ACCA Advanced Taxation (ATX) Practice Exam

Is overseas income in the income tax computation included gross of overseas tax?

1. Yes, it should be included gross

2. No, it should be included net

3. Only for certain jurisdictions

4. Depends on the double taxation agreement

The correct answer is: Yes, it should be included gross

Overseas income in the income tax computation is included gross of overseas tax primarily because taxpayers are generally required to report all their income before any deductions are made for expenses, taxes paid, or other allowances. This means that the full amount of overseas income must be declared to accurately reflect the total income of the taxpayer. When determining the liability for income tax, the gross approach ensures that the individual’s entire income is assessed, which aligns with the principle of income recognition. Taxpayers may then claim relief for any foreign taxes paid on that income through mechanisms such as foreign tax credits or relief under double taxation agreements, if applicable. This process allows for the legal recognition of the taxes already paid overseas while ensuring transparency and consistency in income reporting. Choosing to include overseas income net of tax would misrepresent the income earned and could lead to discrepancies with tax authorities, which typically require gross reporting to maintain accuracy in the taxable income calculation. Therefore, reported income must be included in its gross form, highlighting the importance of adhering to reporting requirements set forth in tax legislation.