UPM Annual Report 2021

RESPONSIBILITY

BEYOND FOSSILS

STRATEGY

BUSINESSES

GOVERNANCE

ACCOUNTS FOR 2021

UPM

RESPONSIBLE FOUNDATION OF OUR BUSINESS

pulp and papermills’ EMAS-verified reports on environmental and societal responsibility. Energy taxation at various levels of the value chain In addition to changes in global income taxation in the future, as described above, the European Commission also proposes to reform the current taxation of energy prod ucts and electricity as part of the European Green Deal development programme and its Fit for 55 climate package. Energy taxation is relevant to us, not only as a significant electricity producer but also in themanufacturing processes of our prod ucts, in terms of the taxation of end products as well as at various levels of the supply chain. Therefore, we will monitor the implemen tation of the EU’s reformwith great interest and welcome all initiatives to create a future beyond fossils in accordance with our values. Electricity produced by us is subject to electricity taxation, regardless of which sources are used. The majority of our electricity production is CO 2 emission-free hydropower and nuclear power. Also our renewable products, UPMBio Verno diesel and naphtha, which are produced froma residue of pulp production, are subject to energy taxation charged by fuel distributors to their customers. However, the energy tax rates for transport fuels fromrenewable and sustainable sources, likeUPMBioVerno, 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 allow member states to compensate for the taxes paid on, or apply lower tax rates to, ener gy-intensive industrial production, for exam ple. Many of themain 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.

GENERATING TAX REVENUE The winds of change are blowing through the global principles of taxation.

Throughout 2021, the OECD, G20 and EuropeanUnion (EU) introduced solutions to address the tax challenges arising from the digitalisation and globalisation of economies. For example, these solutions are aiming for aminimum level of taxation of companies in the countries in which they operate (the OECD’s Statement on a Two-Pillar Solu tion), as well as for a standardised public tax reporting by companies (the EU’s public country-by-country reporting). We have implemented our transparent and responsible Tax Strategy for several years. Therefore, we welcome any initiatives for more standardised global tax reporting by corporations, as well as those for fair and responsible tax payments in the countries where corporations operate. We will modify our tax reporting accordingly, alongside our current GRI-reporting, as soon as the final definitions of these projects are available. UPM’s effective tax rate in 2021 was 15.5% (22.9%) and its cash tax rate was 17.8% (19.8%). Due to the fast recovery of our profitability from the pandemic that hit in 2020, the corporate income tax reported in 2021 was EUR 240 million (EUR 169 million) and the corporate income tax paid in 2021 was EUR 276 million (EUR 146 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). UPM paid real estate and similar taxes in various countries to the sum of EUR 30 million (EUR 32 million). The table on the right displays the corporate income tax and property tax paid in our main countries of operation. Based on our corporate and operational structure, Corporate income taxes vary by countries

IMPACT • Taxes contribute to society on local, regional and national level. TARGET • We are strongly committed to continu ously improving our economic and social performance • Our good financial performance also generates higher tax revenues • Our businesses also play a leading role in contributing to societal development in the surrounding communities through the tax revenue we generate UPMmainly reports and pays its corporate income tax in countries where production and innovating activity takes place. In Finland, we have significant production operations across our six business areas, as well as research and development operations. As a result, UPM is one of themajor taxpay ers in Finland. UPM’s corporate income tax in Finland in 2021 is estimated to be EUR 235 million (EUR 88million), with subsidiaries reporting and paying approximately EUR 122million (EUR 79million). The remaining figure of approximately EUR 113million (EUR 9million) will be reported and paid by the UPM-Kymmene Corporation. InUruguay, the government has granted several free-trade zone permits for domestic and foreign investments. The Uruguay gov ernment has granted our pulpmill a permit to operate in a free-trade zone, and therefore taxes inUruguaymainly consist of property tax and annual tax-like charges paid to the Uruguay government for the development of the zone. The newpulpmill under con struction inUruguay will also be located in a similar free-trade zone.

OUR WAY • Based on the standards of the UPM Code of Conduct, the UPM Tax Strategy describes the main principles of and guide lines for 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

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 of customers and suppliers is a part of our counterparty risk management processes. The UPMTax Strategy is supported by internal instructions, benchmark analyses of best practice and related internal controls. Taxmatters aremanaged 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 stakeholders concerning taxation. In Finland, UPMco-op erates with the Finnish Tax Administration.

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2021

2020

225

Finland

91 14 13 28

20 15 24

Germany Uruguay

China

8 3 0 4 2 1 2 2

United States

8 4 6 4 1 2 3 4

United Kingdom

Austria Russia Poland Estonia France

In China, as a fine paper producer, UPM qualifies as a high-tech enterprise with a reduced corporate income tax rate of 15%. UPM also pays withholding tax on divi dends in China. In countries where our companies are using tax losses from previous years to off set the tax liability of the year in question, such as Germany, limited corporate income tax is paid. In accordance with UPM’s Tax Strategy, the locations of our companies are driven by commercial rationale and business reasoning. We do not transfer any value cre ated, nor have any investments in produc tion 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 incor poration, can be found on pages 204-206. Furthermore, our sites contribute to local employment, income tax and purchasing power, and are engaging in projects with com munities. Information can be found in the

Other

Group total

306

178

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2021 (EUR MILLION) Direct economic value created

Economic value distributed Operating costs

-7,010 -1,094

Sales

9,814 Employee wages and benefits 181 Payments to providers of loans

Income from sale of assets

-28

Income from financial investments

3 Dividend distribution

-693

-306

Other income

107 Corporate income taxes paid and property taxes

Our tax governance and tax compliance

Total

10,105

-9,131

Economic value retained 974

The Board of Directors’ Audit Committee is responsible for the supervision of tax risk management as part of our risk manage

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.

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UPM ANNUAL REPORT 2021

UPM ANNUAL REPORT 2021