ACCA Advanced Taxation (ATX) Practice Exam

How is interest paid by companies on overdue tax treated in tax computations?

1. Deductible from interest income

2. Taxable as income

3. Ignored in computations

4. Addition to taxable profits

The correct answer is: Deductible from interest income

Interest paid by companies on overdue tax is typically treated as a disallowable expense in tax computations. This is because tax legislation generally dictates that penalties and interest paid on overdue taxes cannot be deducted when calculating taxable profits. Therefore, the correct approach regarding how to treat this interest reflects a fundamental aspect of tax policy: while interest expense for loans or other types of borrowings is usually deductible, interest or penalties incurred due to non-compliance with tax obligations is viewed differently. It's considered part of the tax liability rather than a cost of doing business. Consequently, in this context of taxable income and expenses, the treatment of interest on overdue tax does not align with being deductible from interest income as suggested. Instead, it is typically added back to taxable profits, reinforcing the principle that tax-related interest penalties are not eligible for deduction. This understanding leads to the conclusion that the most accurate treatment in tax computations as per the legislation is indeed to ignore the interest when calculating deductible expenses, as it is not permissible under tax rules. Thus, the right selection reinforces the nature of the tax legislation surrounding overdue tax interest.