UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

LOCAL TAXES UPM Steyrermühl paper mill, Austria

UPM’S VALUE CREATION ALSO GENERATES TAX REVENUE

SIGNIFICANT LOCAL ECONOMIC IMPACTS

UPM Changshu paper mill, China

UPM Kymi pulp and paper mill, Finland

Each of UPM’s mills helps strengthen the vitality of the local community and support public services. Taxes paid locally – property or real estate taxes, municipal taxes paid from wages, social security contributions and municipal share of corporate income tax – serve also as a basis for valuable dialogue with the municipalities and analysing the local taxes paid help to clarify the differences on country and local levels. In addition to taxes, the local consumption impact and the indirect employment effect generated by the mills have been calculated for Finnish pulp and paper mills based on a model provided by the Research Institute of the Finnish Economy (ETLA). The six sites in Finland generated a total of EUR 193 million of regional consumption impact and employed over 4,000 persons indirectly in the region. Since 2018, UPM has included in its EMAS statements relevant tax and societal contributions generated by its pulp and paper mills in Austria, China, Finland, France and Uruguay. EMAS statements are third-party verified. It is important to note that UPM’s economic impact spreads not just on the corporate or country level but also in the local communities.

17m

EUR incl. corporate income taxes, local taxes (real estate taxes, land use taxes, stamp duties and local levies), customs duties on imported materials and equipment, individual income taxes on salaries and social security contributions for employees 34m

30m

EUR

EUR

incl. income taxes on salaries, social security contributions and employer’s contribution to Family Burdens Equalisation Fund, corporate income taxes and real estate taxes.

incl. real estate taxes, estimated tax on salaries, estimated corporate income tax based on the number of employees.

Tax payment by country In the table below, we report the corporate income taxes and property taxes paid in each country. Based on UPM’s corporate and operational structure, UPM reports and pays its corporate income taxes mainly in countries where production activity takes place and where innovations are developed. UPM follows the arm’s length principle in related party transactions. At the end of 2017, the Council of the European Union published for the first time a list of non-cooperative jurisdictions for tax purposes. UPM does not utilise or have any investments in production or services operations in those jurisdictions or in any similar secrecy jurisdictions. In accordance with UPMTax Policy, the locations of its companies are driven by commercial rationale and business reasoning. UPM’s effective tax rate in 2018 was 18.6% (17.9%) and cash tax rate 13.7% (18.2%). The corresponding corporate income taxes reported in 2018 were EUR 342.5 million (EUR 212.5 million), and corporate income taxes paid in 2018 were EUR 252.0 million (EUR 216.2 million). In addition to the taxes on income, UPM’s various production inputs and outputs are also subject to taxation, which is either paid by UPM (e.g. energy taxes and real estate/property taxes) or collected by UPM (e.g. VAT, payroll taxes and social security contributions). In Finland, UPMhas significant production operations through all its six business areas, as well as research and development operations. Accordingly, UPM is one of the major taxpayers in Finland. In 2018, UPM’s corporate income taxes in Finland are estimated to be EUR 202 million (EUR 172 million), of which subsidiaries report and pay approximately EUR 80 million (EUR 65 million). The remaining figure of approximately EUR 122 million (EUR 107 million) is reported and paid by UPM-Kymmene Corporation. In Uruguay, the government granted UPM’s pulp mill 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 zone. In China, regarding 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. Tax compliance UPMTax Policy is supported by internal instructions, benchmark analysis of best practices and related internal controls. Tax matters at UPM are managed by UPM’s tax function, which is complemented by third-party tax services to comply with local tax reporting, filing and other requirements. 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 operations review tax risks regularly and update the control framework together with the tax function. More thorough review of the tax practices of customers and suppliers is a part of UPM’s counterparty risk management processes. UPM aims to cooperate transparently and proactively with tax authorities and values dialogue with other important stakeholders concerning taxation. In Finland, UPMparticipates in an enhanced relationship with the Finnish Large Taxpayers’ Office.

SIGNIFICANCE • UPM’s continuous improvement in its financial performance also generates higher tax revenue • UPM is strongly committed to continuously improving its economic and social performance • UPM's businesses play a leading role in contributing to societal development also through the tax revenue they generate OUR WAY • Based on the standards of the UPM Code of Conduct, the UPM Tax Policy describes the main principles and guidelines of UPM taxation. • Taxes are paid in accordance with local tax laws and regulations of the country in question. • UPM pays corporate income taxes in the countries where added value is created and profit is generated.

Compensation of paid energy taxes for global cost-competitiveness

Energy taxation at various levels of the value chain Taxation of end products In addition to taxes on income, UPM’s various production inputs and outputs are subject to taxation. Energy taxation is especially relevant to UPM in various countries. This refers to excise taxes on liquid fuels, as well as electricity and some other fuels. Energy taxation is subject to detailed regulation at the country and EU levels. Most of UPM’s electricity production is hydropower or combined heat and power (CHP) production at mill sites, where most 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. 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 for example. The environmental goals of taxation of transport fuels directly impact the business. The energy taxes on transport fuels from renewable sources, like UPMBioVerno, are lower than those of fossil fuels because of their lower carbon dioxide emissions. Taxation of rawmaterials and other inputs UPM is also a significant energy consumer, especially for paper production. Most of the energy used in the production processes is subject to energy taxes, although there are various tax rates and exemptions depending on the type of use. UPMpays a significant amount of energy tax on fuels as part of logistics costs, especially for road transportation.

Within the EU, energy taxation laws allowmember states to compensate for the taxes paid or apply lower tax rates for energy-intensive industrial production or other activities. Many of the main countries in which UPMhas production facilities, for example, Finland and Germany, offer such tax relief because the level of energy taxation has increased significantly in recent years. In Finland, electricity is taxed at a lower rate when used in industrial production. Energy-intensive industries receive a retroactive refund of energy taxes paid based on a separate application, if the amount exceeds a threshold dependent on the company’s added value. It is possible to apply for a similar retroactive energy tax refund in Austria, while, in the UK and France, relief is granted upfront in the form of lower tax rates for energy-intensive industrial users fulfilling specific requirements. In Germany, there are energy tax relief schemes that companies can apply for in advance; some are available retroactively if the company meets various eligibility criteria. UPM also benefits from certain subsidy schemes or feed-in tariffs related to renewable energy production, such as EEG (Erneuerbare Energien Gesetz) compensation for energy-intensive industries in Germany and operating aid for wood fuel power plants in Finland.

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2018 (EUR MILLION) Direct economic value created

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2018

Economic value distributed Operating costs

2017

–7,515 –1,193

215

Finland

177

Sales

10,483 Employee wages and benefits 33 Payments to providers of loans

17 13 13

China

25 12 –1

Income from sale of assets

–35

Uruguay Germany

Income from financial investments

4 Dividend distribution

–613 –283

READ MORE: UPM’s assets and capital expenditure by country on page 133.

Other income

38 Corporate income taxes paid and property taxes

5 5 5 4 1 5

Russia

6 5 2 0

United Kingdom

Donations

–0

France Estonia

UPM Tax Policy is available on the corporate website under www.upm.com/governance.

Total

10,558

–9,639

United States Other countries

19

Economic value retained 919

6

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.

Total

283

251

66

67

CONTENTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018