What is Effective Tax Rate?
The effective tax rate is the actual percentage of pre-tax profit a company pays in tax. It is computed as total tax expense divided by profit before tax and differs from the statutory rate due to deductions, exemptions, and deferred tax.
How It Works
- Take total tax expense (current + deferred).
- Divide by profit before tax.
- Reconcile to the statutory rate via permanent and temporary differences.
Saudi Context
A mixed Saudi company can show different effective rates on its Saudi/GCC Zakat (~2.5% of Zakat base) and corporate-tax (20% on foreign share) blocks. Final ETR can land in the 5 to 12% range.
Example
A Saudi company with SAR 100 million PBT and SAR 8 million combined tax expense has an effective tax rate of 8%.