Why is our effective tax rate lower than the statutory rate?
Because the two measure different things. A statutory rate applies to taxable profit in one country. An effective rate is tax expressed over a defined measure of profit, which may include income taxed nowhere, deductions with no accounting equivalent, losses brought in from an earlier year, and a mix of countries with different rates. A low rate is therefore a question rather than a finding. The useful exercise is to reconcile the two line by line, because each line has a different consequence: a permanent difference changes the rate for good, a timing difference only moves it between years.
Is the effective tax rate worked out per company or per country?
Under the minimum tax rules it is computed for a jurisdiction rather than for a single company, so entities and branches taxed in the same place are brought together before the rate is struck. That blending matters. A loss-making entity can pull down the profit of a profitable sister in the same country and lift the rate, while the same two entities in different countries would be measured separately. Establishing which jurisdiction each entity and branch belongs to is therefore the first piece of work, not an administrative detail to tidy up later.
Which profit figure goes in the denominator?
Not taxable income. The starting point is an accounting figure drawn from the consolidated reporting, then adjusted by the rules to remove or add back defined items. This catches groups out, because the number cannot be taken from a tax return and often cannot be taken from statutory accounts either, where those are prepared on a different basis from the consolidation. In practice we ask for the consolidation working papers for the entity rather than the local financial statements, and we keep a record of every adjustment so the figure can still be explained a year later.
Do deferred taxes affect the effective tax rate calculation?
They are part of the design. If only tax paid in the year were counted, an accelerated deduction would show up as a low rate even though the tax arrives later, and the rules would be triggered by timing alone. So the tax figure used is an adjusted one that brings certain deferred amounts into account. The practical consequence is that deferred tax balances have to be capable of being analysed by jurisdiction and by category, which is a heavier requirement than most deferred tax notes were ever built to meet.
Can a tax credit make our effective rate look worse?
It can change where the credit lands. Depending on how a credit is characterised it may reduce the tax figure or increase the profit figure, and those two treatments move the rate in different directions and by different amounts. The characterisation usually turns on the terms of the credit itself: whether it is paid out when there is no tax to absorb it, whether it can be transferred or sold, and how quickly it can be used. So the document granting the credit is the thing to read before deciding how it is presented.
Why did our rate change when nothing changed in the business?
Usually because something changed in the inputs rather than in the operations. An adjustment to an earlier year, a revised deferred tax balance, a change in where profit was recorded, an entity moving into or out of a jurisdiction group, or a different treatment of an item that had previously been netted, will each move the rate on their own. Before explaining a movement to anyone outside the group, rebuild the rate for both years on the same basis, because many of the movements we are asked to explain turn out to be a change in method.
What is double tax relief and how is it given?
Three mechanisms, and which one you get depends on your residence country's law and the treaty. Exemption leaves the foreign income out of the residence-country base. Credit taxes it and then subtracts the foreign tax, capped at the residence-country tax on that income. Deduction merely reduces taxable income by the foreign tax, and is usually the weakest. Canada and the United States lead with credit; several treaties give exemption for specific income types. See claiming the credit.
Branch or subsidiary — which should we use to expand?
A branch keeps one taxpayer: results consolidate at home, losses are usable sooner, and the exposure is that the branch is a permanent establishment whose profit the host country taxes, sometimes with a branch tax on repatriation. A subsidiary is a separate taxpayer with limited liability and local rates, at the cost of withholding on dividends home and transfer pricing on everything between them. The deciding facts are usually expected losses, liability and exit plans. See branch against subsidiary.
