LESSON TWO: TAXATION OF BANKS

The banking industry is a very dynamic and competitive industry. It involves the provision of
financial services. It is regulated by CBK CAP 431 and the banking act cap 455.
A bank engages in the following activities
i. Receiving deposits from customers
ii. Advancing loans at an interest
iii. Collection of bills on behalf of client for a fee
iv. Facilitating foreign exchange transactions
v. Providing safe custody services.
The taxable income is arrived at by taking;
a) Interest income, which includes,
i. Interest on loans and advances to customers
ii. Interest on government securities.
iii. Interest on overnight lending to other bank and other institutions
iv. Interest on placement with other banks
v. Interest on bills and notes discounted
b) Fees and commission income
c) Income from foreign exchange dealings.
d) Other income of banks.
The expenditure in a bank may include the following:
a. Interest expenses
i. Interest on customers deposits
ii. Interest on fixed deposits
iii. Interest on borrowing from other banks
iv. Interest on placement by other banks and other institutions
b. Deposit protection fund (DPF)
c. Business promotion cost e.g. adverting expenses
d. Occupancy expenses e.g. rent expenses.
e. Brokerage fees and commission
f. Other allowable expenses under sec 15 of ITA e.g. salaries and wages, capital all, telephone
and electricity etc.

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NB/
1. Taxation of banks is made in reference to section 15 and 16 of the Income Tax Act (like any
other business)
2. Banks are exempted from preparing specified sources computations. The rental income shall
be aggregated with other income generated by bank and taxed as one lump sum amount and
taxed at the prevailing corporation tax rate for that year. This applies to other incomes
generated by a bank.
QUESTION ONE
The management of Shamrock Bank Ltd. has sought your professional guidance in determining
the Bank’s tax liability for the year ended 31 December 2019.
The income statement of Shamrock Bank Ltd. for the year ended 31 December 2019 is given
below:
Sh. ‘000’
Interest on loans and advances to customers 840,800
Interest on government securities 120,600
Interest on placements with other banks and
40,650
institutions
Fees and commissions income 39,360
Rental income (net) 2,190
Income from foreign exchange dealings 31,980
Gain on disposal of property and equipment 12,300
Other operating income 42,950
Total income 1,130,830
Expenses:
Salaries and employee benefits
Occupancy expenses 360,400
Deposit protection fund contributions 20,350
Depreciation expense 12,360
Interest on customers’ deposits 43,700
Interest on deposits from other Banks and
202,450
institutions
Director’s emoluments: 80,200
Fees 11,200
Other 3,600 14,800
Auditors’ remuneration:
Current year 2,100
Under provision for the previous year (2018) 300 2,400
Operating lease rental 16,300
Loss on disposal of equipment 7,250
Other administrative expenses 20,620

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 Provision for bad and doubtful debts 80,500
Provision for interest suspense 20,950
Total expenses 882,280
Profit for the year 248,550

Additional information:
1. Salaries and employee benefits comprise:
Sh. 000
 Leave benefits 720
 Pension contributions 1,460
 Termination costs 2,860
 Provision for staff leave accruals 4,920
9,960
2. Included in the Directors’ “other” emoluments are:
Sh. ‘000’
School fees for the Chairman’s children 1,200
Entertainment allowance (used on clients) 1,800
Travelling costs for a newly recruited expatriate director 600
3. The movement in provisions for bad and doubtful debts during the year was as follows:
Specific General Total
provisions provisions Sh. ‘000’
Sh. ‘000’ Sh. ‘000’
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
At 1 January 2019 630,500 630 631,130
Charge for the year 83,800 15,300 99,100
Released during the year (18,600) - (18,600)
At 31 December 2019 695,700 15,930 711,630

4. Provision for interest suspense represents non-performing loans and advances on which
interest has been suspended. The management has confirmed that the loans and advances
are fully secured.
5. Capital allowances for the year ended 31 December 2019 amounted to Sh. 18,900,000.
6. Lease rental charges relate to office equipment leased from AB office solutions for use in
the entire bank network.

Required:
(a) Taxable income of Shamrock Bank Ltd. for the year ended 31 December 2019.
(b) Tax payable (if any), on the taxable income computed in (a) above.
(c) Given the Shamrock Bank Ltd’s taxable income for the year ended 31 December 2018, was
assessed at Sh. 240,000,000, show how the tax computed in (b) above is to be paid, inclusive
of the due dates.

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Solution
Shamrock Bank Ltd.
Taxable income for the year ended 31 December 2019
Net profit for the year 248,550
Add back disallowable expenses
Termination costs 2,860
Provision for staff leave accruals 4,920
School fees for the Chairman’s children 1,200
Increase in provision for bad and doubtful debts during 15,300
Depreciation expense 12,360
Auditors’ remuneration: Under provision for the previous year 300
Loss on disposal of equipment 7,250
Provision for interest suspense 20,950 60,220
308,770
Less: Non business income, nontaxable business income and capital
allowances
Rental income 2,190
Gain on disposal of property and equipment 12,300
Capital Allowances 18,900 33,390
Adjusted Taxable business income 275,380
Add other taxable income
Rental income 2,190
Total Taxable income 277,570

b. Gross Tax liability =30%x277,570=83,271

83,271

c. Instalment tax payable in 2019

Adjusted taxable income for the year 2018 240,000
Estimated adjusted taxable income for the year 2019 (110%x240,000) 264,000
Estimated tax liability for 2019 30%x264,000 79,200
Installment tax per instalment (79.200/4) 19,800

1st instalment, on or before 20th of the 4th month (April 2019) 19,800
2nd instalment, on or before 20th of the 6th month (June 2019) 19,800
3nd instalment, on or before 20th of the 9th month (September 2019) 19,800
4th instalment, on or before 20th of the 12th month (December 2019) 19,800
Total Instalment tax paid 79,200
Actual tax liability for 2019 83,271
Final tax due on or before 30th of the 4th month following the year end
4,071
(April 2020) (83,271-79,200)

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QUESTION TWO
The following information was obtained from the financial records of Pesa bank Ltd for the year
ended 31st December 2019
Sh. "000"
Interest on loans and advances 464,800
Contribution to deposit protection fund 98,000
Occupancy expenses 6,480
Interest on government securities 14,600
Interest paid on deposits 142,740
Interest on placement with other banks 2,660
Loss on disposal of collaterals 840
Fees and commission expenses 1,420
losses from investment in securities 790
Purchase of equipment 1,200
Depreciation 496
Transfer to statutory reserves 626
Loss on stock brokerage dealings 348
Gain on foreign exchange dealings 1,470
Discounts on bills purchased 329
Auditor remuneration 786
Provision for bad and doubtful debts 1,540
Investment in government securities 1,850
Bills receivable 314
Guarantees and performance bond 378
Interest accrued and paid 1,974
Rebate on bills discounted 292
Corporate taxes 400
Staff cost 6,250
Loss on sale of assets 400
Commission received on brokerage 784
Security expenses 490
Additional information
1. Provision for bad and doubtful debts include specific bad debts at the beginning and the end
of the year amounting to sh. 680,000 and 1,400,000
2. Capital allowance for the year amounted to sh. 1,240,000
Required
a. Taxable profits or loss for Pesa bank ltd. for the year ended 31st December 2019
b. Tax payable (refundable) for the year ended 31st December 2019

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 Solution
Pesa Bank Ltd.
Taxable income for the year ended 31 December 2019
Income
Interest on loans and advances 464,800
Interest on government securities 14,600
Interest on placement with other banks 2,660
Gain on foreign exchange dealings 1,470
Rebate on bills discounted 292
Commission received on brokerage 784
484,606
Less allowable expenses
Contribution to deposit protection fund 98,000
Occupancy expenses 6,480
Interest paid on deposits 142,740
Fees and commission expenses 1,420
Auditor remuneration 786
Increase in specific provision for bad debts 720
Interest accrued and paid 1,974
Staff cost 6,250
Security expenses 490
Capital Allowances 1,240 (260,100)
Taxable Business Income 224,506

Tax liability = 30%x224506=67,351.8 (in sh. “000”)

QUESTION THREE
The following information relates to Faida bank for the year ended 31st December 2019. The net
profit for the year was sh. 4,800,000,000 after recording the following

Sh. "000"
Loss on disposal of shares 94,000
Income from trading activities 480,000
Management fees from head office in Uganda 764,800
Fees and commission income 1,460,500
Interest on government treasury bills (Gross) 436,400
Interest on placement with other banks 174,600
Interest in loans and advances to customers 2,460,300
Contribution to deposit protection fund 248,000

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 Interest on customer deposit 484,000
Occupancy expenses 86,400
Directors emoluments 360,000
Royalties paid 120,000
Rental income 560,000
Income from foreign exchange transactions 243,600
Depreciation expenses 145,300
Provision for interest expenses 84,400
Auditors fees 236,500
Interest on overnight borrowing 146,400
Loss on disposal of equipment 156,000
Installation of an online banking system 134,600
Corporate taxes 372,400
Staff costs 894,000
Finance lease rentals 180,000
Capital Redemption reserve 1,700,000
10% Debenture stock 1,500,000
Purchase of a pickup motor vehicle 1,500,000
Factoring costs for debtors 126,400
Product development costs 324,800
Cost of hiring armed security 265,400
Profit and Loss Account (Debit) 694,000
Additional Information
1. Staff costs comprised of the following
 Ex-gratia payments of sh. 94, 000, 0000
 Staff Pension Sh.400, 000,000
 Club Membership sh. 360,000,000
2. Capital allowance have been agreed at sh. 560,000,000
Required
a. A statement of adjusted taxable profits or loss for Faida bank for the year ended 31st
December 2019
b. Tax payable (refundable) for the year ended 31st December 2019

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