In 30 seconds
- Earnings before taxes (EBT, or pre-tax income) is operating income after interest and other non-operating items, but before income tax.
- The effective tax rate is income tax expense divided by EBT, and it rarely matches the statutory rate: 21% federal in the US or 25% in Spain.
- Among US drugmakers, the 2025 effective rate was −3.5% at Pfizer, 13.3% at Merck and 35.8% at AbbVie: comparing net income mixes up business and taxes.
- An EBT shrunk by unusual expenses sends the effective rate soaring, and a single year's rate is never a normal rate.
- Meta's rate was 29.6% in 2025 because of a $15,930 million charge; without it, the rate would have been 13%, according to its own 10-K.
Introduction
Pfizer ended 2025 with pre-tax income of $7,520 million and net income of $7,771 million. It earned more after tax than before. No magic involved: that year it booked a $266 million tax benefit, an effective tax rate of −3.5%. AbbVie, in the same industry, paid 35.8% of its pre-tax income.
If you compare the two on net income, you're also comparing their tax advisers. To see the businesses, you have to climb one step up the income statement.
Explanation
Earnings before taxes (EBT, also called pre-tax income, or "income before income taxes" in a 10-K) is the last step of the income statement before income tax. Everything else has already been taken out: the costs of running the business, interest on debt, what the company earns on its cash and its non-operating income and expenses. Only the tax is left.
It helps to keep the three bottom steps straight:
1. EBIT (operating income): what the business earns, before looking at how it's financed or how much it hands over to the taxman. Use it to compare businesses.
2. EBT (earnings before taxes): EBIT after interest and other non-operating items. Use it to compare companies with different tax regimes.
3. Net income: EBT minus tax. It's what's left for shareholders, and it's the figure the P/E ratio uses.
Picture two workers with the same gross salary, one in Texas and the other in California. Their take-home pay will differ, but neither one works any harder than the other: what changes is the tax bill. EBT is the company's gross salary.
The effective tax rate
Divide income tax expense by EBT and you get the effective tax rate: what the tax authorities actually took that year. It rarely matches the statutory rate, the one set by law: the 21% US federal rate since 2018, Spain's 25% standard corporate rate or Ireland's 12.5%. Why do they drift apart?
Jurisdictions. A multinational pays tax in each country on what it earns there. In 2025 Merck reported a pre-tax loss of $4,948 million in the United States and a profit of $26,015 million abroad; its effective rate was 13.3%. Since 2024, the OECD's 15% global minimum tax, which the European Union and other countries apply to large groups, has clawed back part of that advantage: the United States hasn't adopted it, but it reaches the European subsidiaries of US companies.
Credits and deductions. Research and development credits lower the rate for drugmakers and tech companies.
Loss carryforwards. A company that lost money in the past can offset those losses against future profits and pay little tax for years.
One-off items. Settled tax audits, changes in the law and adjustments to the value of tax assets move the rate for a single year.
That last group is the one that confuses investors most, and it's why EBT is so useful: it's the last line that taxes haven't muddied yet.
Formula
Earnings before taxes (EBT) = Operating income (EBIT) − Interest expense + Interest income ± Other non-operating items
Net income = EBT − Income tax expense
Effective tax rate = Income tax expense / EBT × 100
Pre-tax margin = EBT / Revenue × 100
Example
The table below compares the effective tax rate of five big US drugmakers over the last twelve months. If one jumps out, the way Merck sits far above the 13.3% of its fiscal 2025, the latest quarters are carrying one-off charges (for example, acquired research projects that aren't tax-deductible): always compare it with the full-year rate. Here's how to read it: they all sell patented drugs with similar margins, so the gaps between them tell you where they manufacture and register their patents, which tax credits they have and which one-off items hit the year, not how good the business is. Notice how spread out they are before you draw conclusions from any single figure.
Step by step: AbbVie, fiscal 2025 (figures from its Form 10-K annual report, in millions of dollars):
1. Revenue: 61,160.
2. Operating income (EBIT): 15,075, an operating margin of 24.6%.
3. Net interest: −2,627.
4. Other non-operating expenses: −5,793, mostly $6,495 million from revaluing pending payments on past acquisitions (payments that depend on the success of the drugs it bought).
5. EBT: 6,597, a pre-tax margin of 10.8%. More than half of the profit vanished between EBIT and EBT.
6. Tax: 2,364. Effective rate: 2,364 / 6,597 = 35.8%.
7. Net income: $4,226 million, a net margin of 6.9%.
Why 35.8%? Because AbbVie lost $3,540 million before tax in the United States and earned $10,137 million abroad, and the US tax on low-taxed foreign profits added 16.9 points to its rate. With a small EBT, any fixed chunk of tax weighs far more as a percentage.
Your turn. Merck, 2025 accounts (10-K, millions of dollars): revenue of $65,011 million, EBT of $21,067 million and tax of $2,804 million. Work out its effective rate and its pre-tax margin. Hint: the rate comes in below 15% and the margin above 30%. Which is the better business, Merck or AbbVie, if you look only at pre-tax margin?
Before you look: which of the five companies in the table do you think has the lowest effective rate? Here's a hint: one of them is below zero.
Real-data example
| Company | Ticker | Effective tax rate |
|---|---|---|
| Merck & Co., Inc. | MRK | 46.7% |
| Pfizer Inc. | PFE | -3.9% |
| Johnson & Johnson | JNJ | 16.5% |
| AbbVie Inc. | ABBV | 27.4% |
| Eli Lilly and Company | LLY | 20.5% |
How to read it
How to read it
Rough ranges for US companies (Kaplio doesn't set a threshold for the effective tax rate; treat these as a reference, not a rule):
| Effective rate | Reading | What to do |
|---|---|---|
| Below 10% or negative | Very low | Look for the one-off item or the loss carryforwards; don't assume it will repeat |
| 10-25% | Normal for a large company | Compare it with the company's multi-year average |
| Above 30% | High | Look for a one-off charge or an EBT shrunk by unusual expenses |
The sector does matter. Drugmakers and tech companies, with patents and profits spread around the world, tend to sit below the 21% federal rate. Utilities, retailers and banks that earn most of their revenue in the United States land closer to 21% plus state taxes.
Pitfalls and limitations
1. One year tells you nothing. AbbVie's rate was −15.3% in 2024 and 35.8% in 2025. Pfizer's was −105.4% in 2023, −0.4% in 2024 and −3.5% in 2025. For ROIC or a valuation, use a normalized rate, not that year's.
2. Tax on the books isn't tax paid. In 2025 Alphabet recorded income tax expense of $26,656 million and paid $21,526 million in cash. The difference is deferred taxes: they'll be paid, or not, in other years.
3. The company picks its own "adjusted" rate. Alongside its reported rate, Pfizer publishes an adjusted rate of 12.7% for 2025, calculated without the items it considers one-offs. It's useful, but the recipe is Pfizer's.
4. Comparing countries takes the same yardstick. To compare a Spanish company with a US one, look at EBT and pre-tax margin; then, if you want to compare net income, apply the same normalized rate to both.
Case in point: Meta in 2025, where the rule breaks
The rule says EBT strips out taxes and the effective rate tells the normal story of the year. Meta broke it in 2025. Its EBT grew 21.6%, from $70,663 to $85,932 million, but its net income fell 3.0%, from $62,360 to $60,458 million. Its effective rate went from 11.8% in 2024 to 29.6% in 2025.
The 10-K explains why. With the new deductions in the tax reform passed in the United States in July 2025, Meta now pays the US corporate alternative minimum tax (CAMT), a 15% levy on the book income of large corporations that has nothing to do with the OECD global minimum and that claws back those benefits. So it no longer expects to use part of its tax credits, and in the third quarter it booked a $15,930 million charge, $14,030 million of which was a valuation allowance against those credits. The company itself says that without that charge, its 2025 rate would have been 13%. Notice what that means: 2025 net income understates what the business earned, and a P/E calculated on it comes out higher than it would at a normal rate.
So where's the catch? The charge isn't purely an accounting entry: the minimum tax will be there for years to come, and Meta's normal rate probably won't go back to 11.8%. Use EBT to judge the business, but read the tax note to decide which rate is normal from here on. Tesla went through the opposite in 2023, with a negative effective rate; you'll see it in the Tesla fundamental analysis, and the lesson on the effective tax rate covers it in depth.
Practice on Kaplio
Frequently asked questions
What is the formula for earnings before taxes?
Start from operating income (EBIT), subtract interest expense, add interest income, and add or subtract any other non-operating items. In 2025, for example, AbbVie went from EBIT of $15,075 million to earnings before taxes of only $6,597 million because of interest and other non-operating expenses, mostly revaluations of payments owed on past acquisitions.
What is the difference between EBIT and EBT?
EBIT is operating income: what the business earns before interest and taxes. EBT is earnings before taxes: EBIT after interest and other non-operating items. EBIT lets you compare businesses regardless of how they're financed; EBT lets you compare companies without each one's tax regime getting in the way of the comparison.
What is income before taxes also called?
It goes by several names: earnings before taxes (EBT), pre-tax income, profit before tax (PBT) and, in US company filings, "income before income taxes." In Spanish it's abbreviated BAI. They all mean the same thing: profit after interest and before income tax.
What is the effective tax rate?
It's a company's income tax expense for the year divided by its earnings before taxes. It measures what the tax authorities actually took, which rarely matches the statutory rate set by law. Among US drugmakers in 2025, it was −3.5% at Pfizer, 13.3% at Merck and 35.8% at AbbVie.