ACCA Advanced Taxation (ATX) Practice Exam

Which statement is true regarding Personal Service Companies (PSC)?

1. PSCs are exempt from all taxes

2. PSCs must always pay their employees a fixed salary

3. Income from PSC services will be deemed taxable as salary

4. All PSC income is treated as business income

The correct answer is: Income from PSC services will be deemed taxable as salary

The statement that income from Personal Service Companies (PSCs) will be deemed taxable as salary is accurate because of how such companies are structured and taxed under specific tax regulations. In many jurisdictions, PSCs are typically used by individuals to provide services, often in fields like consulting or technology, and the income generated from these services can be classified differently than traditional business income. When examining the nature of income in PSCs, it’s essential to understand that tax authorities often look through the corporate structure of PSCs to determine how the income should be taxed. The rationale is to prevent tax avoidance through corporate structures that may be designed primarily to minimize tax liabilities. As a result, certain rules can apply, leading income derived from PSC activities to be treated as salary for tax purposes. This means that individuals providing services through a PSC may find that their income is subject to personal income tax rates akin to salaries, rather than business income rates. The other options do not accurately reflect the tax treatment of PSCs. They may suggest blanket exemptions or stipulations (like mandatory fixed salaries) that do not generally hold true under typical tax regulations, thus clarifying why the statement regarding income being deemed taxable as salary is the correct choice.