CTA 9-TAX COMPLIANCE & ETHICS:

Solution 1:(a)

Advice to management of KACL on the issues arising out of audit in

reference to previously decided cases:
As per the Income Tax Act Section 83 , Interest from sources in Uganda paid
to a non resident person should be subjected to withholding tax. And as per
Section 79, income is said to be derived in Uganda where the payer is a resident
person or borrowing relates to a business in Uganda.

Section 83 (5) provides that interest paid by a company in respect of

debentures is exempt from tax where; a) The debentures were issued by a
company outside Uganda for the purpose of raising a loan outside Uganda. b)
the debentures were widely issued for the purpose of raising funds for use by
the company in a business carried on in Uganda or the interest is paid to a bank
or financial institution of a public character. c) Interest is paid outside Uganda.

Therefore, in the case of KACL, for the loan to be classified as a debenture, it

must meet the “public offer test” which in this case the public offer test include;
a) Debentures must have been issued to a reasonable number of people
operating in the capital markets. b) Issued out as a result of negotiations of a
loan in a public forum used by financial markets dealing in debts instruments
c) issued to previous investors with a history of dealing in debentures and debt
instruments d) issued by a dealer, manager or under writer for the purpose of
placement of a debt instrument. In this case, CASL loan to KACL fails the test
as a debenture.

Given the definition of a debenture and the requirement of section 83 (5), the
debt instrument is not debenture and hence any interest attached to it is
subject to withholding tax.

Interest Payable once accrued in the books of accounts could be defined as

“that which is due or must be paid” and once it features in the books of
accounts, it becomes due and payable as decided in the case of Kenya
Revenue Authority Vs Republic (Ex Parte: Fintel Ltd.) Where the term
paid was defined as “. Distributed, credited, dealt with or deemed to have been
paid”

As per section 47 (2) of the Income tax Act, withholding tax is charged when
interest is paid on international payments. And the word payment is defined to

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 include paid or payable in Cash. As per decided in the Case of Cooper Motors
Vs Uganda Revenue Authority

The annual report of KACL showed that interest expenses were deducted
before tax was imposed hence the KACL could not have deducted for tax
purposes, what was not incurred. This therefore makes the Withholding tax
on the interest due to URA.

KACL if they are to go to the Tax Appeals Tribunal, the they have to discharge
the burden of proof that the interest expenses were deducted before tax was
imposed.

The fact that KACL expensed interest as a deductible expense mean that it paid
less taxes in financial years they filed their returns. Given the fact that KACL
made this representation to URA, it might be difficult for them to turn back and
claim the withholding tax was not due yet they had paid less taxes and on the
accrued interest that they filed as expenses.

Therefore, URA was right to hold that the Appellant actually recognized the
interest as expenses and hence raising the assessment for the withholding
taxes. Where Management decides to continue to the appeals tribunal, they
should be able to prove otherwise.

(b) Possible and common tax fraud indicators:

The objective of tax fraud and of those involved in a wide range of criminal
activities and to disguise the source of income and such could be disguised in
bank accounts, assets, stocks, loans and other disguised transactions.

Fabricating of loans between parent and subsidiaries within foreign existence.

loan-back or back-to-back; Companies as well structure loans with the intention
of frauding the tax authorities. In the reference to KACL, the intention could
have been of good faith, however, the fact, that the company tried to conceal
the payment of interest to the parent company so that not to pay Withholding
tax in itself could be an indication of tax Fraud.

Disguising the ownership of assets and interest in businesses (constructions

with foreign legal entities, e.g., offshore companies or relatives as legal owner);
Such structures when clinically hidden from disclosure to the Tax Authorities
could have an indication of tax fraud. Where companies own assets and interest
in business without having clear disclosure about them and their transactions.
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 In reference to KACL, it’s 99% foreign owned which could have been well
intentioned. However, Management of KACL using such structure to disguise
their assets, transactions, hide interest and defraud URA of withholding tax
could be an indication of tax fraud.

Non-transparent ownership: When shareholder relationships are transparent,

the true beneficial owner is visible. This beneficial owner will also declare their
shares and any income earned from the business on their income tax return. If
transparency is absent, the identity of the true beneficial owner is hidden.
Criminals conceal the assets of criminal origin in this way so they can continue
to use or enjoy the assets or obtain a return on their illegal money. The lack of
transparency in a shareholder relationship is an indicator for the concealment
of assets with a criminal orig

Price-manipulating (over- and under-invoicing); where companies practice the

vice of over and under invoicing for the sole purpose of defrauding of tax
authorities including manipulation of transfer pricing rules to avoid

Manipulating turnover/sales by commingling illicit and legal sources of income.

International structure with no apparent commercial, legal or tax benefits

Purchase or sale of the companies' shares at a price far above or below

estimated value

Companies/directors registered at a foreign company service provider's

address, Ownership contributions of capital are not supported by previous tax
returns, Interest accumulating on loans receivable or loans payable

(c) General principles of tax audits and investigations while carrying out
the audit:

Taxpayers’ record-keeping obligations.

Tax audits heavily rely on the records that are kept by the Tax payer. The level
of detail could vary from tax payer to tax payer. The records should as well be
kept electronically. Revenue bodies often specify additional record-keeping
requirements. These may be put in place to provide evidence that supports
specific parts of the tax calculation and could be vital pieces of evidence within
the audit process. In this case KACL was mandate to ensure they have proper
records of all their financial transactions, including the interest, group structure
that reflect the transactions they have filed with URA on every return.

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Giving tax officials access to taxpayers’ books and records.
Legal provisions should give an auditor access to all tax-relevant information
during an audit. Tax-relevant information is any piece of information (such as
books and records, bank statements, trade letters, contracts etc.), which is
essential to determine the correct amounts of tax due. It must be available to
the auditor during an audit at his request within an acceptable time, whether
in paper form or electronically.

Giving tax officials access to third party information sources.

There are legal provisions to support the auditor in cases where the taxpayer
provides unsatisfactory information or the auditor must verify taxpayers’
information using an independent or third-party source. However, these
provisions set limitations for auditors that can be summarised as follows:
✓ Protection under a professional pledge of secrecy (e.g., lawyers, public
and tax accountants);
✓ Protection of trade or industrial secrets; and
✓ Protection of taxpayers’ privacy.

Obtaining information from other countries’ revenue bodies. There are

tax treaties in existence which reflect, among other things, the fundamental
importance of accepted rules for exchange of information between countries
for liability verification purposes. Some treaties cannot meet the international
information needs relating to indirect taxes because this is not covered by the
respective treaty. Other restrictions on the kind of information that may be
exchanged are found with some revenue bodies while a very small number limit
the scale of cases for which they will consent to an exchange of information

Powers of revenue bodies to amend returns. The power to audit must be

supported by a power to amend the original tax return. The report made by
the auditor at the conclusion of the audit will form the basis for any
reassessment. Most revenue bodies enable taxpayers to provide comments on
the audit report before the reassessment is completed, in order to raise unclear
facts or different interpretations of law Similarly, the taxpayer will commonly
have the right to appeal against that reassessment if agreement cannot be
reached

Sanctions for non-compliance. The voluntary reporting of taxpayers’

correct tax liabilities and the provision of any assistance that may be required
to verify taxpayers’ reported liabilities are facilitated by an appropriately
structured regime of sanctions (e.g., penalties and interest, and imprisonment).

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Other principles

1. Be fair and objective. Everyone involved in an investigation deserves to

be treated with respect and dignity.
2. Do not pre-judge. Wait until all witnesses have been interviewed and
evidence examined before reaching factual determinations and ultimate
conclusions.

3. Avoid the appearance of bias. If the key parties to a dispute or allegation

of misconduct are personally known to the investigator, or if the allegation
of misconduct is against a high-level university official, someone more
independent should be brought in to conduct the investigation.

4. Plan and outline the investigation before starting. Think through who
should be interviewed and in what order; what documents and evidence
should be gathered before interviewing certain witnesses; and what
interim measures are needed (e.g., temporarily restricting access to
computers).

5. Investigate promptly. Certain investigative steps may need to be done

immediately – for example, preserving electronic and other evidence. But
rarely should an investigation be rushed and prematurely concluded due
to some arbitrary deadline.

6. Keep the investigation separate and independent from the stakeholders.

Especially in sensitive matters, the university president, provost, general
council, or board members may wish to be kept apprised of the
investigation’s progress and preliminary findings. This should generally be
avoided so as not to compromise the integrity and independence of the
investigation itself.

7. Never mislead a witness. Do not disclose details of the investigation to

your witnesses, do not make promises that cannot be kept, and do not
lie to or make misleading statements to the witnesses.

8. Protect confidentiality. Failure to take reasonable precautions to protect

the confidentiality of the investigation and the witnesses being
interviewed can damage reputations and potentially lead to cover-ups,
liability, and retaliation.

9. Protect reputations. Nothing can undermine the credibility of a

university-based investigation more severely than if the investigation
fails to adequately protect the reputations of students, university
employees, and witnesses.

10. Investigate acts of retaliation. If during the investigation a report or

allegation of retaliation against the person who reported the misconduct
or any other witness is received, the alleged retaliation must be
immediately and thoroughly investigated.

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 11. Seek every witness’s cooperation. Try to obtain the cooperation of all
potential

(d) Tax issues that may arise and safeguards that tax auditors should
apply.
To be most effective in addressing tax crimes, tax authorities need to have a
range of strategies that can enable them to respond to tax fraud allegations
and / or suspicions. For efficient response, then a coherent strategy for
enforcing the law should be devised. There are various techniques that can be
used to respond and in stages as will include;
Detection (Done through interviews, surveillance, execution of search
warrants, analysis of financials, review of taxpayer records, and obtaining of
third-party information).
Disruption (aimed at identifying tax evasion schemes and dismantling the
cartels and all the players involved in such schemes including the perpetrators,
professional enablers, the system used, collaborators and facilitators among
others. Some of the enforcement measures includes; Issuance of departure
prohibition orders, preservation of funds, asset caveats and preservation,
issuance of agency notices, cancellation of TCCs, deactivation of TINS,
revocation of customs agent’s licences, continuous surveillance, arrest and
prosecution of offenders).
Deterrence (against tax evasion and other fraudulent activities to ensure
compliance through prosecution, imposition of penalties, taxpayer education
and awareness as well as media publicity among others)
Enhancing compliance (through unearthing emerging evasion schemes and
recommend measures to seal loopholes through administrative action or
amendment of laws)
And where an investigation is constituted, the below stages can be adopted in
response;
Investigations maybe commenced at any time (either overtly or covertly) where
actionable intelligence is availed indicating that a taxpayer is involved in tax
evasion. Investigations involve the following;
Preliminary Investigation
Preliminary investigations are conducted upon receipt of information in order
to ascertain the veracity of the allegations of tax evasion. If satisfied that the
information is sufficient to warrant investigation, a case is registered for
investigations.
Surveillance
The investigation is carried out by conducting surveillance on the taxpayer’s
business premises, residences, tax agent’s premises, third parties and other
premises as may be necessary. The aim is to identify the nature of business,
documents in the taxpayer’s custody and gather such other information that

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may assist in tax fraud investigations. The inspection will be conducted in a
professional and ethical manner.
Notice to investigate
After preliminary investigations, a notice is issued to the taxpayer informing
them that he/ she/they are under investigations and outlining the reasons for
such investigations as well as the potential amounts of taxes lost.
Request for Documents
During Investigations, the officers may obtain records (including electronic
format) from the taxpayer or directly from third parties for examination to
establish the tax affairs of the taxpayer. This information can be obtained via
ordinary requests or through use of court warrant. Information obtained will be
treated with confidentiality.
Analysis of records
The records obtained are then analysed against the taxpayer’s self declaration
if any, and any other available information to establish the actual tax liability.
Interviewing and recording of statements
Statements may be recorded from the taxpayer and any other persons of
interest to the case being investigated.
Finalisation of Investigations

(e) The nature of tax practice presents a number of unique ethical issues. Tax
practice require compliance with multiple ethical frameworks.

Conflict of Interest in tax practice:Conflict of interest is an ethical issue

faced by almost every tax professional. The tax laws by the various governing
frameworks sometimes create potential ethical dilemmas in the area of conflict
of interest. A concurrent conflict of interest exists if;
✓ The representation of a tax client could directly adverse to another tax
client
✓ There is a significant risk that representing one or more client could
materially affect a tax partitioners ability to represent another tax client,
a former client or a third party or by a personal interest of the tax
practitioner.
Contingent fee tax representations: Fees paid to tax partitioners present
specific ethical issues. While charging contingent fees, it’s key to ensure not to
charge “unconscious fees” which is not representative of the services charged.
Ethical issues involving amended tax returns: Amending returns and
correcting errors come with some ethical issues where the tax payers might not
have complied with the tax laws and might have made errors in their returns
either intentionally or unintentionally. The tax practitioner needs to put into

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 consideration whether they correctly advised the client or if they participated
in such errors or mis-representation of the initial errors made.
Adequate disclosure to tax authorities: Where there is non-disclosure of
the true tax picture of a client by a tax practitioner, this would cause some
serious ethical issues and hence put the tax practitioner at risk.

Solution 2(a)
Advice to management of OCFL on the various evidence collection
steps used by URA to conduct an audit and investigation:

Investigations maybe commenced at any time (either overtly or covertly) where

actionable intelligence is availed indicating that a taxpayer is involved in tax
evasion and / or tax fraud. Investigations involve the following;
Preliminary Investigation: Preliminary investigations are conducted upon
receipt of information in order to ascertain the veracity of the allegations of tax
evasion / tax fraud. If satisfied that the information is sufficient to warrant
investigation, a case is registered for investigations.
Surveillance: The investigation is carried out by conducting surveillance on
the taxpayer’s business premises, residences, tax agent’s premises, third
parties and other premises as may be necessary. The aim is to identify the
nature of business, documents in the taxpayer’s custody and gather such other
information that may assist in tax fraud investigations. The inspection will be
conducted in a professional and ethical manner.
Notice to investigate: After preliminary investigations, a notice is issued to
the taxpayer informing them that he/ she/they are under investigations and
outlining the reasons for such investigations as well as the potential amounts
of taxes lost.
Request for documents: During Investigations, the officers may obtain
records (including electronic format) from the taxpayer or directly from third
parties for examination to establish the tax affairs of the taxpayer. This
information can be obtained via ordinary requests or through use of court
warrant. Information obtained will be treated with confidentiality.
Analysis of records: The records obtained are then analysed against the
taxpayer’s self-declaration if any, and any other available information to
establish the actual tax liability.
Interviewing and recording of statements: Statements may be recorded
from the taxpayer and any other persons of interest to the case being
investigated.

a) Good working papers should have:-

✓ methodical continuity;

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 ✓ clarity of purpose;
✓ simple yet complete cross-referencing;
✓ each page numbered;
✓ where necessary, pages should have a heading identifying the taxpayer;
✓ a description of the content or purpose of the sheet and period covered;
✓ each page/ letter/document should be placed in chronological order;
✓ papers should be filed in the correct compartment; and
✓ working papers should evidence all significant verification activities
detailing what was actually done (i.e. reconciliation of income from
source documents).

• It should state a clear tax audit objective, usually in terms of an audit

assertion (the purpose of the tax audit / investigation and the intended
outcome and cause / intention e.g., VAT under declaration, Income
understatement, Withholding tax etc).
• It should fully state the period of tax audit / investigation, so that the
working paper is not confused with documentation belonging to a different
period.
• It should state the full extent of the tax tests to be done. This will enable
the preparer, and any subsequent reviewers, to determine the sufficiency
of the tax audit evidence provided by the working paper.
• Where there is necessary reference to another working paper, the full
reference of that other working paper must be given. A statement that
details of testing can be found on ‘another working paper’ is insufficient.
• The working paper should clearly and objectively state the results of the
test, without bias, and based on the facts documented.
• The conclusions reached should be consistent with the results of the test
and should be able to withstand independent scrutiny.
• The working paper should be clearly referenced so that it can be filed
appropriately and found easily when required at a later date.
• It should be signed by the person who prepares it so that queries can be
directed to the appropriate person.
• It should be signed and dated by any person who reviews it, in order to
meet the quality control requirements of the review.

Solution 3(a)

Expectations from a taxpayer during an investigation:

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 Cooperation: The investigation will be undertaken with or without taxpayer’s
voluntary cooperation. A taxpayer’s conduct and cooperation during the course
of the investigation will be taken into consideration when the Commissioner
determines the appropriate outcome of the investigation and recommendation
for waiver of penalties and interest

Permit access to Premises and Information: The law allows revenue

officers to obtain information, specifically the power to have full and free access
to all lands, buildings, places, records, data and documents. The officers may
inspect all goods, equipment, devices and records, whether in the custody or
control of a public officer, or of a body corporate or of any other person, and
may make extracts from or copies of those records. It is an offence to hinder
or obstruct the officers in carrying out their duties under the revenue laws.
Provide Information: A tax payer is required to provide any information and
documents that Investigation Officers may reasonably request. You will be
given a reasonable amount of time to respond to our requests. You should
ensure that any information you provide and any answers you give are correct
and complete. Under the law, false statements or information provided can
result in a criminal investigation with a view to prosecution. Further, failure to
provide information (including third party information) constitutes an offence
under revenue laws.
Maintain Records: You are required to maintain any document required
under a tax law to enable your tax liability to be readily ascertained. In this
regard you are required to retain the document for a period of five (5) years
from the end of the reporting period to which it relates or such shorter period
as may be specified in a tax law. However, note that an investigation will require
records beyond the 5-year period in cases where there is gross or wilful neglect,
evasion or fraud by a taxpayer.
(b)The enforcement measures available to URA during and after an
investigation:
• Arrest and prosecution of offenders
• Recovery of debts
• Issuance of Departure Prohibition Orders
• Issuance of agency notices
• Preservation of Funds
• Asset caveats
• Cancellation of Tax clearing certificate(TCC)
• Deactivation of Tax Identification
• Stoppage of cargo clearance
• Continuous surveillance among others.

Solution 4(a)

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Indirect methods that are used to verify income:
Source and application of funds method: This method involves reconstructing
income to determine the actual tax liability and is an analysis of a tax payer’s cash
flows and comparison of all known expenditures with receipts for the period. Net
increases and decreases in assets and liabilities are taken into account along with
non-deductible expenditures and non-taxable income over the sum of reported and
unreported taxable income. It is suitable when the expenditure appears out of
proportion to the income reported.
Bank deposit and cash expenditure method: Under this method, we compute
income by analysing what happened to a tax payer’s funds. It is based on the
theory that if a tax payer received money, only two things can happen, it can either
be deposited or spent. This is based on the assumption that the proof of the deposit
into the bank, after certain adjustments have been made for non-taxable receipts,
constitutes evidence of taxable receipts. This method can be used in the
examination of income tax returns.
Mark-up method: This method is based on the use of ratios or percentages
considered typical for the business under examinations, in order to make the actual
determination of the tax liability. It consists of the application of appropriate
percentage of mark-up to arrive at the tax payer’s gross receipts. This method can
overcome the weaknesses of the bank deposit/cash expenditure methods and
others, which do not effectively reconstruct income when cash is not deposited
and the total cash outlays cannot be determined unless volunteered by the tax
payer. The method is recommended when inventory are the principal income
producing factor and the tax payer has non-existent or unreliable records.
Unit and volume method: In many instances, gross receipts may be determined
or verified by applying the sales price to the volume of the business done by the
tax payer. The number of units or volume of business done by the tax payer might
be determined from the tax payer’s books or records. The records under
examinations may be adequate regarding cost of sales and expenses. In some
cases, information may be obtained from third parties.
Net worth method: This method is based on the theory that increases in tax
payer’s net worth during a tax year, adjusted for non- deductible income may result
from taxable income. The method requires that the reconstruction of the tax
payer’s financial history, since all assets and liabilities need to be accounted for
during the relevant period.
(b)
Competencies that URA staff should build in its staff to ensure proper
tax administration:
• analyst and savvy technologist
• tax accounting and financial analysis
• conduct research and analysis
• apply the law (technical expertise)
• make effective decisions
• communicate effectively

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• apply work processes and procedures
• manage own work
• manage relationships.
• leadership and management skills
• technical expertise
• advanced audit skills
• ability to develop and coach others
• ability to make strategic decisions.
• Clear understanding of the business dynamics

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