Lesson 7 of 7 · All lessons in this module
- Accounting profit, taxable income and the tax base
- Temporary versus permanent differencesVideo lesson
- Deferred tax balances and income tax expenseVideo lesson
- Realising deferred tax assets and tax rate changesVideo lesson
- Effective, statutory and cash tax ratesVideo lesson
- Tax disclosures and financial analysis
- Integrated cases: reading a tax note, cash tax versus effective tax
Lesson 7 of 7 · 16 min
Integrated cases: reading a tax note, cash tax versus effective tax
A tax note lets you split a change in the effective rate into geographic mix and one-off items, and tie cash taxes to the movement in the net deferred tax balance, so each rate is used for the question it answers.
In short
- Compute both rates for every year: effective = total tax expense ÷ pretax income; cash (proxy) = current tax ÷ pretax income.
- The gap between them is the deferred tax expense, which equals the change in the net deferred tax liability (ignoring rate changes and acquisitions).
- Explain a falling effective rate in two parts: the profit mix across countries (blended statutory rate) and everything else (allowance changes, credits, one-offs).
- Look at each country's own current and deferred tax: a deferral lowers the cash rate and reverses later, but never changes the effective rate.
- A valuation allowance release lowers tax expense but is not cash and is not a forecastable operating gain.
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