Lesson 5 of 6 · 13 min
Effective, statutory and cash tax rates
The statutory rate is the law, the effective rate is what the income statement charges per unit of pretax income, and the cash tax rate is what was actually paid.
In short
- Statutory tax rate: the corporate income tax rate in the company's home country.
- Effective tax rate (ETR) = income tax expense ÷ pretax income. Use it to forecast earnings.
- Cash tax rate = cash taxes ÷ pretax income. Use it to forecast cash flows.
- Cash vs effective rate gaps come from changes in DTAs and DTLs; effective vs statutory gaps come from permanent differences, foreign rates, credits and prior-year adjustments.
- A multinational's ETR is a profit-weighted blend of national rates, so it shifts as the geographic mix of profit shifts.
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