UPM annual report 2014

UPM’S CORPORATE INCOME TAX IN FINLAND REACHES NEARLY EUR 90 MILLION

UPM pays income tax where added value is created and profit generated. As a result, especially in the countries where UPM’s different business areas have significant value- adding operations, the company is also a major tax payer both of direct taxes (for example corporate income tax, real estate tax) and indirect taxes (value added tax). In addition to Finland, UPM has significant investments in production, for example in Uruguay, Germany, China, the UK and the USA. Corporate income tax particularly, which is based on the company’s taxable profits, is directly proportional to the company’s profitability. UPM has worked systematically to improve its profitability over the past few years, not only through increasing its cost efficiency and making savings, but also by investing in new operations. Corporate income tax is paid in accordance with local legislation. In some countries, governments support companies making significant investments, for example by granting temporary operating permits for special economic zones. In Uruguay, the government has granted a permit to UPM’s pulp mill to operate in a free trade zone. Finland’s corporate income tax rate decreased to 20% from the beginning of 2014. UPM’s corporate income tax in Finland in 2014, estimated at nearly EUR 90 million, has been calculated at the tax rate of 20%. In 2013, UPM’s corporate income tax in Finland was EUR 116 million at the tax rate of 24.5%. UPM is one of Finland’s biggest tax payers Despite the challenging operating environment, UPM has been able to improve its results through its own actions year on year, and thus the amount of taxes paid has also increased. Another reason for the large amount of taxes paid is that UPM has significant operations in Finland through all of its six business areas. At the same time as some operations have been reduced, new operations have been started and new service concepts have been developed. Investments have been made in production and service operations as well as in research and development, which will contribute to the results in the future. For example, following research work carried out in Finland, the production of biofuels has been started in Lappeenranta. Local investments and expertise can also be used in a completely new business environ- ment, good examples of which include business premises and related services provided by UPM to entrepreneurs in Kajaani and Kouvola, and the provision of forest management services to an increasingly larger group of investors. A certain amount of the corporate income tax paid by UPM in Finland is distributed to regions where the company has significant operations, for example Lappeenranta, Jämsä, Kouvola, Rauma and Tampere. In addition to this corporate income tax and real estate tax paid by UPM, the taxes paid by the company’s own employees and indirectly-employed contractors increase the tax revenue of the regions. The taxes are used to finance common services and projects, with the purchasing power of UPM and its employees also adding to the vitality of these regions.

STAKEHOLDERS 31–44

UPM’s tax policy promotes compliance, risk management, transparency and efficiency

local tax legislation and regulations of the country in question. UPM’s significance to local tax revenue is especially emphasised at the locations of production sites. In addition to the taxes paid by UPM, such as corporate income taxes and real estate taxes, the local impact is augmented by the taxes paid to the local municipalities by UPM’s employees as well as those indirectly employed to perform various services at the production sites. Work on developing tax transparency continues UPM supports transparency of tax issues through sufficient and regular reporting on taxes and by open communication with authorities and other relevant stakeholders. UPM aims to achieve a transparent, proac- tive and professional relationship with tax authorities in all the countries where it operates. An enhanced relationship or co-operative compliance, available in some countries, is one example of a more structured way of improving co-operation with tax authorities. OECD recom- mends an enhanced relationship between tax authorities and large taxpayers to enable the real-time sharing of information on significant tax matters to make sure that the correct tax is paid when it is due and to avoid unnecessary compliance costs. In Finland, UPM participates in a voluntary pilot project of enhanced relationship with the Finnish tax authority, the Large Taxpayer’s Office. In 2014, the enhanced relationship started with so-called compliance scans that included a review of UPM’s current tax control framework concerning all taxes supervised by the Large Taxpayer’s Office. Through the pilot project, UPM aims to achieve efficiency, cost savings and certainty around tax issues in the long term.

Based on the standards of behaviour required by UPM’s Code of Conduct, UPM’s tax policy describes the main principles and guidelines of taxation at UPM. UPM is committed to paying all the relevant statutory indirect, direct and other taxes and to file, report and disclose the information required to comply with the pre- vailing legal requirements and transparency objectives of UPM. The four main principles of UPM’s tax policy, updated in 2014, are: • Compliance with relevant statutory legislations and rules. • Management of tax risks, both financial and non-financial. • Transparency of tax issues and an overall • Continuous enhancement of shareholder value by aiming for cost efficient and opti- mal tax processes, business transactions and structures. UPM pays taxes where value is created All of UPM’s tax-relevant transactions are based on commercial rationale. The location of UPM’s group entities is driven by business reasons, such as the location of customers, suppliers, raw materials and know-how. UPM recognises the importance of follow- ing arm’s length standards as stated in the OECD guidelines and in other standards. Accordingly, transactions are taxed where operations are performed and where value is created. Due to UPM’s corporate and operational structure, UPM reports and pays its corporate income taxes mainly in the production coun- tries and in the countries where innovations are being developed, in accordance with the requirement of commercial rationale concerning tax-related transactions.

DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED BY UPM IN 2014 (EUR MILLION)

In addition to the enhanced relationship with tax authorities, UPM has engaged in open dialogue with various stakeholder groups inter- ested in tax issues. UPM aims to develop tax reporting that meets the expectations of various stakeholders. UPM closely follows the develop- ment of international and local guidelines and recommendations for country-by-country reporting, for example via OECD’s work on tax reporting or other international corporate responsibility initiatives as well as local legislations.

Direct economic value created

Economic value distributed

Operating costs

–7,413

Sales

9,868

Employee wages and benefits

–1,290

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.

Income from sale of assets

158

Payments to providers of loans

–51

Income from financial investments

Dividend distribution

–319

9

Corporate income taxes paid and donations

Other income

29

–82

10,064

–9,155

UPM’s tax policy is available at www.upm.com

Economic value retained 909

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UPM Annual Report 2014

UPM Annual Report 2014