DCSIMG
7 Income tax - Annual Report 2015 - DSM

7 Income tax

The income tax expense on the total result was €68 million, which represents an effective income tax rate of 52.4% ( 2014: €7 million, representing an effective income tax rate of 4.2%) and can be broken down as follows:

Table 1

 
2015
2014
     
Current tax expense:
   
- Current year
(104)
(64)
- Prior-year adjustments
1
10
- Tax credits compensated
3
16
- Non-recoverable withholding tax
(6)
(7)
     
 
(106)
(45)
Deferred tax expense:
   
- Originating from temporary differences and their reversal
48
76
- Prior-year adjustments
7
(7)
- Change in tax rate
(2)
26
- Change in tax losses and tax credits recognized
(15)
(57)
     
 
38
38
     
Total
(68)
(7)
     
Of which related to:
   
- The result from continuing operations before exceptional items
(97)
(84)
- The result from exceptional items continuing operations
51
11
- The result from discontinued operations
(22)
66

The effective income tax rate on the result from continuing operations before exceptional items was 22.9% in 2015 (2014: 17.3%). This increase was due amongst others to a one-time tax settlement for the internal transfer of a business and a somewhat less favorable geographical mix. For the strategy period 2016-2018, DSM expects the effective tax rate to be in the range of 18-20%. The relationship between the income tax rate in the Netherlands and the effective tax rate on the result from continuing operations is as follows:

Table 2: Effective tax rate

Effective tax rate
in %
2015
2014
     
Domestic income tax rate
25.0
25.0
     
Tax effects of:
   
- Deviating rates
7.1
(7.9)
- Tax-exempt income and non-deductible expense
(3.9)
(4.8)
- Other effects
(5.3)
5.0
     
Effective tax rate continuing operations
22.9
17.3
Discontinued operations
2.5
0.4
Exceptional items (see note 6)
0.9
(1.3)
Impairment / book result bulk chemicals
26.1
(12.2)
Total effective tax rate
52.4
4.2

Other effects relate to changes in tax losses and tax credits recognized.

The balance of deferred tax assets and deferred tax liabilities decreased by €15 million owing to the changes presented in the table below:

Table 3: Deferred tax assets and liabilities

Deferred tax assets and liabilities
 
2015
2014
     
Balance at 1 January
   
Deferred tax assets
427
364
Deferred tax liabilities
(365)
(375)
     
Total
62
(11)
     
Changes:
   
- Income tax expense in income statement
38
38
- Income tax expense in other comprehensive income
1
56
- Acquisitions and disposals
(49)
(5)
- Exchange differences
(16)
(17)
- Transfer
11
1
     
Balance at 31 December
47
62
     
Of which:
   
- Deferred tax assets
366
427
- Deferred tax liabilities
(319)
(365)

In various countries DSM has taken standpoints regarding its tax position which may at any time be challenged, or have already been challenged, by the tax authorities because the authorities in question interpret the law differently. In determining the probability of realization of deferred tax assets and liabilities these uncertainties are taken into account.

The deferred tax assets and liabilities relate to the following balance sheet items:

Table 4: Deferred tax assets and liabilities by balance sheet item

Deferred tax assets and liabilities by balance sheet item
   
2015
 
2014
 
Deferred tax assets
Deferred tax liabilities
Deferred tax assets
Deferred tax liabilities
         
Intangible assets
20
(261)
22
(224)
Property, plant and equipment
11
(214)
102
(279)
Financial assets
2
(5)
2
(4)
Inventories
54
(7)
58
(35)
Receivables
5
(6)
6
(5)
Equity
1
(3)
2
(2)
Other non-current liabilities
40
(1)
36
(1)
Non-current provisions
92
-
104
(1)
Non-current borrowings
-
-
-
-
Other current liabilities
71
(2)
81
(5)
         
 
296
(499)
413
(556)
Tax losses carried forward
250
-
205
-
Set-off
(180)
180
(191)
191
         
Total
366
(319)
427
(365)

No deferred tax assets were recognized for loss carryforwards amounting to €86 million (2014: €88 million). Unrecognized loss carryforwards amounting to €2 million will expire in the years up to and including 2020 (2014: €2 million up to and including 2019), €77 million between 2021 and 2025 (2014: €63 million between 2020 and 2024) and the remaining €7 million between 2026 and 2030 (2014: €23 million between 2025 and 2029).

The valuation of deferred tax assets depends on the probability of the reversal of temporary differences and the utilization of tax loss carryforwards. Deferred tax assets are recognized for future tax benefits arising from temporary differences and for tax loss carryforwards to the extent that the tax benefits are likely to be realized. In the Netherlands tax losses may be carried forward for nine years. For the entities in the Dutch tax consolidation, losses will start to expire in 2019. DSM has to assess the likelihood that deferred tax assets will be recovered from future taxable profits. Deferred tax assets are reduced if, and to the extent that, it is not probable that all or some portion of the deferred tax assets will be realized. In the event that actual future results differ from estimates, and depending on tax strategies that DSM may be able to implement, changes to the measurement of deferred taxes could be required, which could impact on the company’s financial position and profit for the year. The recoverability of the Dutch deferred tax assets was enhanced in 2015 due to steps that were taken to structurally improve the profitability of the operations in the Netherlands.