UPM Annual Report 2021

ACCOUNTS FOR 2021

UPM

BEYOND FOSSILS

STRATEGY

BUSINESSES

RESPONSIBILITY

GOVERNANCE

7. Income tax 7.1 Tax on profit for the year Income tax

Movements in deferred tax assets and liabilities

EURm

2021 2020

Carrying value, at 1 January Charged to income statement

-143

-153

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. 7.2 Deferred tax

32 -15

-28 29

Charged to other comprehensive income

In 2021, tax on profit for the year amounted to EUR 240 million (169 million). The effective tax rate was 15.5% (22.9%). In 2021 and 2020, the effective tax rate was affected by the income not subject to tax from subsidiaries operating in tax free zone and German tax rate that is higher than in Finland. In addition, in 2021 effective tax rate was impacted by tax exempt capital gain on the sale of shares of Shotton Mill Ltd and in 2020 by the losses resulting from the closure of UPM Chapelle paper mill for which no deferred tax assets were recognised due to uncertainty of their utilisation. Income tax

Exchange rate adjustments

-4

9

Net deferred tax assets (liabilities)

-130

-143

Tax charge to other comprehensive income

Before tax

Tax

After tax

Before tax

Tax

After tax

EURm

2021

2020

Actuarial gains and losses on defined benefit plans

128 643 337 -149

-32 -11

96

-50

14

-36

Energy shareholdings Translation differences

632 337 -127

-254 -262

3

-251 -262

EURm

2021 2020 2019

—

—

Deferred tax assets Intangible assets and property, plant and equipment

EURm

2021 2020

Cash flow hedges

22

-37

13

-24

Current tax expense

273

141

Net investment hedges

-27

5

-21

6

-1

5

83

77

77

Change in deferred taxes

-32

28

Total

933

-15

918

-597

29

-569

Inventories

53

38

45

Total

240

169

Retirement benefit liabilities and provisions

127 269 230 -297 466

156 163 157 -170 421

148 103 180 -157 395

Other temporary differences

Tax losses and tax credits carried forward

Key estimates and judgements

Tax rate reconciliation

Offset against liabilities

Total

EURm

2021 2020

Deferred tax liabilities Intangible assets and property, plant and equipment

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 2021, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 802 million (536 million), of which EUR 717 million (475 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, The net operating loss carry-forwards for which no deferred tax is recognised due to uncertainty of their utilisation amounted to EUR 843 million (849 million) in 2021. These net operating loss carry-forwards are mainly attributable to certain German and French subsidiaries and do not expire. In addition, the group has not recognised deferred tax assets on loss carry-forwards relating to closed Miramichi paper mill due to only minor operations in Canada. These loss carry-forwards expire at different times by the end of 2029. some of which are outside of the control of the group. Unrecognised deferred tax assets and liabilities

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.

Profit before tax

1,548

737 147

-261

-245

-249

Computed tax at Finnish statutory rate of 20% Difference between Finnish and foreign rates

310

Forest assets

-398

-352

-364

-16 -90

1

Retirement benefit assets Other temporary differences

-17

-5

-7

Tax-exempt income

-29

-217 297 -596 -130

-132 170 -564 -143

-86

Non-deductible expenses

6 4

6 9

Offset against assets

157 -549 -153

Withholding taxes

Total

Tax loss with no tax benefit

18

29

Net deferred tax assets (liabilities)

Results of associates

0 2

-1

Change in tax legislation

4 3

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

13

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.

-3 -3

-3

Other items

2

Total income taxes Effective tax rate, %

240

169

15.5 % 22.9 %

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.

202

UPM FINANCIAL REPORT 2021 203 UPM ANNUAL REPORT 2021 203

UPM ANNUAL REPORT 2021

UPM FINANCIAL REPORT 2021 202