Note 8: Income tax

Pre-tax income from continuing operations amounted to a profit of €785 million (2018: €573 million). The net tax charges related to continuing operations are included in the statement of income as shown in the table below:

Classification of current and deferred tax result

In € millions

2018

2019

 

 

 

Current tax expense for

 

 

The year

(121)

(171)

Adjustments for previous years

23

1

Separation of Specialty Chemicals business

(4)

Total current tax expense

(102)

(170)

 

 

 

Deferred tax expense for

 

 

Separation of Specialty Chemicals business

44

Origination and reversal oftemporary differences and tax losses

(48)

(22)

(De)recognition of deferred tax assets

(9)

(45)

Changes in tax rates

(3)

7

Total deferred tax expense

(16)

(60)

Total

(118)

(230)

The total deferred tax charge including discontinued operations was €55 million (2018: €143 million). The total tax charge including discontinued operations was €229 million (2018: €549 million).

Effective tax rate reconciliation

In 2019, the effective income tax rate based on the statement of income is 29.3% (2018: 20.6%).

For comparative reasons, the next table presents the effective consolidated tax rate excluding the impact of results on discontinued operations. Including these results, the effective consolidated tax rate is 28.4% (2018: 7.5%) as the result on the sale of Specialty Chemicals was largely tax exempted; refer to Note 2).

Effective tax rate

in %

2018

2019

Corporate tax rate in the Netherlands

25.0

25.0

Effect of tax rates in other countries

(0.1)

(2.2)

Weighted average statutory income tax rate

24.9

22.8

Separation of Specialty Chemicals business

(7.0)

Non-taxable (income)/expenses

2.4

2.2

(De)recognition of deferred tax assets

1.6

5.8

Non-refundable withholding taxes

2.3

0.4

Adjustment for prior years

(4.0)

(0.2)

Deferred tax adjustment due to changes in tax rates

0.4

(1.7)

Effective tax rate

20.6

29.3

Following the divestment of the Specialty Chemicals business in 2018, the company is reorganizing itself into a focused Paints and Coatings company. As part of our Winning together: 15 by 20 ambition, we are simplifying our intercompany financing structure, enlarging the scope of our global business support services, centralizing and supply chain functions and implementing other cost-saving initiatives. This has substantially affected the income generated and expenses incurred by subsidiaries in most countries, because intercompany interest, cost sharing and royalty flows, albeit all remaining at arm’s length, have changed following these changes in the business set up. For subsidiaries in several countries in Europe, changes in future profitability have led to the derecognition or re-recognition of deferred tax assets. In aggregate, the net effect of the derecognition and re-recognition of deferred tax assets was a charge of €47 million.

The impact of non-refundable withholding tax on the tax rate is dependent on our relative share in the profit of subsidiaries in countries that levy withholding tax on dividends and on the timing of the remittance of such dividends. Based on the Dutch tax system there is a limited credit for such taxes.

Deferred tax assets and liabilities

In assessing the recognition of the deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of deferred tax assets considered realizable, however, could change in the near term if future estimates of projected taxable income during the carryforward period are revised.

From the total amount of recognized net deferred tax assets, €345 million (2018: €393 million) is related to entities that have suffered a loss in either 2019 or 2018 and where utilization is dependent on future taxable profit in excess of the profit arising from the reversal of existing taxable temporary differences. This assessment is based on management’s long-term projections and tax planning strategies.

Deferred tax assets and liabilities

In € millions

2018

2019

*

Excluding discountinued operations charge of €1 million.

Deferred tax assets

575

559

Deferred tax liabilities

(285)

(368)

Balance at December 31 prior year

290

191

Impact of adoption IFRS 15

16

Impact of adoption IFRS 9

1

Impact of application IAS 29*

(6)

Balance at January 1

301

191

Movement in deferred tax:

 

 

Changes in exchange rates

9

6

Recognized in income

(143)

(55)

Recognized in equity/ Other comprehensive income

40

37

Classified as held for sale

(6)

Acquisitions

(10)

(41)

Balance at December 31

191

138

Deferred tax assets

559

529

Deferred tax liabilities

(368)

(391)

A deferred tax liability is recognized for taxable temporary differences related to investments in subsidiaries, branches and associates and interests in joint arrangements, to the extent that it is probable that these will reverse in the foreseeable future. The expected net tax impact of the remaining differences for which no deferred tax liabilities have been recognized is €30 million (2018: €30 million).

Expiration year of loss carryforwards

In € millions

2020

2021

2022

2023

2024

Later

Unlimited

Total

Total loss carryforwards

2

2

11

134

141

133

2,995

3,418

Loss carryforwards not recognized in deferred tax assets

(1)

(1)

(8)

(1)

(2)

(15)

(1,221)

(1,249)

Total recognized

1

1

3

133

139

118

1,774

2,169

Deferred tax assets and liabilities per balance sheet item

 

December 31, 2018

December 31, 2019

In € millions

Net balance

Assets

Liabilities

Net balance

Assets

Liabilities

Intangible assets

(363)

28

391

(410)

32

442

Property, plant and equipment

47

75

28

49

83

34

Financial non-current assets

(158)

9

167

(200)

10

210

Post-retirement benefit provisions

121

124

3

158

161

3

Other provisions

37

49

12

35

44

9

Other items

79

102

23

102

147

45

Tax credits

150

150

173

173

Tax loss carryforwards

582

582

641

641

Deferred tax assets not recognized

(304)

(304)

(410)

(410)

Tax assets/liabilities

191

815

624

138

881

743

Set-off of tax

(256)

(256)

(352)

(352)

Net deferred taxes

191

559

368

138

529

391

Unrecognized deferred tax assets

In € millions

2018

2019

*

Mainly related to post-retirement benefit provisions.

Tax losses and tax credits

167

242

Deductible temporary differences*

137

168

Total

304

410

Income tax recognized in equity

In € millions

2018

2019

Currency exchange differences on intercompany loans ofapermanent nature

17

11

Cash flow hedges

5

Share-based compensation

(1)

4

Post-retirement benefits

24

24

Impact of adoption IFRS 15

16

Impact of adoption IFRS 9

1

Impact of application IAS 29

(7)

Total

55

39

Current tax

5

2

Deferred tax

50

37

Total

55

39

R&D

Research & Development.