UPM Annual Report 2020

GENERATING TAX REVENUE

In accordance with UPM's Tax Policy, the locations of our companies are driven by commercial rationale and business reasoning. We do not transfer any value created and do 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 198-200. Furthermore, our sites contribute to local employment, income tax and purchas ing power and are engaging in projects with communities. Information can be found in pulp and paper mills’ EMAS-verified reports on environmental and societal responsibility. Energy taxation at various levels of the value chain Energy taxation is relevant to us in vari ous countries and for various levels of the supply chain. Energy taxation is subject to detailed regulation at both individual coun try and EU levels. Electricity produced by us is subject to electricity taxation, regardless of which sources are used. Also our renewable UPM BioVerno diesel and naphtha, which are produced from a residue of pulp produc tion, are subject to energy taxation. How ever, the energy tax rates for transport fuels from renewable and sustainable sources, like UPMBioVerno, are lower than those from fossil fuels. Most of the energy used in the produc tion processes is subject to energy tax, although there are various tax rates and exemptions depending on the type of use. We also pay a significant amount of energy tax on fuels for logistics costs, especially for road transportation. Within the EU, energy taxation laws allowmember states to compensate for the taxes paid on, or apply lower tax rates to, energy-intensive industrial production, for example. Many of the main countries in which we have production facilities, such as 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

The year 2020 has highlighted the important role of companies play in the wellbeing of surrounding societies.

companies are using tax losses from pre vious years to offset the tax liability of the year in question, such as Germany, limited corporate income tax is paid.

It is evident that the health of employees outweighs any other principle. However, in addition to health, it is crucial that our businesses continue their operations to also help societies overcome crises like the global COVID-19 pandemic, both econom ically and socially. Despite the exceptional circumstances this year, our businesses were able to continue their operations successfully, resulting in a satisfactory financial performance, with the related tax revenue, in various countries. UPM’s effective tax rate in 2020 was 22.9% (17.9%) and its cash tax rate was 19.8% (13.5%). The corresponding corporate income tax reported in 2020 was EUR 169 million (EUR 234 million), and corporate income tax paid in 2020 was EUR 146 mil lion (EUR 176 million). In addition to taxes on income, our various production inputs and outputs are also subject to taxation, which is either paid by us (e.g. energy tax or property tax, such as taxes on real estate) or collected by us (e.g. VAT, payroll tax and social security contributions). The table on the right displays the corpo rate income tax and property tax paid in our main countries of operation. Based on our corporate and operational structure, UPMmainly reports and pays its corporate income tax in countries where production and innovating activity takes place. In Finland, we have significant produc tion operations across our six business areas, as well as research and development operations. As a result, UPM is one of the major taxpayers in Finland. Despite the challenging year, UPM’s corporate income Corporate income taxes vary by countries

tax in Finland in 2020 is estimated to be EUR 86 million (EUR 134 million), with subsidiaries reporting and paying approx imately EUR 78 million (EUR 93 million). The remaining figure of approximately EUR 8 million (EUR 41 million) will be reported and paid by UPM-Kymmene Corporation. In Uruguay, the government has granted several free-trade zone permits for domes tic and foreign investments. The Uruguay government has granted our pulp mill a per mit to operate in a free-trade zone, where taxes mainly consist of property tax and annual tax-like charges paid to the Uruguay government for the development of the zone. The new pulp mill under construction in Uruguay will also be located in a similar free-trade zone. In China, as fine paper production, UPM qualifies as a high-tech enterprise with a reduced corporate income tax rate of 15%. UPM also pays withholding tax on dividends in China. In countries where our

See examples of UPM Kymi mill's social impacts and responsibility at upmimpacts.com

SIGNIFICANCE • 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 our taxation • Taxes are paid in accordance with local tax laws and regulations that apply to the country in question • We pay corporate income taxes in the countries where added value is created and profit is generated of customers and suppliers is a part of our counterparty risk management processes. UPMTax Policy is supported by internal instructions, benchmark analyses of best practice and related internal controls. Tax matters are managed by our tax function, which is complemented by third-party tax services to comply with local tax reporting and filing, as well as other requirements. We aim to co-operate transparently and proactively with tax authorities, and value dialogue with other important stakehold ers concerning taxation. In Finland, UPM co-operates with the Finnish Large Taxpay ers’ Office.

(e.g. in 2020 at 6.9 EUR/MWh). Energy-in tensive industries have received a retroac tive refund of paid energy tax. This is based on a separate application, if the amount exceeds a threshold, which is dependent on the company’s added value. For UPM, this retroactive refund paid in 2020 (for energy taxes paid in 2019) amounted to approxi mately 74% of paid energy taxes. An energy taxation reform, introduced by the Finnish government came into force on 1 January 2021. The overall impact is expected to be minor for us due to the fact that the majority of our energy consump tion is already from renewable sources, although the impact varies with each business area. It is possible to apply for a retroactive energy tax refund in Austria, while in the UK relief is granted upfront in the form of lower tax rates for energy-intensive indus trial users fulfilling specific requirements. In Germany, UPM benefits from certain subsidy schemes such as EEG (Erneuerbare Energien Gesetz) compensation for energy- intensive industries. The Board of Directors’ Audit Committee is responsible for the supervision of tax risk management, as part of our risk manage ment processes. UPM’s internal control and risk management operations review tax risks regularly and update the control framework together with the tax function. A more thorough review of the tax practices Our tax governance and tax compliance

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2020

2019

91 14 13 28

Finland

150

Germany Uruguay

17 15

China

7 0 6 1 3 1 2 5 4

8 4 6 4 1 2 3 4

United States

United Kingdom

Austria Russia Poland Estonia France

Other

Group total

178

211

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2020 (EUR MILLION) Direct economic value created

Economic value distributed Operating costs

-6,183 -1,188

Sales

8,580 Employee wages and benefits 45 Payments to providers of loans

Income from sale of assets

-51

Income from financial investments

6 Dividend distribution

-693

Other income

91 Corporate income taxes paid and property taxes

-178

Total

8,722

-8,293

Economic value retained 429

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.

84

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UPM ANNUAL REPORT 2020

UPM ANNUAL REPORT 2020

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