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.
How do you avoid double taxation?
You claim relief once, in the right country, in the right order. Usually the source country taxes first, the residence country then gives a credit for that tax against its own charge on the same income, and a treaty caps the source-country rate. Getting the order wrong is what produces a double charge you then have to unwind. The mechanism differs by income type, which is why we map the whole position before filing either return. See how to avoid double taxation.
Is double taxation illegal?
It is legal. Two countries can each have a valid claim on the same income — one because the income arose there, the other because you live there — and nothing prohibits both from exercising it. What exists instead is relief: tax treaties allocate the claim, and domestic law gives a credit for foreign tax paid. The relief is not automatic, though. It is claimed on a return, and unclaimed relief is simply lost. See how double taxation is relieved.
