UPM Annual Report 2016

First page Previous page 54-55 Next page Last page

Stakeholders

In brief

Strategy

Businesses

Governance

Accounts

UPM’s value creation also generates tax revenues

UPM aims to develop tax reporting that meets the expectations of various stakeholders and fulfils the various statutory reporting requirements. During 2016, UPMhas prepared for the country-by- country reporting on taxes to tax authorities in accordance with the OECD Guidelines. During 2016, UPM changed its corporate structure in Finland to better match its current business structure. Three new subsidiaries were established in Finland: UPMEnergy Oy, UPM Specialty Papers Oy and UPMPaper ENA Oy. The personnel and assets of UPMEnergy, UPM Specialty Papers and UPMPaper ENA in Finland were transferred to the new companies on 1 July 2016. UPMRaflatac and UPMPlywood were already operating as subsidiaries in Finland while UPMBiorefining remained part of the UPM-Kymmene Corporation. In 2016, UPM’s corporate income taxes in Finland are estimated to be approximately EUR 138 million in total (EUR 83 million), of which subsidiaries report and pay approximately EUR 56 million (EUR 22 million), and the remaining approximately EUR 82 million (EUR 61 million) is reported and paid by UPM-Kymmene Corporation. In addition to the taxes on income, UPM’s various production inputs and outputs are also subject to taxation. These are typically local taxes in the production countries (for example energy taxes, real estate/land and property taxes) or in the location of customers or a final consumption (for example value added taxes, customs and duties or various excise taxes). These taxes may either be paid by UPM or collected by UPM from the customers and remitted to the local authorities. Due to significant production and consumption of mainly renewable energy, energy taxation is especially relevant for UPM in various countries. The energy taxation refers to excise taxes of liquid fuels as well as electricity and certain other fuels. Energy taxation is subject to detailed regulation not only at country level but also at EU level. The majority of UPM’s own electricity production is hydropower or combined heat and power production at mill sites, where the majority of the fuels used in energy production are from renewable sources. The electricity produced by UPM is subject to the electricity taxation regardless of which sources are used. The renewable diesel, UPMBioVerno which is produced from crude tall oil, a residue of the pulp production, is also subject to energy taxation. The taxes are charged by fuel distributors to their customers at service stations. The environmental goals of taxation of transport fuels directly impact the business. One of the main goals of the energy taxation Taxation at various levels of the value chain Taxation of end products varies by business area

is to globally limit and mitigate climate change and therefore the regulation has developed in favour of advanced biofuels. Consequently, the energy taxes of transport fuels from renewable sources like UPMBioVerno are lower than those of fossil fuels due to their lower carbon dioxide emissions. Therefore the fuel tax of renewable diesel UPMBioVerno is 30–50% lower than that of fossil diesel in the main market in Finland. Taxation of raw materials and other inputs UPM is also a significant electricity consumer, especially for pulp and paper production. All of the electricity consumed by UPM, including the electricity that has been self-produced from renewable sources, is subject to electricity taxes. Most of the fuels used in the production processes are also subject to energy taxes, though there are different tax rates or even exemptions depending on the type of use. Additionally, taxation of transport fuels is also a significant form of energy taxation for UPM in businesses other than UPMBiofuels. UPMpays significant amounts of energy taxes on fuels as part of logistics costs, especially on road transportation. Compensation of paid energy taxes for global cost-competitiveness Within the EU, the energy taxation legislation allows member states to compensate paid taxes or apply lower tax rates for industrial production or activities which are considered energy intensive. Many of the main UPMproduction countries, e.g. Finland and Germany, apply such tax reliefs because the level of energy taxation has increased significantly in recent years. For example, in Finland, electricity is taxed at a lower tax rate when used in industrial production. Energy-intensive industries get a retroactive refund of paid energy taxes based on a separate application, if the amount of energy taxes paid exceeds a certain threshold dependent on the company’s added value. A similar retroactive energy tax refund can be applied for in Austria while in the UK and France, relief is granted upfront in a form of lower tax rates for energy-intensive industrial users that fulfil the requirements. In Germany, there are certain energy tax reliefs that companies may apply for in advance and some that are applied for retroactively if the company fulfils various criteria to be eligible for the reliefs. Like the entire field of energy taxation, energy tax reliefs are subject to detailed regulation not only at country level but also at EU level. Regarding energy production, UPM benefits from some subsidy schemes and feed-in tariffs related to renewable energy production, such as EEG (Erneuerbare Energien Gesetz) in Germany and operating aid for wood fuel power plants in Finland.

In accordance with UPM’s tax policy, UPM pays corporate income taxes in the countries where added value is created and profit is generated. Taxes are paid in accordance with the local tax legislation and regulations of the country in question.

UPM’s corporate and operational structure means that UPM reports and pays its corporate income taxes mainly in the production countries and in the countries where innovations are being developed. In the countries where UPM’s business areas have significant value- adding operations in particular, UPM is also a major taxpayer of both income taxes and taxes applied to various production inputs and outputs. In addition to these taxes, the local impact is augmented by the taxes paid to the local municipalities by UPM’s employees as well as by those indirectly employed by UPM to perform various services at the production sites. About UPM’s tax policy UPM’s tax policy is supported by internal instructions, benchmark analysis of best practices as well as by related internal controls. Tax matters at UPM are managed by UPM’s own tax function, which is complemented by third-party tax services in order to comply with local tax reporting and filings among others. The Audit Committee is responsible for the supervision of tax risk

management as part of UPM’s risk management processes. UPM’s internal control and risk management functions review the tax risks regularly and update the control framework together with the tax function. UPM aims to co-operate transparently and proactively with tax authorities and other important interest groups regarding taxation. UPM’s tax policy is available on the corporate website under www.upm.com/governance. Corporate income taxes and property taxes paid by country According to UPM’s tax policy, the location of UPM group entities in different countries is driven by business reasons, such as the location of customers, suppliers, rawmaterials, know-how and other similar considerations. Corporate income taxes and property taxes paid by UPM are reported by country (see table). The tax figures shown in the country analysis include corporate tax payments and property taxes.

UPM CREATES SIGNIFICANT ADDED VALUE IN THE FINNISH ECONOMY According to a study made by the Research Institute of the Finnish Economy (Etla), UPM is the company producing the most added value in Finland when taking into account the added value produced by companies themselves and the indirect added value resulting from purchases. UPM’s share of the GDP was 2.0% in 2015. The added value produced by UPM in Finland totalled EUR 1.5 billion and the added value generated by the multiplier effects resulting from purchases as much as EUR 2.6 billion. UPM’s supply chain in Finland includes 10,000 companies and service providers, and, for example, the company’s annual wood sourcing spend is approximately EUR 850 million. “Forest industry companies mainly purchase their wood raw material from Finland, which means that the added value from wood trade, felling and transport is created in Finland,” says Jyrki Ali-Yrkkö, Deputy CEO at Etlatieto Oy. Added value is the difference between the product’s final selling price and the purchase price paid for raw materials, energy, services and other intermediate products to manufacture the product. “The share of domestic added value is the largest in forest and paper industry as well as in the food industry because they use more domestic raw materials and intermediate products than other industries.”

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2016 (EUR MILLION) Direct economic value created

CORPORATE INCOME TAXES AND PROPERTY TAXES PAID BY COUNTRY EURm 2016

Economic value distributed Operating costs

2015

–7,115 –1,246

133

Finland

131

Sales

9,812 Employee wages and benefits 99 Payments to providers of loans

11 10

China

–32

Income from sale of assets

Uruguay

–400 –181

Income from financial investments

10 Dividend distribution

7 6 5 3 8

United States

8 2 8 3 3

Other income

81 Corporate income taxes paid and property taxes

United Kingdom

Russia France

–1

Donations

Total

10,002

–8,975

Other countries

–2

– 2

Germany

Economic value retained 1,027

Total

181

172

UPM’s economic impact is significant in the surrounding communities. The company’s operations contribute to local, regional and national economies by generating economic benefits for different stakeholder groups. The related direct monetary flows indicate the extent of added value globally.