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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:

1. •

   the rate of tax paid by each company in the group

2. •

   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:

1. •

   withholding taxes on trading and other income ― see the Foreign trading income and Withholding tax guidance notes

2. •

   controlled foreign company (CFC) and other anti-avoidance rules ― see the Controlled foreign companies (CFCs) and Shareholder issues ― international corporate structures guidance notes

3. •

   withholding taxes on dividends paid to the group’s parent company ― see the Holding companies guidance note

4. •

   tax on dividends received by the group’s parent company

It is therefore also important