In this workout we're asked to calculate the tax liability, tax expense and ETR. Just to point out the tax liability, that will be the figure that will appear on the balance sheet and the tax expense, the figure on the income statements. So we see profit before tax from the income statement is 13,773, however that is after we've already included a non deductible expense of 39,047. The statutory tax rate or the marginal tax rate, MTR is 8.5%. So we need to adjust the company's profits before we calculate tax. So profit before tax from the income statement is our starting point, 13,773. We're now going to add back that non deductible expense of 39,047. So my profits that are actually subject to tax is 52,820.

At this point I can now apply the statutory tax rates of 8.5%. Remember, that's just the MTR, marginal tax rate. So that gives me tax due of 4,489.7. That is also my tax liability.

Now, question mark, where do we get the tax expense from? In theory, the company could calculate its tax expense from the wrong profit, from the 13,773. Because we have a non deductible expense, and because that is a permanent difference, a permanent difference between the tax authority numbers and the accounting numbers well that means my tax expense can thus just come from the tax liability. Even if the company wanted to come up with the tax expense, nope, just get rid of it. Replace it with the figure that the tax authority come up with. Fantastic, I can now calculate the ETR. The effective tax rate, that's your tax expense divided by your profit before tax from the income statements giving you a figure of 32.6%. You might notice that's quite different to the statutory tax rate, the MTR, because we added back that expense.