Thin Capitalization Exercise

X KENYA LIMITED is a permanent establishment of A Inc. based in the US.

Below is the balance sheet for the year ended 31st Dec 2015.

X KENYA LIMITED
BALANCE SHEET FOR THE YEAR ENDED 31ST DEC 2015

Capital Employed Kshs.

Share Capital 2,000,000
Retained earnings 40,000,000
Capital Reserves 25,000,000
Revaluation reserves 37,000,000
104,000,000
Non-Current Liabilities
Finance Lease 144,000,000
Long term loans 232,000,000
Deferred tax 5,000,000
381,000,000
Represented by

Non-Current asset
Property plant and equipment 280,900,000
Non-current assets
Trade and other receivables 237,000,000
Cash and cash equivalents 3,000,000
Tax Recoverable 8,000,000
248,000,000
Current Liabilities
Trade and other payables 106,000,000
Bank overdraft 41,900,000
147,900,000
Net current Assets 100,100,000
381,000,000

NOTES:

1. All the long term loans have been advanced by A inc. for expansion.
2. The taxable income after adjusting for allowable expenses was Kshs.25,000,000.

Required:

Scenario one
1. X Kenya limited claimed interest expense relating to the foreign loan amounting to Kshs.
11,000,000 in the year 2015. In reference to Section 16 (2) (j) of the Income Tax Act Cap 470,
calculate the tax payable by X Kenya Limited.

Scenario two
2. Assume the loan was advanced interest free, calculate the taxes payable by X Kenya Limited
(Refer to section 2 and Section 16 (2) (j) of the Income Tax Act Cap 470).