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Effective tax rate definition

Description

Effective tax rate is a ratio used for measuring company’s tax rate. It indicates a percentage of income paid for the government as a form of tax income. Data to calculate this ratio is collected from the income statement.

Effective tax ratio is important for investors while choosing a country for their investment, because tax income rates differ within separate countries. It is important to notice that choosing a country for the investment, measuring the tax income rate is not the only important factor. For example, currency stability, labor cost, and other reasons are important as well.

Norms and limitations

The lower rate of tax income means that there is less income taxes are paid for the government.

As it was already mentioned, the tax income rate is not the only rate that must be considered.

Formula

Income tax expense - an amount of income, paid for the government as a form of tax income.

EBT (pretax income) - earnings before tax expenses.