Effective tax rate driver identifier · free AI skill

Analyzes book income, tax expense, permanent and temporary differences, and jurisdiction mix to produce a full effective tax rate reconciliation that isolates and ranks the primary drivers of ETR variance from the…

Purpose

Build a complete statutory-to-effective rate reconciliation from raw book and tax inputs, then isolate and rank the specific drivers responsible for the variance — so tax leaders can explain ETR movement to the CFO, audit committee, or auditors with line-item precision rather than a black-box number.

When to Use

Invoke this skill when the user asks to:

Explain why the effective tax rate differs from the statutory rate
Build or review an ETR rate reconciliation walkthrough
Diagnose quarter-over-quarter or year-over-year ETR movement
Prepare the rate reconciliation footnote support for a 10-K or 10-Q
Identify which permanent differences or jurisdictions are moving the rate
Brief the CFO or audit committee on tax expense drivers

Inputs Required

Before starting, collect:

Pre-tax book income: Consolidated book income before tax, by jurisdiction if available
Total tax expense (provision): Current + deferred, and the reported ETR if known
Statutory rate: The blended or domestic statutory rate to reconcile against (default: 21% US federal if unstated)
Permanent differences: Items like meals & entertainment, fines, tax-exempt income, stock comp shortfalls/windfalls, GILTI, FDII, §162(m)
Temporary differences: Major book-tax timing items (depreciation, reserves, accruals) if separating current vs. deferred impact
Jurisdiction mix: Income split across jurisdictions and their respective statutory rates (US states, foreign)
Discrete items: Return-to-provision true-ups, valuation allowance changes, uncertain tax position (FIN 48) movements, audit settlements

If only consolidated figures are provided, reconcile at the consolidated level and flag which drivers cannot be isolated without jurisdiction-level data.

Instructions

Step 1: Establish the Reconciliation Baseline

Compute the starting point and the gap to be explained:

Tax at statutory rate = Pre-tax book income × statutory rate
Reported tax expense = the provided provision
Total variance to explain = Reported tax expense − Tax at statutory; express both in dollars and as a percentage of pre-tax income (rate points)
State the reported ETR and confirm it ties: Reported tax expense ÷ Pre-tax book income

Every subsequent driver must sum to this total variance. Track a running residual.

Step 2: Quantify Each Reconciling Driver

Convert each item to both a dollar tax effect and rate-point impact (dollar effect ÷ pre-tax income). Work through these standard driver categories:

State and local taxes (net of federal benefit)

State income tax expense × (1 − federal rate) for the deductible benefit

Foreign rate differential

For each foreign jurisdiction: foreign income × (foreign rate − statutory rate); positive when foreign rates are higher, negative when lower

Permanent differences

Each permanent item × statutory rate (e.g., non-deductible expense × 21% increases ETR; tax-exempt income × 21% decreases it)
Treat GILTI, FDII, and BEAT as separate named lines given their distinct mechanics

Stock-based compensation

Excess tax benefits/shortfalls (ASU 2016-09) — often a volatile, period-specific driver

Valuation allowance changes

Establishment or release; flag as discrete vs. recurring

Uncertain tax positions (FIN 48)

Reserve increases/decreases and interest/penalties

Tax credits

R&D, foreign tax credits, other — applied dollar-for-dollar against tax, then converted to rate points

Return-to-provision and other discrete items

Prior-year true-ups, audit settlements, law changes

Step 3: Rank Drivers by Rate-Point Impact

Order all quantified drivers by absolute rate-point magnitude, largest first. Separate:

Recurring/structural drivers (jurisdiction mix, ongoing permanent items, state taxes) — these define the run-rate ETR
Discrete/non-recurring drivers (true-ups, valuation allowance, stock comp swings, settlements) — these explain period volatility

Step 4: Build the Reconciliation Walkthrough

Present a statutory-to-effective bridge table with columns: Driver | Dollar Tax Effect | Rate-Point Impact | Recurring or Discrete. Start at the statutory rate, layer each driver in ranked order, and arrive at the reported ETR. Confirm the residual is zero (or explain any unexplained gap).

Step 5: Narrative Diagnosis

Write a plain-language explanation answering: What are the top 3 reasons the ETR differs from statutory? Which drivers are structural vs. one-time? If period-over-period data is available, what changed and why? End with a normalized "run-rate" ETR stripping out discrete items.

Output Format

Structure: Baseline summary → ranked driver analysis → reconciliation bridge table → narrative diagnosis
Length: 800–1,100 words plus the reconciliation table
Format: Structured document with one bridge table (statutory rate → each driver → effective rate) and supporting prose
Sections: Reconciliation Baseline → Driver Quantification → Ranked Driver Summary → Statutory-to-Effective Bridge Table → Narrative Diagnosis & Run-Rate ETR
Tone: Tax technical and precise — the voice of a tax provision reviewer; every figure tied, no hand-waving

Quality Checklist

Before delivering output, verify:

[ ] Reported ETR ties to tax expense ÷ pre-tax income (show the calculation)
[ ] All identified drivers sum to the total statutory-to-effective variance with zero unexplained residual (or the residual is explicitly flagged)
[ ] Every driver is expressed in both dollars and rate points
[ ] Drivers are ranked by absolute rate-point impact, largest first
[ ] Each driver is tagged recurring/structural vs. discrete/non-recurring
[ ] State taxes are shown net of federal benefit, not gross

Notes

The single most common explanation error is conflating recurring structural drivers with one-time discrete items — the run-rate ETR is what forecasting and guidance depend on, so always separate them
Foreign rate differential and jurisdiction mix shifts are frequently the largest unexplained movers quarter-over-quarter; isolate them first when income geography changes
Stock-comp excess benefits/shortfalls are mechanically tied to share price and vesting timing, making them inherently volatile — flag them as discrete even though they recur in concept
If jurisdiction-level income detail is unavailable, the foreign rate differential and state driver cannot be fully isolated; state this limitation rather than estimating without basis

How to use this skill

This file is a Claude Code skill in Anthropic's standard format — markdown with YAML frontmatter at the top.

Installing in Claude Code:

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Using in Claude.ai, ChatGPT, Gemini, or other AI tools:

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