ACCA Advanced Taxation (ATX) Practice Exam

Which factor qualifies as a tax exemption under CFC rules?

1. Overseas tax paid

2. Domestic profits

3. Nature of business

4. Size of the company

The correct answer is: Overseas tax paid

The correct answer relates to the concept of "overseas tax paid" as a tax exemption under Controlled Foreign Company (CFC) rules. CFC rules are designed to prevent tax avoidance by ensuring that profits accumulated in low-tax jurisdictions face appropriate taxation in the parent company’s home country. When a company pays taxes in another country, these taxes can affect how profits are ultimately taxed when brought back to the parent company. In many jurisdictions, if a CFC pays a certain amount of tax overseas, this can qualify as an exemption or relief under domestic tax rules, potentially reducing the overall tax liability upon repatriation. This aspect alleviates the burden of double taxation by allowing firms to credit or exempt overseas taxes against their domestic tax obligations. The other options do not directly relate to exemptions under CFC rules. Domestic profits pertain to income generated within a country and do not involve exemptions but rather are subject to local tax laws. The nature of business may influence tax rates and qualifying for specific incentives but is not an exemption factor by itself. Similarly, the size of the company can impact eligibility for various tax incentives or reliefs but does not constitute an exemption per se within the CFC context. Thus, "overseas tax paid"