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HMRC internal manual

International Manual

Transfer pricing: risk assessment: transfer pricing risk indicators: effective tax rates

Factors affecting the effective tax rate

If a group is headed by a public company (either in the UK or overseas), the published accounts will state the group’s effective tax rate - the rate that the group actually pays on its total income, taking into account all tax allowances and reliefs, calculated as a percentage by dividing total tax paid by total worldwide gross income. It’s unlikely this will be the same as the current UK full rate of corporation tax. One reason is that different countries have different tax rates, and the consolidated profit and loss account will aggregate the results from all the different countries where the group has a taxable presence. Other factors, such as loss-making companies and timing differences, will also affect the effective rate of tax.

Depending on the strategy adopted by a group, one of the tasks the finance director and tax department may be targeted to achieve could be a reduction in the effective tax rate.

Notes to the accounts will sometimes indicate how a reduction (or increase) in the effective tax rate has been achieved. The reduction may have been accomplished in ways that have nothing to do with transfer pricing. It would be unreasonable to expect any notes to the accounts to go into much detail. However the Notes might, for example, state that the effective tax rate had been reduced by say 3% as a result of operations based in another country. The risk assessment should consider why and how this reduction had been achieved. In some cases the notes might even say how much the tax saving was.