UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

7.

Income tax

Tax charge to other comprehensive income

EURm

2017

2016

Before tax

Tax After tax Before tax

Tax After tax

7.1 Tax on profit for the year Income tax

7.2 Deferred tax

Actuarial gains and losses on defined benefit plans

78 20

–13

66 24

–120 –148

23

–97

Energy shareholdings Translation differences

4 –

3 –

–144

–270

–270

–14

–14

In 2017, tax on profit for the year amounted to EUR 212 million (200 million). The effective tax rate was 17.9% (18.5%). In 2017 and 2016, the effective tax rate was affected by the income not subject to tax from subsidiaries operating in tax free zone. In 2017, accrued and paid withholding taxes relating to dividend payments of subsidiaries amounted to EUR 19 million (EUR 9 million). Changes in the United States tax legislation resulted in recognition of EUR 5 million tax expense relating to reassessment of deferred tax assets and liabilities. Change of recoverability of deferred tax assets includes EUR 8 million tax income related to reassessment of deferred tax assets on capital losses in the United States.

EURm

2017

2016

Cash flow hedges

153

–31

122

91 –1

–18

73 –1

Deferred tax assets Intangible assets and property, plant and equipment

Net investment hedges

26

–5

20

– 9

Total

7

–44

–37

–193

–184

90 41

107

Inventories

42

Retirement benefit liabilities and provisions

135

145

Other temporary differences

19

23

8. Group structure

Key estimates and judgements

Tax losses and tax credits carried forward

222 –84 423

226 –97 446

Offset against liabilities

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 2017, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 758 million (744 million), of which EUR 632 million (622 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 821 million (842 million) in 2017. 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 426 (450 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 utilised 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.

Total

Deferred tax liabilities Intangible assets and property, plant and equipment

8.1 Business acquisitions and disposals In 2017, UPM made a minor business acquisition by acquiring the assets of Southwest Label Stock in the United States. In 2016, no business acquisitions were made. In 2017 and 2016 no business disposals were made.

Income tax

–186 –244

–206 –261

EURm

2017

2016

Forest assets

Current tax expense

224 –11 212

172

Retirement benefit assets Other temporary differences

–16 –95

–14 –73

Change in deferred taxes

28

Total

200

Offset against assets

84

97

Total

–458

–457

Tax rate reconciliation

Net deferred tax assets (liabilities)

–36

–11

EURm

2017

2016

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.

Profit before tax

1,186

1,080

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.

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

237

216

18

21

–50

–32

Withholding taxes

19

9 8

Tax loss with no tax benefit

5

Movements in deferred tax assets and liabilities

Results of associates

–1

–1 –4 –1

Change in tax legislation

5

EURm

2017

2016

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

–15

Carrying value, at 1 January Charged to income statement

–11

10

–7

–11

11

–28

Other items

1

–5

Charged to other comprehensive income

–44

9

Total income taxes

212

200

Exchange rate adjustments

8

–2

Net deferred tax assets (liabilities)

–36

–11

Effective tax rate, %

17.9% 18.5%

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. 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.

CONTENTS

ACCOUNTS

152

153

UPM Annual Report 2017

UPM Annual Report 2017