UPM Annual Report 2022

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ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

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

Timing of nominal amounts of derivatives 2022

Within 1 year

Between 1–5 years

Later than 5 years

Total

EURm

2022

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

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. The Finnish Government has published in December 2022 the law proposal for a temporary profit tax on the electricity sector. The proposed tax would be 30% of the companies’ net profits generated from the electricity business in Finland in fiscal year 2023 exceeding 10% annual return on shareholder’s equity of the electricity business (in addition to standard 20 % corporate income tax rate on profits generated from electricity operations). According to the proposal, internal electricity business profits would not be taken into account when calculating the taxable net profit for the temporary profit tax. UPM Energy is the second largest electricity producer in Finland and in the scope of the proposed temporary profit tax. The tax would become payable in early 2024. However, the financial impact would depend on the results of the electricity business and energy market development. In December 2022, EU member states reached agreement to implement at EU level the minimum taxation component, known as Pillar 2, of the OECD’s reform of international taxation. The entities in scope will be liable to pay a top-up tax for the difference between their GloBE effective tax rate per jurisdiction and the 15% minimum rate. The EU currently has plans to implement the rules in member states in 2023 with an effective date for accounting periods starting on or after 31 December 2023. The rules have no impact on current or deferred taxes for financial reporting period ending on 31 December 2022 as Pillar 2 requirements have not been substantively enacted in any of the territories in which it operates. UPM is currently evaluating Pillar 2 requirements and legislation in the jurisdictions that are likely to be impacted.

2,597

— — —

2,615

Net investment hedge Non-qualifying hedges Cross currency swaps Non-qualifying hedges Interest rate risk Interest rate swaps Fair value hedges Cross currency swaps Fair value hedges Interest rate futures Non-qualifying hedges

365 928

—

365 934

In 2022, tax on profit for the year amounted to EUR 388 million (240 million). The effective tax rate was 19.9% (15.5%). In 2022 and 2021, 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 2021, effective tax rate was also impacted by tax exempt capital gain on the sale of shares of Shotton Mill Ltd. Income tax

—

149

—

352

750

1,102

—

149

EURm

2022 2021

Current tax expense

344

273

1,969

—

1,969

Change in deferred taxes

-32

Commodity risk Electricity sales

Total

388

240

Cash flow hedges

968

393

— —

1,361

Tax rate reconciliation

Non-qualifying hedges

Electricity purchase Cash flow hedges

244

—

283

EURm

2022 2021

Other commodities Non-qualifying hedges

Profit before tax

1,944

1,548

—

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

389

310

62 -99 11

-16 -90

Tax-exempt income

Timing of nominal amounts of derivatives 2021

Within 1 year

Between 1–5 years

Later than 5 years

Total

Non-deductible expenses

6 4

EURm

2021

Withholding taxes

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

Tax loss with no tax benefit

Results of associates

-1

0 2

2,196

— — —

2,286

7.2 Deferred tax

Change in tax legislation

1 9

Net investment hedge Non-qualifying hedges Cross currency swaps Non-qualifying hedges

392 864

—

392 872

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

-9

-3 -3

EURm

2022 2021 2020

Other items

Deferred tax assets Intangible assets and property, plant and equipment

—

161

Total income taxes Effective tax rate, %

388

240

Interest rate risk Interest rate swaps Fair value hedges

19.9 % 15.5 %

Inventories

86 88

— —

1,081

Retirement benefit liabilities and provisions

127 269 230 -297 466

156 163 157 -170 421

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. 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

Non-qualifying hedges Cross currency swaps Fair value hedges Interest rate futures Non-qualifying hedges

—

Other temporary differences

475 167 -417 485

Tax losses and tax credits carried forward

—

161

Offset against liabilities

Total

2,190

—

2,280

Deferred tax liabilities Intangible assets and property, plant and equipment

Commodity risk Electricity sales

-335

-261

-245

Forest assets

-423

-398

-352

Cash flow hedges

612

335

— —

947

Retirement benefit assets Other temporary differences

-2

-17

-5

Non-qualifying hedges Electricity purchase Cash flow hedges Other commodities Non-qualifying hedges

—

-294 417 -636 -151

-217 297 -596 -130

-132 170 -564 -143

Offset against assets

397

108

—

505

Total

Net deferred tax assets (liabilities)

—

The nominals of cross currency swaps are included in both foreign exchange risk and interest rate risk.