Income tax
The income tax expense on the total result was €89 million, which represents an effective income tax rate of 17.0% (2015: €68 million, representing an effective income tax rate of 52.4%) and can be broken down as follows:
2016 | 2015 | |
Current tax expense: | ||
- Current year | (113) | (104) |
- Prior-year adjustments | (10) | 1 |
- Tax credits compensated | 3 | 3 |
- Non-recoverable withholding tax | (2) | (6) |
(122) | (106) | |
Deferred tax expense: | ||
- Originating from temporary differences and their reversal | 79 | 48 |
- Prior-year adjustments | 7 | 7 |
- Change in tax rate | (4) | (2) |
- Change in tax losses and tax credits recognized | (49) | (15) |
33 | 38 | |
Total | (89) | (68) |
Of which related to: | ||
- Adjusted result from continuing operations | (120) | (97) |
- APM adjustments | 31 | 51 |
- Result from discontinued operations | - | (22) |
The effective tax rate on the Adjusted result from continuing operations was 18.3% in 2016 (2015: 22.9%). This decrease was due amongst others to a more favorable geographical mix and a one-time tax settlement for the internal transfer of a business in 2015. 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 is as follows:
Effective tax rate
in % | 2016 | 2015 |
Domestic income tax rate | 25.0 | 25.0 |
Tax effects of: | ||
- Deviating rates | (5.4) | 7.1 |
- Tax-exempt income and non-deductible expense | (0.3) | (3.9) |
- Other effects | (1.0) | (5.3) |
Effective tax rate Adjusted result, continuing operations | 18.3 | 22.9 |
Discontinued operations | (1.1) | 2.5 |
APM adjustments (see Note 2) | (0.2) | 0.9 |
Impairment / book result bulk chemicals | - | 26.1 |
Total effective tax rate | 17.0 | 52.4 |
Other effects mainly include an internal transfer of business (-5.5%) and a change in the recognition of tax losses (+3.6%).
The balance of deferred tax assets and deferred tax liabilities increased by €30 million owing to the changes presented in the table below:
Deferred tax assets and liabilities
2016 | 2015 | |
Balance at 1 January | ||
|---|---|---|
Deferred tax assets | 366 | 427 |
Deferred tax liabilities | (319) | (365) |
Total | 47 | 62 |
Changes: | ||
- Income tax expense in income statement | 33 | 38 |
- Income tax expense in other comprehensive income | 8 | 1 |
- Acquisitions and disposals | (3) | (49) |
- Exchange differences | (12) | (16) |
- Transfer | 4 | 11 |
Balance at 31 December | 77 | 47 |
Of which: | ||
- Deferred tax assets | 355 | 366 |
- Deferred tax liabilities | (278) | (319) |
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. These uncertainties are taken into account in determining the probability of realization of deferred tax assets and liabilities.
The deferred tax assets and liabilities relate to the following balance sheet items:
Deferred tax assets and liabilities by balance sheet item
2016 | 2015 | |||
Deferred tax assets | Deferred tax liabilities | Deferred tax assets | Deferred tax liabilities | |
Intangible assets | 13 | (209) | 20 | (261) |
Property, plant and equipment | 18 | (200) | 11 | (214) |
Financial assets | 3 | (1) | 2 | (5) |
Inventories | 71 | (22) | 54 | (7) |
Receivables | 5 | (5) | 5 | (6) |
Equity | 1 | (3) | 1 | (3) |
Other non-current liabilities | 18 | (1) | 40 | (1) |
Non-current provisions | 95 | (6) | 92 | - |
Non-current borrowings | - | - | - | - |
Other current liabilities | 95 | (3) | 71 | (2) |
319 | (450) | 296 | (499) | |
Tax losses carried forward | 208 | - | 250 | - |
Set-off | (172) | 172 | (180) | 180 |
Total | 355 | (278) | 366 | (319) |
No deferred tax assets were recognized for loss carryforwards amounting to €216 million (2015: €121 million). Unrecognized loss carryforwards amounting to €74 million will expire in the years up to and including 2021 (2015: €30 million up to and including 2020), €77 million between 2022 and 2026 (2015: €77 million between 2021 and 2025) and the remaining €65 million between 2027 and 2031 (2015: €14 million between 2026 and 2030).
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.