Answer to Question #278302 in Financial Math for James

Question

The company made a profit before tax of Ksh. 14,000,080 in the past 12 months of accounting

-The company made a net book loss of Ksh.1,100,050 in the year 2019

-The company engaged in consultancy services in the year 2020 where they were paid Ksh. 5,000,000

-The company supplied vaatable goods worth Ksh. 3,500,000 and Ksh. 9,000,000 in the years 2019 and 2020 respectively

-The company is seeking to invest Ksh. 7,000,000 in the coming year in a foreign country and in a different line from what they are dealing with in Kenya

Required:

(I) Calculate the different taxes due from the company as at the close of the year 2020 (6 mks)

(ii) Advise the company concerning their planned investment in terms of the taxation concept of incvestment. (3 mks)

c) Explain the relevance of Ability to pay theory in Kenya as applied in the principle of taxation.

Answer 1

i.Taxation in Kenya

• Corporate income tax (CIT): resident companies, including subsidiaries of foreign firms, pay 25%. Non-resident branches - 37.5%.
• The tax rate is 25%
• VAT: 14% for local supplies, 8% for local fuel supplies (starting from September 2018), 0% for exports
• Income tax: the tax rate is 25%
• Capital gains (CGT): taxed at a rate of 5 %
• Dividends: resident companies are taxed 5%, non-residents - 15%
• Royalty: the tax rate is 25%
• Foreign income: Only income earned in Kenya is taxed
• Withholding Taxes (WHT): Residents: Dividends: 5%; Interest: 15%; Royalties: 5%. Non-residents: Dividends: 15%; Interest: 15%; Royalties: 20%

$Corporate income tax=0.25\times14,000,080=3500020$

$VAT=0.14\times9000000=1260000$

$VAT=0.14\times5000000=700000$

ii.If there are investments in Russia, then for non-residents the following taxation is in the taxation:

The general rate of personal income tax for non-residents is 30%.Tax is imposed on interest on a deposit that exceeds a fixed limit. The limit is calculated as follows: 1,000,000 × Key rate as at 1 January of the reference year. The key rate as at 1 January 2021 is 4.25%. 

What taxes non-residents pay

Personal income tax, if you have income from a source in Russia.

Property tax if you have property registered in Russia.

Land tax if you own a plot of land in Russia.

Transport tax if you have a vehicle registered in Russia.

Mandatory pension insurance of foreign employees of all listed statuses (except highly qualified specialists) is subject to contributions from payments not exceeding 1,465,000 rubles in 2021. at the rate of 22%, and from the excess amount — at the rate of 10%.

The income tax rate is 20%

c)Ability-to-Pay principle is principle of taxation which asserts that the amount of tax levied on an economic entity should be directly proportional to the ability of the entity to pay taxes. Therefore, a person having high income and wealth should be taxed more and less tax should be levied on those having low income and wealth provided other things remain constant.