Note 9: Income tax

Pre-tax income from continuing operations for the year amounted to a profit of €602 million (2021: €1,105 million). The net tax charges related to continuing operations are included in the statement of income as shown in this Note and amount to €214 million (2021: €246 million), leading to an effective tax rate of 35.5% (2021: 22.3%).

Classification of current and deferred tax result

A breakdown into current and deferred tax expenses and a split of the main categories is provided in the next table. For comparative reasons, this table presents the income tax expense excluding the impact from discontinued operations. The total deferred tax in the statement of income including discontinued operations was a credit of €8 million (2021: €77 million charge). The total tax charge including discontinued operations was €211 million (2021: €248 million).

Adjustments for prior years in 2022 is mainly related to a net tax charge of €13 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 2022 mainly relate to the changes in the UK tax rate (2021: Dutch and UK tax rates).

Effective tax rate reconciliation

In 2022, the effective income tax rate based on the statement of income is 35.5% (2021: 22.3%). A reconciliation between the effective tax rate and the weighted average statutory income tax rate is provided in the next table. For comparative reasons, this table presents the effective consolidated tax rate excluding the impact from discontinued operations. Including these results, the effective consolidated tax rate is 35.8% (2021: 22.3%).

Non-taxable income is mainly related to R&D credits and the tax exemption for investments (2021: 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 the effects of Argentina and Türkiye hyperinflation accounting and certain non-deductible costs in various countries (2021: non-deductible costs and the effects of Argentina hyperinflation accounting).

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.

Adjustments for prior years in 2022 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 2022 mainly relate to the changes in the UK tax rate (2021: Dutch and UK tax rates).

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 tables below show the origination of deferred tax assets and liabilities, and the movements thereof, for the financial years 2022 and 2021.

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 assets recoverability assessment

In assessing the recognition of 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 against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized. 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 could change 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 and current taxes will be recovered or settled after more than 12 months.

In 2022 and 2021, deferred tax asset recoverability has been assessed using taxable profit forecasts. In 2022, these assessments did not result in a significant net derecognition or re-recognition of deferred tax assets (2021: net re-recognition of €18 million).

Both in 2022 and 2021, deferred tax assets not recognized relate to tax loss carryforwards. 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, €206 million (2021: €151 million) is related to entities that have suffered a loss in either the current or 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 €55 million (2021: €31 million).

Income tax recognized in equity

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

Impact OECD Pillar Two Framework

AkzoNobel is closely monitoring progress on the OECD Pillar Two global minimum tax rate legislative framework in each jurisdiction where the group has operations. At year-end 2022, the group does not have sufficient information to determine the potential quantitative impact. The recently announced safe harbor rules are likely to limit the financial impact in particular during the 3-year transitional period during which these safe harbor rules apply.