Note 9: Income tax

Pre-tax income from continuing operations amounted to a profit of €1,105 million (2020: €919 million). The net tax charges related to continuing operations are included in the statement of income as shown in this Note and amount to €246 million (2020: €241 million), leading to an effective tax rate of 22.3% (2020: 26.2%).

Classification of current and deferred tax result

In 2021, the income tax expense was €246 million (2020: €241 million). A breakdown into current and deferred tax expenses and a split of the main categories is provided in the table below. For comparative reasons, this table presents the income tax expense excluding the impact from results on discontinued operations. The total deferred tax charge including discontinued operations was €77 million (2020: €108 million). The total tax charge including discontinued operations was €248 million (2020: €249 million).

Adjustments for prior years in 2021 is mainly related to a net tax benefit of €29 million for the UK Advanced Corporation Tax (ACT) case, which is further described in Note 4 on Alternative Performance Measures due to its identified nature. Origination and reversal of temporary differences and tax losses is driven, amongst others, by timing differences between recognition and payments for provisions, timing differences on depreciation and amortization for tax purposes versus the consolidated financial statements, and tax loss carryforwards utilized against profits of the year or new tax losses incurred. Changes in tax rates in 2021 mainly relate to the changes in the UK and Dutch tax rates.

Effective tax rate reconciliation

In 2021, the effective income tax rate based on the statement of income is 22.3% (2020: 26.2%). A reconciliation between the effective tax rate and the weighted average statutory income tax rate is provided in the table below. For comparative reasons, this table presents the effective consolidated tax rate excluding the impact from results on discontinued operations. Including these results, the effective consolidated tax rate is 22.3% (2020: 27.1%)

Non-taxable income is mainly related to interest on tax credits in Brazil, the Innovation box in the Netherlands, R&D credits and the tax exemption for investments. Non-deductible expenses are mainly related to base erosion and the effects of Argentina hyperinflation accounting. Adjustments for prior years in 2021 is mainly related to the UK Advanced Corporation Tax (ACT) case, which is further described in Note 4 on Alternative Performance Measures due to its identified nature. Changes in tax rates in 2021 mainly relate to the changes in the UK and Dutch tax rates.

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.

Origination of deferred tax assets and liabilities

Deferred tax assets and liabilities originate from temporary differences in various balance sheet line items, as well as from tax credits and tax loss carryforwards.

The below tables show the origination of deferred tax assets and liabilities, and the movements thereof, for the financial years 2021 and 2020.

Reconciliation deferred tax assets and liabilities to the balance sheet

The above table provides a reconciliation of the total deferred tax amounts for each of the originating items to the deferred tax asset and liability positions as included in the balance sheet.

Deferred tax asset recoverability assessment

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, losses, and credits 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. The majority of the amount of the non-current portion of deferred or current taxes will be recovered or settled after more than 12 months.

In 2020 and 2021, deferred tax asset recoverability has been assessed using taxable profit forecasts, which take the potential impact of the COVID-19 pandemic on future results into account. These assessments showed sufficient taxable profit to recover deferred tax assets in most jurisdictions, whilst in some jurisdictions this resulted in derecognitions or re-recognitions. In 2021, these assessments resulted in a net re-recognition of deferred tax assets of €18 million (2020: net re-recognition of €4 million).

Deferred tax assets not recognized fully relate to tax loss carryforwards in 2021. The losses in the tables on tax losses carried forward are gross amounts, with the tax impact included in the last column of the table.

From the total amount of recognized net deferred tax assets, €151 million (2020: €196 million) is related to entities that have suffered a loss in either the current of the previous year 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.

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 €31 million (2020: €33 million).

The following table shows income tax items recognized in equity by category.