TAX COMPLIANCE

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MALAW I

THE INSTITUTE OF CHARTERED ACCOUNTANTS IN MALAWI

PRINCIPLES OF TAXATION(P6)

KNOWLEDGE LEVELCHARTERED ACCOUNTANT (MALAWI)

e Institute of Chartered Accountants in Malawi 2017

e Institute of Chartered Accountants in MalawiP.O. Box 1 Blantyre

E-mail: icam@icam.mwwww.icam.mw

ISBN: 978-99960-9-732-4

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means-graphic, electronic or mechanical including photocopying, recording, taping or information storage and retrieval systems-without the written permission of the copyright holder.

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Contents Aim of the Module .......................................................................................................................................... 4 Outcomes ........................................................................................................................................................... 4 Format and Standard of the Examination Paper ............................................................................... 4 Chapter 1: Introduction to Taxation .................................................................................................. 8 Chapter 2: Administration of Taxes ................................................................................................. 17 Chapter 3: Taxation of Individuals ................................................................................................... 22 Chapter 4: Taxation of Employment Income ............................................................................... 35 Chapter 5: Fringe Benefits Tax .......................................................................................................... 40 Chapter 6: Taxation of Passive Income .......................................................................................... 45 Chapter 7: Taxation of Gains and Losses ....................................................................................... 49 Chapter 8: Capital Allowances ........................................................................................................... 61 Chapter 9: Business Taxation ............................................................................................................. 74 Chapter 10: Taxation of Partnerships ............................................................................................ 89 Chapter 11: Taxation of Companies ................................................................................................ 94 Chapter 12: Special Trades and Cases ........................................................................................ 103 Chapter 13: Tax Collection Methods ............................................................................................ 115 Chapter 14: Provisional Tax System ............................................................................................ 122 Chapter 15: Returns and Assessments ....................................................................................... 126 Chapter 16: Tax Appeals Procedure ............................................................................................ 133 Chapter 17: Value Added Tax ........................................................................................................ 136 Chapter 18: Customs Duty ............................................................................................................... 150 Chapter 19: Excise Tax ...................................................................................................................... 166 References ................................................................................................................................................... 171 Appendices .................................................................................................................................................. 172

Appendix A: General Exemptions First Schedule to the Taxation ACT ................. 172 Appendix B: Rates of Income Tax - Eleventh Schedule .................................................... 174 Appendix C: Countries with which Malawi has Entered into Tax Agreements 175174 Appendix D: Annual Allowances ............................................................................................... 176 Appendix E: List of Approved Charitable Organisations ................................................. 177 Appendix F: Withholding Tax Rate of Deduction ............................................................... 179 Appendix G: Zero Rated Goods and Services for VAT Purposes ................................... 180 Appendix H: Exempt Goods and Services for VAT Purposes ......................................... 181

Agreements...175

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Studying Taxation (TC 10) Paper TC10 Taxation is a paper that is discursive and requires computation. As a result the exam has both narrative and computational questions. Contents of the Paper This paper comprises the following main areas: a) Principles of taxation and introduction to Malawi taxation; b) Income tax on persons; c) Taxation of businesses income; d) Capital allowances; e) Taxation of special trades and cases; f) Collection and administration of tax; g) Value added tax; h) Customs duties; and i) Excise tax. Skills to Demonstrate You will be required to understand the principles of taxation and apply these principles in computation of tax.

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Aim of the Module To enable candidates understand the general objectives of taxation and to apply this knowledge in practice by calculating income tax for different taxable persons including individuals, partnerships, corporate bodies and taxation principles applicable to special trades. Outcomes On completion of this module the candidate should be able to: i. Explain the principles of taxation; ii. Describe the administration of taxes in Malawi; iii. Explain the general objectives of Malawi tax and the different types of tax; iv. Calculate tax liabilities for individuals and corporate bodies; v. Calculate value added taxes, excise and customs duties owed by taxpayers; and vi. Prepare various tax returns. Format and Standard of the Examination Paper The examination will be divided into two sections, A and B. Section A will have two compulsory questions. Section B will have five questions and candidates will be required to answer any three. Section A will account for 40% of the examination and section B 60%. There will be a balance between narrative and computational questions. The table below shows the relative weightings of topics within this module and gives an indication of the exam content for each area. Syllabus area Weighting Introduction to Taxation and Administration of Tax 10% Income tax on individuals and corporate bodies 40% Capital allowances 10% Taxation of special trades and cases 10% Collection of taxes 10% Value added tax 10% Customs duties 5% Excise 5% Total 100%

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Learning Outcomes The following are the learning outcomes: 1. Introduction to Taxation and Tax Administration

Candidates should be able to explain the principles and objectives of taxation and how taxes are administered in Malawi. In the exam candidates may be required to: Explain reasons for a government introducing a tax system; Describe essential elements of a good tax system; Classify taxes and explain characteristics of taxes; State the powers of the Commissioner General; Explain the significance and application of the rule of secrecy; Explain the role of the Public Officer; and State appeal procedures.

2. Income Tax on Individuals and Corporate Bodies

Candidates should be able to classify entities as individuals, partnerships, or companies for tax purposes and state how they are taxed. In the exam candidates may be required to: Identify assessable and exempt income, allowable and non- allowable

deductions and taxable income; Compute fringe benefits tax; Compute capital gains or losses; Compute foreign exchange gains or losses; Compute tax on passive income; and Compute taxes for individuals, partnerships and corporate bodies.

3. Capital Allowances Candidates should be able to explain and compute the different types of capital allowances and identify the scenarios and on which assets capital allowances can be claimed. In the exam the candidate may be required to: Describe initial, investment and annual allowances; Identify assets that qualify for capital allowances; Compute capital allowances; and Describe incentives and restrictions on capital allowances.

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4. Taxation of Special Trades and Cases Candidates should be able to describe how special trades are taxed.

Candidates may be required to explain or compute taxes for: Farming; Timber trade; Charities and trusts; Clubs and societies; Ecclesiastical bodies; Insurance business; Hire purchase; Double taxation; and Turnover tax.

5. Collection of Taxes

Candidates should be able to identify the obligations the Malawi tax system imposes on tax payers and the implications of non-compliance. In the exam candidates may be required to: Explain collection procedures for the following:

Pay As You Earn, Withholding tax, Provisional tax, and Non-resident tax.

Identify the records that must be kept for various taxes; and State due dates for various tax returns and penalties for non-compliance.

6. Value Added Tax Candidates should be able to calculate the amount of VAT owed by or owed to businesses. In the exam candidates may be required to: Classify supplies as exempt,