Marginal tax rate

The marginal rate answers a forward looking question: if this business earns one more euro of operating profit, what does the tax authority take? For most companies that is the headline statutory rate in the country the profit is earned in, blended across countries where the group operates in several.

This is the default rate for an unlevered cash flow build, because the build is asking what the business would pay on its operating profit in a normal year with no debt. It is a hypothetical question, so a hypothetical rate is the right instrument.

It is not the same as the rate the company reported. A reported effective rate contains one off items, prior year adjustments and deferred tax movements, none of which are a guide to the next euro. It is also not the cash rate, which can sit far below both while capital allowances or brought forward losses are being used up.

The honest qualification is that practice varies where a low rate is structural rather than temporary. A group with genuine intellectual property in a patent box regime, or a profit mix that is not going to move, may sustainably pay below the statutory rate, and some practitioners normalise to that instead. The requirement is to know which rate you have chosen and to say why.