRA- Taking advantage of tax credits (which directly reduce your tax liability