The following summarized statement of profit or loss has been extracted from the financial statements of...
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The following summarized statement of profit or loss has been extracted from the financial statements of Gwembe Mining Corporation, a Zambian resident company which engaged in open cast mining operations of copper in Zambia Gwembe Mining Corporation is a 100% owned subsidiary of a foreign multinational mining company. The group financial statements are prepared in United States Dollars. Gwembe Mining Corporation Statement of Profit or Loss for the year ended 31 December 2019 Note K' 000 1 Revenue Cost of Sales Gross Profit Operating expenses Other income Interest expense Loss before taxation 2 3 198,000 (50,129) 147,871 (48,320) 2,866 (195,000) (92.583) The following information is available (1) The figure for sales revenue in the statement of profit or loss above represents the gross sales of copper based on the average London Metal Exchange cash price, which was above US$4.900 per tonne throughout the tax year 2019. Mineral royalty has been accounted for. (2) Included in operating expenses is depreciation on non-current assets amounting to K958,000 expenditure incurred on constructing clinics in the local mining township of K6,250,000, expenditure incurred on upgrading roads in the local mining township of K10,680,000, expenses incurred in complying with health and safety regulations of K128,000 and mineral royalty tax paid during the year amounting to K9,900,000. The balance represents business expenses which are allowable for tax purposes. (3) Other income include company rental income of K2,520,000 (gross) received from investment property the company owns which is let out in Zambia on a commercial basis, fair valne gains on the investment property arising during the year of K220,000, fixed deposit interest of K34,000 (gross) and realised foreign exchange gains of a revenue nature amounting to K92,000 (4) There were no capital assets qualifying for capital allowances at 1 January 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019. (7) Mining losses may be indexed using the formula: [1+(R2-R1R1)] x Mining loss brought forward (8) The following information relating to the capital structure of Gwembe Mining Corporation has been extract from the statement of financial position at 31 December 2019 K'000 Equity and liabilities Equity KI Ordinary shares Share premium Revaluation reserve Retained earnings Non-current liabilities 30% Bank loan 10% Debentures Current liabilities Trade payables Total equity and Liabilities 142,000 38,000 22,500 97,500 75,000 1,725,000 60,000 2,160,000 Interest on the bank loan and the debentures is payable annually in arrears and was paid in full as at 31 December 2019 The interest expense in the statement of profit or loss shown above relates entirely to the above loans. The company does not have any other borrowings (9) The following Zambian Kwacha per US Dollar (K/USS) exchange rates have been provided by the Bank of Zambia and approved by the Commissioner General: Exchange rate Date ZK/ US$ 31 December 2017 31 December 2018 9.50 10.50 Required: (a) Explain what is meant by thin capitalisation in the context of the taxation of mining operations in Zambia, clearly stating the criteria for determining whether a mining company is thinly capitalised, and evaluate whether Gwembe Mining Corporation is thinly capitalised. (b) Compute the taxable business profits for the year ended 31 December 2019. (15 Marks) (e) Calculate the total amount of tax payable by the company for the tax year 2019 (4 Marks) The following summarized statement of profit or loss has been extracted from the financial statements of Gwembe Mining Corporation, a Zambian resident company which engaged in open cast mining operations of copper in Zambia Gwembe Mining Corporation is a 100% owned subsidiary of a foreign multinational mining company. The group financial statements are prepared in United States Dollars. Gwembe Mining Corporation Statement of Profit or Loss for the year ended 31 December 2019 Note K' 000 1 Revenue Cost of Sales Gross Profit Operating expenses Other income Interest expense Loss before taxation 2 3 198,000 (50,129) 147,871 (48,320) 2,866 (195,000) (92.583) The following information is available (1) The figure for sales revenue in the statement of profit or loss above represents the gross sales of copper based on the average London Metal Exchange cash price, which was above US$4.900 per tonne throughout the tax year 2019. Mineral royalty has been accounted for. (2) Included in operating expenses is depreciation on non-current assets amounting to K958,000 expenditure incurred on constructing clinics in the local mining township of K6,250,000, expenditure incurred on upgrading roads in the local mining township of K10,680,000, expenses incurred in complying with health and safety regulations of K128,000 and mineral royalty tax paid during the year amounting to K9,900,000. The balance represents business expenses which are allowable for tax purposes. (3) Other income include company rental income of K2,520,000 (gross) received from investment property the company owns which is let out in Zambia on a commercial basis, fair valne gains on the investment property arising during the year of K220,000, fixed deposit interest of K34,000 (gross) and realised foreign exchange gains of a revenue nature amounting to K92,000 (4) There were no capital assets qualifying for capital allowances at 1 January 2019. During the year ended 31 December the company constructed a new copper smelter at a cost of K1,600,000 and new administration buildings at a cost of K1,250,000 (6) The company incurred a tax adjusted mining loss of US$2,200,000 in the year ended 31 December 2019. (7) Mining losses may be indexed using the formula: [1+(R2-R1R1)] x Mining loss brought forward (8) The following information relating to the capital structure of Gwembe Mining Corporation has been extract from the statement of financial position at 31 December 2019 K'000 Equity and liabilities Equity KI Ordinary shares Share premium Revaluation reserve Retained earnings Non-current liabilities 30% Bank loan 10% Debentures Current liabilities Trade payables Total equity and Liabilities 142,000 38,000 22,500 97,500 75,000 1,725,000 60,000 2,160,000 Interest on the bank loan and the debentures is payable annually in arrears and was paid in full as at 31 December 2019 The interest expense in the statement of profit or loss shown above relates entirely to the above loans. The company does not have any other borrowings (9) The following Zambian Kwacha per US Dollar (K/USS) exchange rates have been provided by the Bank of Zambia and approved by the Commissioner General: Exchange rate Date ZK/ US$ 31 December 2017 31 December 2018 9.50 10.50 Required: (a) Explain what is meant by thin capitalisation in the context of the taxation of mining operations in Zambia, clearly stating the criteria for determining whether a mining company is thinly capitalised, and evaluate whether Gwembe Mining Corporation is thinly capitalised. (b) Compute the taxable business profits for the year ended 31 December 2019. (15 Marks) (e) Calculate the total amount of tax payable by the company for the tax year 2019 (4 Marks)
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Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
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