How will the tax landscape be post-COVID? Tax accountability starts with tax accounting!

Can you explain the differences between the effective tax rate ("ETR") on your company's income statement and the weighted average of country tax rates based on the geographic sales mix?

(Tax)Proof it!

Dear CEO,

Did you team up with your CFO? As explained in my previous blog, you should be able to find all the answers you need in your company’s financial statements. To save you some time, let me offer you (and your CFO) some additional help 😃  in answering the tax accountability questions found in my first blog.

The first question I raised was: “Can you explain the difference between the effective tax rate (ETR) on a company’s income statement and the weighted average of country tax rates based on the firm’s geographic sales and net profit mix?”

In short, the question is: Do you understand your company’s tax gap‘? Large and persistent tax gaps are generally the result of profit-shifting and aggressive tax planning, and they may be worth a conversation with your tax team and/or advisors. A tax gap can also mean that your tax accounting process is off, and that may also be worth discussing with your responsible officer for tax accounting and your group auditors.

Just to make sure we understand all the elements, please find a brief explanation below.

Net sales: the net sales in group FX and according to your group accounting principles (e.g., IFRS, US GAAP, other accounting principles).

Statutory tax rate: the corporate income tax rate enacted by a country for the relevant fiscal year. This rate is also typically used in the tax package(s) used by your MNE‘s reporting entity, so this should be easy to retrieve.

Weighted statutory tax rate contribution: the amount (weight) of the relevant country net sales relative to the total net sales, times the country‘s statutory tax rate.

Weighted statutory tax rate based on your MNE‘s geographic sales mix: the total of the weighted statutory tax rate contributions for the areas in which your firm is active.

Effective tax rate: the percentage you will find if you divide the Total P&L Tax Charge according to your consolidated income statement by the Total Earnings Before Tax (EBT).

Need help? TaxModel is contributing to the creation of a transparent tax world. We are building TaxProof 2.0, a standardized tax accounting solution that is accessible and affordable for any size company!

So, dear CEO, make sure your company pays its fair share of taxes and be transparent about it! That‘s the only way to prove you are a socially responsible corporate entity!

Good luck!

If you would rather have a chat with me, let me know via LinkedIn or the contact form below.

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Hank Moonen
CEO/Founder TaxModel International

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