UPM Annual Report 2019

Operations

SIGNIFICANCE • Our good financial performance also generates higher tax revenue • We are strongly committed to continuously improving our economic and social performance • Our businesses play a leading role in contributing to societal development 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 • We pay corporate income taxes in the countries where added value is created and profit is generated taxation has increased significantly in recent years. In Finland, electricity is taxed at a lower rate when used in industrial production, at 6.9 EUR/MWh, while the tax rate for other- than-industrial use is 22.4 EUR/MWh. Energy-intensive industries also 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. For UPM, this retroactive refund paid in 2019 (for energy taxes paid in 2018) amounted to approximately 74% of paid energy taxes. This is on the same level as a typical refund rate for companies operating in the manufacture of paper and paper products according to a report published by VTT Technical Research Centre of Finland. 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. UPMbenefits 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.

OUR VALUE CREATION GENERATES TAX REVENUE

UPM’s effective tax rate in 2019 was 17.9% (18.6%) and cash tax rate 13.5% (13.7%). The corresponding corporate income taxes reported in 2019 were EUR 234million (EUR 342million), and corporate income taxes paid in 2019 were EUR 176million (EUR 252million). In addition to 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 property taxes such as taxes on real estate) or collected by UPM (e.g. VAT, payroll taxes and social security contributions). In the table below, we report the corporate income taxes paid and property taxes inmain countries. 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 innovations are developed. UPM follows the arm’s length

EUR 94million (EUR 80million). The remaining figure of approximately EUR 43 million (EUR 120million) is reported and paid by UPM-Kymmene Corporation. In Uruguay, the government has granted many free trade zone permits for domestic and foreign investments. The Uruguay government has granted UPM’s pulpmill a permit to operate in a free trade zone, whereby taxes in Uruguay consist mainly of property tax and annual tax-like charges paid to the government for the development of the zone. The new pulpmill under construction in Uruguay will also be located in a similar free trade zone. In China, regarding fine paper production, UPMqualifies as a high-tech enterprise with a reduced corporate income tax rate of 15%. UPMalso pays withholding taxes on dividends in China. In those countries where UPM’s companies are using tax losses fromprevious years to

offset the tax liability of the year in question, such as Germany, no or only limited corporate income taxes are paid. Tax compliance UPMTax Policy is supported by internal instructions, benchmark analysis of best practices and related internal controls. Tax matters 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. UPMaims to co-operate transparently and proactively with tax authorities, and values dialogue with other important stakeholders concerning taxation. In Finland, UPM co-operates with the Finnish Large Taxpayers’ Office.

taxation is subject to detailed regulation at country and EU levels. The majority 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 energy tax rates for transport fuels from renewable and sustainable sources, like UPM BioVerno, are lower than those of fossil fuels. 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 allow member 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 of raw materials and other inputs Compensation for paid energy taxes for global cost-competitiveness

principle in related party transactions. In accordance with UPM's Tax Policy, the locations of its companies are driven by commercial rationale and business reasoning. UPMdoes not have any investments in production or service operations in jurisdictions defined by the Council of the European Union as non- cooperative jurisdictions for tax purposes or in any similar secrecy jurisdictions. A list of UPM subsidiaries and joint operations and their country of incorporation can be found on page 198–199. In Finland, UPMhas significant production operations across all its six business areas, as well as research and development operations. Accordingly, UPM is one of the major taxpayers in Finland. In 2019, UPM’s corporate income taxes in Finland are estimated to be EUR 137 million (EUR 200million), of which subsidiaries report and pay approximately

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2019

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2019 (EUR MILLION) Direct economic value created

Economic value distributed Operating costs

2018

–7,314 –1,214

150

Finland

215

Sales

10,238 Employee wages and benefits 14 Payments to providers of loans

17 15

Germany Uruguay

13 13 17

Energy taxation at various levels of the value chain

Income from sale of assets

–49

Income from financial investments

4 Dividend distribution

–693 –211

7 6 5 3 2 6

China

Other income

93 Corporate income taxes paid and property taxes

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 tax on liquid fuels, as well as electricity and some other fuels. Energy

United Kingdom

5 5 5 4 6

France Russia Estonia

Donations

–0

Total

10,349

–9,481

Economic value retained 868

UPM’s assets and capital expenditure by country page 158 UPM’s Tax Policy is available on upm.com/governance

Other

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.

Group total

211

283

78

79

OUR WAY

OUR WAY

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS