UPM Annual Report 2017

Stakeholders

In brief

Strategy

Businesses

Governance

Accounts

In 2017, UPM’s corporate income taxes in Finland are estimated to be approximately EUR 173 million in total (EUR 138 million), of which subsidiaries report and pay approximately EUR 65 million (EUR 56 million). The remaining figure of approximately EUR 108 million (EUR 82 million) is reported and paid by UPM-Kymmene Corporation. Tax compliance UPM’s tax policy is supported by internal instructions, benchmark analysis of best practices and 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, filings and other duties. The Audit Committee of the Board of Directors 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. More thorough scanning of tax practices of customers and suppliers is a part of UPM’s new counterparty risk management processes. UPM aims to co-operate transparently and proactively with tax authorities and other important stakeholders regarding taxation. The tax revenues generated across the whole value chain are used to finance common services and projects of countries, while the purchasing power of UPM employees and contractors also adds to the local vitality of regions where UPMhas operations. Read more about how value is created around UPMKaukas mill integrate in Lappeenranta, Finland (on previous page). Energy taxation at various levels of the value chain Taxation of end products In addition to the taxes on income, UPM’s various production inputs and outputs are also subject to taxation. These taxes may either be paid by UPM or collected by UPM from the customers and remitted to the local authorities. Energy taxation is especially relevant for UPM in various countries and it 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 (CHP) 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 electricity taxation regardless of which sources are used.

The renewable UPMBioVerno diesel and naphtha which are produced from crude tall oil, a residue of the pulp production, are 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. 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. Taxation of raw materials and other inputs UPM is also a significant energy consumer, especially for the paper production. Most of the energy used in the production processes is subject to energy taxes, though there are different tax rates or even exemptions depending on the type of use. UPMpays a significant amount of energy tax also on fuels as part of logistics costs, especially for 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. 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 tax 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 the 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 eligibility criteria. Energy tax reliefs are also subject to detailed regulation not only at national 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.

UPM’s value creation also generates tax revenues

SIGNIFICANCE • UPM’s continuous improvement in its financial performance also generates higher tax revenues. • UPM is strongly committed to continuously improving its economic and social performance, where the company’s income tax payments mainly in countries of production or service operations, play a major role. OUR WAY • Based on the standards of the UPM Code of Conduct, UPM’s Tax Policy describes the main principles and guidelines of UPM’s taxation. • 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.

Based on UPM’s corporate and operational structure, UPM reports and pays its corporate income taxes on taxable profits mainly in countries where production activity takes place and in the countries where innovations are developed. In the table on the next page, the corporate income tax figures are reported on a cash basis and thus include some taxes of previous years as well but exclude deferred taxes as they may not be paid. In Finland, UPMhas significant production operations through all of its six business areas, as well as research and development operations. Due to these factors, UPM is also one of the biggest taxpayers in Finland. In Uruguay, the government has granted UPM’s pulp mill with a permit to operate in a special economic zone, whereby taxes in Uruguay mainly consist of property/real estate taxes and annual tax-like charges paid to the government for the development of the special economic zone. In China, with regard to fine paper production, UPM qualifies as a high- tech enterprise with a reduced corporate income tax rate of 15%. In those countries where UPM’s companies are using tax losses from previous years to offset the tax liability of the year in question, such as Germany, there are no or only limited corporate income taxes paid.

TRANSPARENCY IN LOCAL SOCIETAL VALUE CREATION

160 summer jobs 2,600 indirectly employed * ) 1,700 external employees in pulp mill maintenance shutdown

EMPLOYMENT EFFECT

INDIRECT EFFECT (PURCHASE POWER)

UPM Kaukas is a large integrated forest industry plant in Lappeenranta, Finland comprising a pulp and paper mill, biorefinery, sawmill, co-owned biofuel power plant, UPM R&D centre and wood sourcing and forestry operations. The mills’ operations benefit the local community in many ways. As the largest private employer in the city, UPM Kaukas plays a major role as a generator of tax revenue and, in addition to the municipal share of corporation tax and the real estate tax paid by UPM, the taxes that UPM employees pay on their wages have a significant local impact. Furthermore, the purchasing power of UPM employees and subcontractors maintains and enhances the vitality of the city. UPM Kaukas invests in the future by actively collaborating with local educational institutions. The mills principally sponsor children and young people through local schools, associations and sport clubs.

1,175 jobs

• UPM Kaukas employees EUR 30 million

• consumption through indirect employment EUR 38–45 million • stimulating effect of consumption on regional economy EUR 68–75 million

Read more: UPM’s assets and capital expenditure by country on page 121.

at the mill site when jobs provided by subcontractors are included

UPM’s tax policy is available on the corporate website under www.upm.com/governance .

COLLABORATION WITH EDUCATIONAL INSTITUTIONS

LOCAL TAXES * )

31–34m

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2017 (EUR MILLION) Direct economic value created

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2017

EUR

47 • students performing upper-secondary vocational education and training completed an on-the-job learning placement

Economic value distributed Operating costs

2016

• estimated municipal tax on personnel wages • municipal share of corporation tax • real estate tax • estimated effect indirect employment has on taxes

–7,225 –1,265

177

Finland

133

Sales

10,010 Employee wages and benefits 110 Payments to providers of loans

25 19 12

China

15

Income from sale of assets

–83

United States

7

Read more on UPM’s project to provide locally relevant information on societal impacts under EMAS environmental performance reports on page 19.

Income from financial investments

12 Dividend distribution

–507 –251

Uruguay

10

• active collaboration with various schools and educational institutions

Other income

28 Corporate income taxes paid and property taxes

6 5 2 6

Russia

5 6 3 4

United Kingdom

Donations

–0

France

Total

10,160

–9,331

*) Source: City of Lappeenranta

Other countries

–1

– 2

Germany

Economic value retained 829

Total

251

181

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.

CONTENTS

UPM Annual Report 2017 58

UPM Annual Report 2017 59