ACCA Advanced Taxation (ATX) Practice Exam

What is NOT a consequence of a UK resident company electing to exempt the profits of its overseas permanent establishment from UK tax?

1. UK corporation tax will apply to overseas profits.

2. Losses from overseas activities will not receive relief in the UK.

3. The election is irrevocable.

4. Capital gains from overseas will not be taxable in the UK.

The correct answer is: UK corporation tax will apply to overseas profits.

When a UK resident company opts to exempt the profits of its overseas permanent establishment from UK tax, one of the key aspects of this election is that it primarily aims to avoid double taxation on the profits that have already been taxed in the foreign jurisdiction where the establishment operates. By choosing this exemption, the company does not have to pay UK corporation tax on the overseas profits. The first option states that UK corporation tax will apply to overseas profits, which contradicts the purpose of making such an election. Therefore, it is indeed the correct answer to identify what is NOT a consequence of the election. The essence of the exemption is to ensure that the profits from the overseas establishment are excluded from being taxed in the UK. The other options reflect true consequences of the election. For example, losses incurred from overseas activities will not be available to offset against UK profits, thereby limiting the potential tax relief the company could otherwise receive. Additionally, the irrevocability of the election means once it is made, the company cannot reverse the choice, which also carries significant implications for future tax planning. Lastly, capital gains from overseas are similarly exempt from UK tax under this election, reinforcing the preference for excluding international profits from UK tax obligations.