The effective tax rate (ETR) is the average tax rate applied to pretax income. In corporate financial reporting, it is typically calculated as income tax expense divided by pretax income, reflecting the overall tax burden after considering current taxes, deferred taxes, and credits.
ETR = income tax expense / pretax income. For individuals, a related concept can be framed as total taxes paid divided by total income, but the exact definition varies by context and standard. The result can differ from the statutory tax rate because of deductions, credits, and jurisdictional differences.
Analysts and investors compare ETRs across periods, segments, or peers to assess how taxes impact reported profitability and to understand the geographic or policy mix that affects tax outcomes. ETRs can reveal the effects of tax planning, incentives, or impairment of tax assets.
ETR is an accounting measure subject to timing and judgements in tax provisioning. It can be volatile due to tax law changes, one-time items, or large credits and deductions, and it is not a guaranteed indicator of future cash taxes.
If a company reports pretax income of $120 million and income tax expense of $30 million in a period, the effective tax rate is 25%.
Tax rate · Tax expense · Pre-tax income · Income tax expense · Deferred tax assets and liabilities