Effective Tax Rate ETR
Stands for: Effective Tax Rate
The actual rate of tax a company pays on its accounting or economic profit, reflecting deductions, credits, and timing differences.
Definition
What it is
The Effective Tax Rate (ETR) is the ratio of total income tax expense to pre-tax accounting profit. It is the headline number investors look at because it captures the combined impact of statutory rates, deductions, credits, exemptions, and tax planning. A company with a 21% statutory rate may report an ETR of 14% thanks to R&D credits, patent boxes, and tax-loss usage, or 28% because of permanent disallowances and foreign withholding tax.
How it is computed
For financial reporting (IFRS / US GAAP), the ETR is total income-tax expense (current plus deferred) divided by pre-tax profit. For Pillar Two purposes, the GloBE ETR is computed differently: jurisdiction-by-jurisdiction, using GloBE income (a tax-adjusted accounting figure) and covered taxes, and compared to a 15% minimum.
Why founders care
ETR is the right input for cash-flow projections, valuation models, and group structure design. Headline rates are misleading: the relevant question is what rate actually applies to your business after deductions, treaty relief, and incentives. ETR is also used to benchmark group structures and identify pockets of overtaxation or undertaxation that may attract scrutiny.
When you'll encounter it
You will compute and discuss ETR during board reporting, investor due diligence, M&A analysis, and tax-planning reviews. It also appears in Pillar Two compliance, where the per-jurisdiction GloBE ETR drives whether a top-up tax applies, and in management reporting that compares forecast versus realised tax burden.
Used in our guides
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- UK Corporation Tax Rate 2026: Complete Guide
FAQ
Is ETR the same as the statutory rate?
No. The statutory rate is the headline rate set by law. ETR is the actual ratio of tax to profit, which can be lower or higher depending on deductions, credits, and disallowances.
Is ETR a financial-statement concept?
Primarily, yes. It is reported under IFRS and US GAAP. Pillar Two uses a separately defined GloBE ETR with specific rules.
What drives the gap between ETR and statutory rate?
Permanent differences (non-deductible expenses, tax-exempt income), tax credits, foreign-rate differentials, deferred-tax movements, and uncertain tax positions.
References
- OECD - Corporate Tax Statistics https://www.oecd.org/tax/tax-policy/corporate-tax-statistics-database.htm
- IFRS Foundation - IAS 12 Income Taxes https://www.ifrs.org/issued-standards/list-of-standards/ias-12-income-taxes/