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Answer: shifted to countries with lower marginal tax rates.
## Explanation Let's analyze the "Effect of tax rates in foreign jurisdictions" component: - **Year T-2**: 1.8% - **Year T-1**: 2.3% This component represents the impact of operating in foreign jurisdictions with tax rates different from the domestic statutory rate. A **positive** effect indicates the company is operating in countries with **higher** tax rates than the domestic rate. **Key Insight:** - The foreign jurisdiction effect **increased** from 1.8% to 2.3% - This suggests the company generated **more** profits in higher-tax jurisdictions - However, the **effective tax rate actually decreased** from 27.0% to 26.5% - The decrease in effective tax rate despite increased foreign tax burden is explained by the significant increase in tax incentives (-0.1% to -0.9%) **Conclusion:** The company's profit mix shifted to countries with **lower marginal tax rates** because: - The increased foreign tax burden was more than offset by increased tax incentives - This indicates the company moved profits to jurisdictions that offer more favorable tax treatment through incentives - The net result was a lower effective tax rate despite operating in some higher-tax jurisdictions
Author: LeetQuiz Editorial Team
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An analyst gathers the following information from a company's notes to the consolidated financial statements:
| Item | Year T–1 | Year T–2 |
|---|---|---|
| Income tax using the statutory tax rate | 25.0% | 25.0% |
| Effect of tax rates in foreign jurisdictions | 2.3% | 1.8% |
| Effect of tax incentives | –0.9% | –0.1% |
| Withholding taxes | 0.1% | 0.3% |
| Effective tax rate | 26.5% | 27.0% |
If there is no change in applicable tax rates, compared to Year T–2, in Year T–1 the company's mix of profits earned most likely:
A
shifted to countries with lower marginal tax rates.
B
remained unchanged.
C
shifted to countries with higher marginal tax rates.
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