ACCA Advanced Taxation (ATX) Practice Exam

How is the corporation tax payable by a company determined?

1. By calculating its overall revenue

2. By comparing augmented profits to statutory limits

3. By analyzing expenditures and losses

4. By evaluating only the previous year's profits

The correct answer is: By comparing augmented profits to statutory limits

The determination of corporation tax payable by a company primarily involves assessing its augmented profits in relation to statutory limits. Augmented profits are calculated by taking the company's profits as reported in its financial statements and making adjustments for certain items, such as disallowable expenses and additional contributions. This calculation is essential as it reflects the profit available for taxation after accounting for legislative requirements. By comparing these augmented profits to statutory limits, tax rates can be applied to arrive at the corporation tax liability. This approach ensures that the taxation reflects not only the financial performance of the company but also adheres to the regulatory framework guiding corporate taxation. Focusing solely on overall revenue, expenditures and losses, or previous year's profits does not provide a complete or accurate basis for determining corporation tax. Revenue alone does not account for expenses or disallowable items, which can significantly affect taxable profits. Similarly, while analyzing expenditures and losses can inform profit measurement, it does not specifically relate to the calculation of taxable profits as related to corporation tax. Evaluating only the previous year's profits does not consider current operational performance or statutory adjustments, which are necessary for an accurate tax calculation. Thus, the method of comparing augmented profits to statutory limits is the most comprehensive and accurate way to determine corporation tax liability.