Corporation Tax

Effective tax rate planning

Produced by Tolley in association with Anne Fairpo
  • 03 Nov 2021 16:11

The following Corporation Tax guidance note Produced by Tolley in association with Anne Fairpo provides comprehensive and up to date tax information covering:

  • Effective tax rate planning
  • Calculation of the effective tax rate
  • Country-by-country reporting (CBCR)
  • Intercompany charges
  • Management charges
  • Loans
  • Intellectual property
  • Trading models
  • Further reading

Effective tax rate planning

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 guidance note

  2. controlled foreign company (CFC) and other anti-avoidance rules ― see the Introduction to 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

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