ACCA Advanced Taxation (ATX) Practice Exam

What would occur if a UK resident company does not make the election regarding profits from its overseas PE?

1. The profits become tax-exempt in the UK.

2. UK corporation tax will be charged on overseas profits.

3. It would lose eligibility for foreign tax credits.

4. The revenue would be transferred to the government.

The correct answer is: UK corporation tax will be charged on overseas profits.

When a UK resident company does not make the election concerning profits from its overseas permanent establishment (PE), it is important to understand the implications of this situation. The correct answer is that UK corporation tax will be charged on overseas profits. The UK operates a territorial tax system for companies, which means generally that UK-resident companies are subject to UK corporation tax on their worldwide income. However, the double taxation rules allow for relief in the form of foreign tax credits on foreign income, provided the company makes the necessary elections to manage its overseas profits properly. If a company does not make the election regarding profits from its overseas PE, it essentially remains within the ambit of UK taxation, leading to the outcome where UK corporation tax applies to those overseas profits. This scenario can result in the company being taxed twice—once in the foreign jurisdiction where the PE operates and again in the UK—unless foreign tax credits are available to mitigate this. In this context, the other options do not accurately reflect the situation. The profits do not become tax-exempt in the UK since not making the election does not eliminate tax liability. Losing eligibility for foreign tax credits might happen if certain criteria are not met, but it does not directly relate to the immediate consequence of not making the election