Permanent difference

A permanent difference is an amount that is in one measure of profit and out of the other for good. Because there is nothing to reverse, no deferred tax is recognised on it, and its whole effect lands in the current tax charge of the period it arises.

The common sources on the expense side are non deductible items: client entertaining, fines and penalties, and in most cases goodwill impairment where the goodwill arose on a share purchase. On the income side Europe is unusually rich in them, since many European jurisdictions operate a participation exemption that keeps qualifying dividends and gains on substantial shareholdings out of taxable profit altogether, and several offer reduced rates on qualifying intellectual property income.

The effect on reported rates is the mirror of a temporary difference. A permanent item changes how much of the profit is ever taxed, so it moves the effective tax rate away from the statutory rate and leaves it moved. A non deductible expense pushes the effective rate above statutory. Exempt income pulls it below.

The trap is assuming the effective rate drifts back to statutory over time. It does not when the permanent differences are structural, and a group with a large exempt participation portfolio or a favourable intellectual property regime can sit below the statutory rate indefinitely. The separate trap is reading any low effective rate as durable, when it may be a one off recognition of previously unrecognised losses.