ACCA Advanced Taxation (ATX) Practice Exam

How do you calculate DTR in CGT computations?

1. Higher of (i) overseas tax or (ii) UK CGT on overseas gain

2. Lower of (i) overseas tax or (ii) UK CGT on overseas gain

3. (i) plus (ii) divided by 2

4. Average of all overseas and UK gain taxes

The correct answer is: Lower of (i) overseas tax or (ii) UK CGT on overseas gain

In capital gains tax (CGT) computations, the Determination of Tax Relief (DTR) for foreign taxes paid is calculated as the lower of the overseas tax or the UK CGT on the overseas gain. This approach is taken to ensure that taxpayers do not benefit from claiming credit for more tax than is owed to the UK, thereby avoiding double counting of relief and ensuring fair taxation. When determining the DTR, it is important to remember that allowing taxpayers to claim the higher of the two amounts would disproportionately benefit them and could lead to excessive tax relief. By using the lower value, the system maintains a balanced approach to tax relief, complying with both domestic policies and international tax treaties. Other options suggest different methodologies for calculating DTR that would not comply with the established rules and guidelines. For instance, averaging the two amounts (as suggested in one of the incorrect options) fails to reflect the specific tax liabilities accurately, and could misrepresent the taxpayer's actual tax position. Thus, the methodology that focuses on the lower of the two amounts is the standard approach used in practice, supporting compliant and equitable tax relief.