UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

7. Income tax 7.1 Tax on profit for the year Income tax

Tax charge to other comprehensive income

Key estimates and judgements The group is subject to income taxes in numerous jurisdictions and the calculation of the group’s tax expense and income tax liabilities involves a degree of estimation and judgement. Tax balances reflect a current understanding and interpretation of existing tax laws. Management periodically evaluates positions taken in tax returns with respect of situations in which applicable tax regulation is subject to interpretation and adjusts income tax liabilities where appropriate.

EURm

2016

2015

Before tax

Tax After tax Before tax

Tax After tax

Actuarial gains and losses on defined benefit plans

–120 –148

23

–97

153

–40

113

In 2016, tax on profit for the year amounted to EUR 200 million (159 million). The effective tax rate was 18.5% (14.8%). In 2016 and 2015, the effective tax rate was affected by the income not subject to tax from subsidiaries operating in tax free zone. In 2015, other items include tax benefit of EUR 9 million related to capital gain from sale of forestland in UK in 2014 where tax authorities accepted treatment of gain as tax-exempt in 2015.

Energy shareholdings Translation differences

3 –

–144

–424

19

–405

–14

–14

221

–

221

Cash flow hedges

91 –1

–18

73 –1

30

–6 –2

24

Net investment hedges

– 9

–26 –46

–28 –75

Total

–193

–184

–29

8. Group structure 8.1 Business acquisitions and disposals In 2016 and 2015, no business acquisitions were made. In 2016, UPM had no business disposals. In 2015, UPM sold 100% of its shares of Tilhill Forestry Ltd to BSW Timber Ltd in the UK. The following table summarises the amount of assets and liabilities related to disposal.

Key estimates and judgements

7.2 Deferred tax

Income tax

Recognised deferred tax assets The recognition of deferred tax assets requires management judgement as to whether it is probable that such balances will be utilised and/or reversed in the foreseeable future. At 31 December 2016, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 744 million (797 million), of which EUR 622 million (665 million) was attributable to German subsidiaries. In Germany net operating loss carry-forwards do not expire. In other countries net operating loss carry-forwards expire at various dates and in varying amounts. Based on profit forecasts, it is probable that there will be sufficient future taxable profits available against which the tax losses can be utilised. The assumptions regarding future realisation of tax benefits, and therefore the recognition of deferred tax assets, may change due to future operating performance of the group, as well as other factors, some of which are outside of the control of the group. Unrecognised deferred tax assets and liabilities The net operating loss carry-forwards for which no deferred tax is recognised due to uncertainty of their utilisation amounted to EUR 842 million (648 million) in 2016. These net operating loss carry- forwards are mainly attributable to certain German and French subsidiaries. In addition, the group has not recognised deferred tax assets on loss carry-forwards amounting to EUR 450 (423 million) which relate to closed Miramichi paper mill in Canada. The group has not recognised deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that it is probable that the temporary differences will not reverse in the foreseeable future. In addition, the group has not recognised deferred tax liability for the undistributed earnings of Finnish subsidiaries and associates as such earnings can be distributed without any tax consequences. Accounting policies Deferred tax is calculated based on temporary differences between the carrying amounts and the taxable values of assets and liabilities and for tax loss carry-forwards to the extent that it is probable that these can be utilized against future taxable profits. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are recognised net where there is a legal right to set-off and an intention to settle on a net basis.

EURm

2016

2015

EURm

2016

2015

Deferred tax assets Intangible assets and property, plant and equipment

Current tax expense

172

95 64

Change in deferred taxes

28

107

132

Total

200

159

Inventories

42

37

Retirement benefit liabilities and provisions

145

129

Other temporary differences

23

50

Tax rate reconciliation

Tax losses and tax credits carried forward

226 –97 446

241

EURm

2015

Offset against liabilities

–123 466

EURm

2016

2015

Inventories

5

Total

Profit before tax

1,080

1,075

Trade and other receivables Cash and cash equivalents

24

Computed tax at Finnish statutory rate 20% Difference between Finnish and foreign rates Non-deductible expenses and tax-exempt income

216

215

3

Deferred tax liabilities Intangible assets and property, plant and equipment

21

16

Provisions

–2

Trade and other payables

–22

–206 –261

–217 –256

–23

–63

Net assets

8 3

Forest assets

Tax loss with no tax benefit

8

11 –1 –1

Gain on disposals Total consideration

Retirement benefit assets Other temporary differences

–14 –73

–19 –87 123

Results of associates

–1 –4 –1

11

Change in tax legislation

Offset against assets

97

Change in recoverability of deferred tax assets Utilisation of previously unrecognised tax losses

–

Settled in cash and cash equivalents Cash in subsidiaries disposed Net cash arising from disposals

11 –3

Total

–457

–456

–11

–6

8

Net deferred tax assets (liabilities)

–11

10

Other items

–5

–12 159

Total income taxes

200

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

Effective tax rate, %

18.5% 14.8%

Accounting policies UPM consolidates acquired entities at the acquisition date which is when it gains control using the acquisition method. Consideration transferred is determined as the fair value of the assets transferred, the liabilities incurred and equity instruments issued including the fair value of a contingent consideration. Acquisition related transaction costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed are measured initially at their fair values at the acquisition date. The group measures any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the subsidiary acquired is recorded as goodwill.

Accounting policies The group’s income tax expense comprises current tax and deferred tax. Current tax is calculated on the taxable result for the period based on the tax rules prevailing in the countries where the group operates and includes tax adjustments for previous periods and withholding taxes deducted at source on intra-group transactions. Tax expense is recognised in the income statement, unless it relates to items that have been recognised in equity or as part of other comprehensive income. In these instances, the related tax expense is also recognised in equity or other comprehensive income, respectively.

Movements in deferred tax assets and liabilities

EURm

2016

2015

Carrying value, at 1 January Charged to income statement

10

104 –64 –29

–28

Charged to other comprehensive income

9

Exchange rate adjustments

–2

–1 10

Net deferred tax assets (liabilities)

–11

CONTENTS

ACCOUNTS

142

143

UPM Annual Report 2016

UPM Annual Report 2016