Differences in tax rates can be an important driver of value. Generally, three types of tax rates are relevant to analysts:
- The statutory tax rate, which is the corporate income tax rate in the country in which the company is domiciled.
- The effective tax rate, which is calculated as the reported income tax expense amount on the income statement divided by the pre-tax income.
- The cash tax rate, which is the tax paid in cash that period (cash tax) divided by pre-tax income.
Differences between the statutory tax rate and the effective tax rate can arise for many reasons. Tax credits, withholding tax on dividends, adjustments to previous years, and expenses not deductible for tax purposes are among the reasons for differences.
In general, an effective tax rate that is consistently lower than statutory rates or the effective tax rates reported by competitors is not necessarily unusual but might warrant additional attention when forecasting future tax expenses.
