Effective Tax Rate
The actual percentage of pre-tax income a company pays in income taxes, as opposed to the statutory tax rate.
What is Effective Tax Rate?
The effective tax rate is the actual percentage of a company's pre-tax earnings paid as income taxes, calculated by dividing total income tax expense by earnings before tax (EBT). It differs from the statutory corporate tax rate (21% in the US since 2018) due to factors such as tax credits, deferred taxes, international tax planning, stock-based compensation deductions, and tax loss carry-forwards. A very low effective tax rate relative to peers may indicate aggressive tax planning or one-time tax benefits. A high effective tax rate can signal limited use of tax incentives or a heavy presence in high-tax jurisdictions. Analysts track the effective tax rate closely as a key driver of net income changes.
Example
Apple's effective tax rate was approximately 24% in FY2024 — higher than the US statutory 21% — partly reflecting its significant foreign earnings in higher-tax European jurisdictions and the wind-down of certain historical Irish tax structures following EU state aid rulings.