UPM Annual Report 2022

RESPONSIBILITY

UPM

BEYOND FOSSILS

BUSINESSES

GOVERNANCE

ACCOUNTS FOR 2022

CONTRIBUTING TO SOCIETY THROUGH TAXES CREATING VALUE FOR PEOPLE AND SOCIETY

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.

measures introduced in the EU in response to the developments in the energy market over the year. Energy taxation is relevant to us not only as a significant electricity producer but also in our manufacturing processes and the taxation of end products, as well as taxation at various levels of the supply chain. Electricity produced by us is subject to electricity taxation, regardless of which sources are used. The majority of our elec tricity production is CO 2 free hydropower and nuclear power. Also, our renewable products (UPM BioVerno diesel and naphtha produced from a residue of pulp production) are sub ject to the energy taxation charged by fuel distributors to their customers. However, the energy tax rates for transport fuels from renewable and sustainable sources, like UPM BioVerno, are lower than those from fossil fuels. Most of the energy used in our 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, industrial production. Many of the main

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 created or have any investments in production or service operations in jurisdictions defined by the Council of the European Union as non-co-operative jurisdictions for tax purposes, or in any similar secrecy jurisdictions. A list of UPM subsidiaries and joint operations, as well as their country of incorporation, can be found on page 214. Furthermore, our sites contribute to lo cal employment, income tax and purchasing power, as well as engaging in projects with communities. Information can be found in the pulp and paper mills’ third-party veri fied EMAS reports on environmental and societal responsibility. In addition to future changes to global income taxation as described above, the European Commission also aims to reform the current taxation of energy products and electricity as part of the European Green Deal development programme and its Fit for 55 climate package. The energy sector has also been impacted by the temporary Energy taxation at various levels of the value chain

Our tax governance and tax compliance

The Board of Directors’ Audit Commit tee is responsible for the supervision of tax risk management as part of our 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. A more thorough review of the tax practices of customers and suppliers is part of our counterparty risk management processes. The UPM Tax Strategy is supported by internal instructions, internal con trols and the benchmark analyses of best practice. Tax matters are managed by our tax function, which is complemented by third-party tax services to comply with lo cal tax reporting and filing, as well as other requirements. We aim to co-operate transparently and proactively with tax authorities. We also value dialogue with other important stake holders concerning taxation. In Finland, UPM co-operates with the Finnish Tax Administration.

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

Throughout 2022, the OECD, the G20 forum and the European Union (EU) continued to introduce and develop solu tions to address the tax challenges arising from the digitalisation and globalisation of economies. These solutions are aiming for a minimum level of taxation of compa nies in the countries where they operate (the OECD’s Statement on a Two-Pillar Solution), as well as 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 ini tiatives 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 continue to monitor these developments in the global principles of taxation and to assess the impact to UPM. We will modify our tax reporting accordingly as soon as the final definitions are available. Despite the turbulent year, we improved our financial performance in 2022, which is also reflected in the tax revenues gener ated in various countries. In 2022, UPM’s effective tax rate was 19.9% (15.5%) and its cash tax rate was 16.2% (17.8%). The cor porate income tax reported in 2022 was EUR 388 million (EUR 240 million) and the corporate income tax paid in 2022 was EUR 315 million (EUR 276 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. Corporate income taxes vary by country

IMPACT • Taxes contribute to society on a local, regional and national level TARGETS • We are strongly committed to continuously improving our economic and social performance • Our good financial performance 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 VAT, payroll tax and social security contri butions). We paid real estate and similar taxes in various countries to the sum of EUR 35 million (EUR 30 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, UPM mainly 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 develop ment operations. As a result, UPM is one of the major taxpayers in Finland. UPM’s corporate income tax in Finland in 2022 is estimated to be EUR 247 million (EUR 234 million), with subsidiaries reporting and paying approximately EUR 175 million (EUR 121 million). The remaining figure

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

of approximately EUR 71 million (EUR 113 million) will be reported and paid by the 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 permit to operate in a free-trade zone and therefore taxes in Uruguay mainly consist of property tax and annual tax-like charges paid to the Uruguay government for the de velopment of the zone. The new pulp mill in Uruguay will also be located in a similar free-trade zone. 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,

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2022 (EUR MILLION) Direct economic value created

CORPORATE INCOME TAXES PAID AND PROPERTY TAXES BY COUNTRY EURm 2022

Economic value distributed Operating costs

2021

289

-8,289 -1,181

Finland

225

-10

Sales

11,720 Employee wages and benefits 76 Payments to providers of loans

Germany Uruguay

20 15 24

18 11 27

Income from sale of assets

-95

Income from financial investments

11 Dividend distribution

-693

China

Corporate income taxes paid and property taxes

United States

8 3 0 4 2 1 2 2

-349

Other income

194

4 1 1 2 1 2 3

United Kingdom

Total

12,001

-10,607

Austria Russia Poland Estonia France

Economic value retained 1,394

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.

Other

Group total

349

306

80

81

UPM ANNUAL REPORT 2022

UPM ANNUAL REPORT 2022