ACCA Advanced Taxation (ATX) Practice Exam

What is a required action for companies to estimate their tax liability correctly before making payments?

1. Submit an online payment system

2. File an annual tax return

3. Prepare estimates based on previous tax liabilities

4. Consult with a tax advisor

The correct answer is: Prepare estimates based on previous tax liabilities

To estimate tax liability accurately before making payments, preparing estimates based on previous tax liabilities is essential. This approach allows companies to analyze their prior years' tax obligations, reflecting trends and patterns that can inform their current tax situation. By using historical data, businesses can make informed predictions about their tax responsibilities for the current year, considering factors such as changes in income, expenses, deductions, and tax laws. This practice helps ensure they set aside an appropriate amount for taxes and mitigate the risk of underpayment penalties. While consulting with a tax advisor and reviewing the annual tax return can add value to a company's tax planning process, the direct action of generating estimates from previous tax obligations is fundamental and practical for immediate financial planning. An online payment system is related to the payment process and not to the estimation of liabilities. Thus, focusing on past liabilities provides a concrete foundation for accurate tax estimation.