Effective tax rate planning

Produced by

Corporation Tax

Guidance

Calculation of the effective tax rate

An international group’s effective rate of tax is usually calculated as the amount of tax it pays divided by its consolidated profits. The effective tax rate depends largely on:

•
the rate of tax paid by each company in the group
•
the companies in which profits are recognised

See Example 1.

The objective of effective tax rate planning is usually to ensure the profits are recognised in companies which pay tax at a low rate rather than a high rate.

However, other taxes may arise as a result of:

•
withholding taxes on trading and other income ― see the Foreign trading income guidance note
•
controlled foreign company (CFC) and other anti-avoidance rules ― see the Introduction to CFCs and Shareholder issues ― international corporate structures guidance notes
•
withholding taxes on dividends paid to the group’s parent company ― see the Holding

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Anne Fairpo

Barrister

With effect from 1 June 2021, Anne Fairpo is a judge of the First-tier Tribunal sitting in the Tax Chamber. She was previously a fee-paid judge in the same Chamber. Her contributions to LexisPSL Tax and TolleyGuidance were written before her full-time appointment and are her personal view as she is not authorised to write on behalf of the Tribunals Service or the judiciary. Until April 2021, Anne was a tenant at Temple Tax Chambers. She was called to the bar in 2009 after 15 years as a solicitor. Anne’s experience and expertise covers UK and international corporate tax planning and disputes, having acted for a range of clients from small owner-managed businesses to listed multinationals, as well as having advised on intellectual property taxation and UK-US cross-border tax planning, with regard to both direct and indirect tax matters

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