UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

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

7.2 Deferred tax

Movements in deferred tax assets and liabilities

EURm

2023 2022

EURm

2023 2022 2021

Carrying value, at 1 January Charged to income statement

Deferred tax assets Intangible assets and property, plant and equipment

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. In December 2022, EU member states reached agreement to implement at EU level the minimum taxation component, known as Pillar Two, 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. UPM is within the scope of the OECD Pillar Two model rules. Pillar Two legislation was enacted in Finland in 2023, the jurisdiction in which UPM is incorporated, and will come into effect from 1 January 2024. Since the Pillar Two legislation was not effective at the reporting date, the group has no related current tax exposure. The group applies the exception to recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments to IAS 12 issued in May 2023. UPM is currently evaluating Pillar Two requirements and legislation in the jurisdictions that are likely to be impacted. For the annual reporting period to 31 December 2023, some of the jurisdictions have effective tax rate below 15% as calculated in accordance with IAS 12. However, the group might not be exposed to paying Pillar Two income taxes. This is due to the impact of specific adjustments in calculating the GloBE effective tax rates compared to those calculated in accordance with paragraph 86 of IAS 12 as well as substance based income exclusion which limits the tax base. Based on initial assessment, if the Pillar Two rules had been applicable in 2023, there would not have been any impact on group’s income taxes. The assessment is based on the current information available and may change as more details and guidance on the implementation of the Pillar Two rules are released. The main jurisdiction for possible exposure to additional Pillar Two income taxes is Uruguay. The financial impact would depend on the results of the Uruguay subsidiaries and the decrease in the substance based income exclusion in accordance with the OECD Pillar Two model rules in subsequent years. Due to the complexities in applying the legislation and calculating GloBE income and additional guidance still being developed by OECD, the quantitative impact of the enacted or substantively enacted legislation is not yet reasonably estimable. The law for a temporary profit tax on the electricity sector in Finland was enacted in March 2023. The additional tax to be applied is 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 normal 20 % corporate income tax rate on profits generated from electricity operations). UPM is in scope of temporary profit tax and the additional tax accrued amounted to EUR 1 million.

-151

-130

90

-44 58 -26

66 77 94

86 86 88

83 53

Charged to other comprehensive income

-113

In 2023, tax on profit for the year amounted to EUR 71 million (388 million). The effective tax rate was 15.2% (19.9%). In 2023 and 2022, 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 2023, effective tax rate was significantly impacted by restructuring charges and impairment charges related to the closure of the UPM Plattling paper mill and paper machine 6 at the UPM Schongau mill in Germany. Income tax

Inventories

Companies acquired

-5

Retirement benefit liabilities and provisions

127 269 230 -297 466

Classified as held for sale Exchange rate adjustments

-13

—

Other temporary differences

175 242 -224 431

475 167 -417 485

7

-9

Tax losses and tax credits carried forward

Net deferred tax assets (liabilities)

-185

-151

Offset against liabilities

Total

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.

Deferred tax liabilities Intangible assets and property, plant and equipment

-265 -412

-335 -423

-261 -398

Forest assets

EURm

2023 2022

Retirement benefit assets Other temporary differences

—

-2

-17

Current tax expense

161

344

-163 224 -616 -185

-294 417 -636 -151

-217 297 -596 -130

Change in deferred taxes

-90 71

44

Offset against assets

Total

388

Total

Net deferred tax assets (liabilities)

Tax rate reconciliation

EURm

2023 2022

Tax charge to other comprehensive income

Profit before tax

464

1,944

Before tax

Tax

After tax

Before tax

Tax

After tax

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

93 -28 -51 28

389

62 -99 11

EURm

2023

2022

Tax-exempt income

Actuarial gains and losses on defined benefit plans

-14

4

-10

249

-57 -23

192

Non-deductible expenses

Energy shareholdings Translation differences

-1,370

19

-1,351

1,074

1,051

Withholding taxes

2

0

-120 673

—

-120 539

150 -665

—

150 -531

Tax loss with no tax benefit

45

19

Cash flow hedges

-134

134

Results of associates

0

-1

Net investment hedges

8

-2

6

-19

4

-15

Change in tax legislation

—

1 9

Total

-823

-113

-936

789

58

847

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

-5 -3 -9

-9

Other items

7

Key estimates and judgements

Unrecognised deferred tax assets and liabilities The net operating loss carry-forwards for which no deferred tax is recognised due to uncertainty of their utilisation amounted to EUR 902 million (890 million) in 2023. These net operating loss carry-forwards are mainly attributable to certain German and French subsidiaries and do not expire, as well as to certain Uruguayan subsidiaries which expire at different times by the end of 2028. 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. In Uruguay tax credits amounting to EUR 155 million have not been recognised due to uncertainty of their utilisation. 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.

Total income taxes Effective tax rate, %

71

388

15.2 % 19.9 %

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 2023, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 841 million (584 million), of which EUR 772 million (514 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 and tax credits 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, some of which are outside of the control of the group.

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.

216

217

UPM ANNUAL REPORT 2023

UPM ANNUAL REPORT 2023

UPM FINANCIAL REPORT 2023

216

UPM FINANCIAL REPORT 2023

217