7 Income tax
The income tax expense on the total result was €152 million, which represents an effective income tax rate of 17.6% (2018: €194 million, representing an effective income tax rate of 17.0%) and can be broken down as follows:
2019 | 2018 | |
Current tax expense: | ||
| (89) | (162) |
| (4) | 3 |
| 3 | 4 |
| (1) | (1) |
(91) | (156) | |
Deferred tax expense: | ||
| (12) | 23 |
| 14 | - |
| 6 | 4 |
| (26) | (8) |
| (3) | (8) |
| (40) | (49) |
(61) | (38) | |
Total | (152) | (194) |
Of which related to: | ||
| (179) | (217) |
| 27 | 23 |
The effective tax rate in 2019 was negatively impacted by the change in tax rate of -€26 million (mainly an increase in the tax rate in Switzerland with effect from 1 January 2020, impacting the deferred tax position as at 31 December 2019), which was partly compensated for by the tax benefit from innovation facilities of €14 million.
The effective tax rate on the Adjusted taxable result was 18.2% in 2019 (2018: 17.4%). The change in tax rates primarily relates to the increase in the tax rate in Switzerland with effect from 1 January 2020, impacting the deferred tax position as at 31 December 2019.
Within other effects, the impact of the tax benefits for innovation facilities previous years was included with an impact of -1.5%.
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 % | 2019 | 2018 |
Domestic income tax rate | 25.0 | 25.0 |
Tax effects of: | ||
| (6.9) | (8.0) |
| 2.6 | 0.7 |
| (1.5) | (0.9) |
| (1.0) | 0.6 |
Effective tax rate adjusted result | 18.2 | 17.4 |
APM adjustments (see Note 2) | (0.6) | (0.4) |
Total effective tax rate | 17.6 | 17.0 |
The balance of deferred tax assets and deferred tax liabilities increased by €73 million owing to the changes presented in the following table:
Deferred tax assets and liabilities
2019 | 2018 | |
Balance at 1 January | ||
---|---|---|
Deferred tax assets | 248 | 281 |
Deferred tax liabilities | (254) | (259) |
Total | (6) | 22 |
Changes: | ||
| (35) | (30) |
| (26) | (8) |
Total income statement | (61) | (38) |
| 5 | 20 |
| (20) | (17) |
| - | 3 |
| (6) | - |
| 9 | 4 |
Balance at 31 December | (79) | (6) |
Of which: | ||
| 217 | 248 |
| (296) | (254) |
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
2019 | 2018 | |||
Deferred tax assets | Deferred tax liabilities | Deferred tax assets | Deferred tax liabilities | |
Intangible assets | 8 | (184) | 12 | (161) |
Property, plant and equipment | 27 | (182) | 21 | (166) |
Right-of-use assets | 3 | (47) | - | - |
Financial assets | 7 | (10) | 3 | (10) |
Inventories | 44 | (40) | 64 | (34) |
Receivables | 8 | (21) | 8 | (14) |
Equity | - | - | 1 | (1) |
Lease liabilities non-current | 36 | (1) | - | - |
Other non-current liabilities | 9 | (2) | 14 | (3) |
Non-current provisions | 100 | (5) | 77 | (2) |
Other current liabilities | 86 | (4) | 87 | (5) |
Lease liabilities current | 11 | - | - | - |
339 | (496) | 287 | (396) | |
Tax losses carried forward | 78 | 103 | - | |
Set-off | (200) | 200 | (142) | 142 |
Total | 217 | (296) | 248 | (254) |
No deferred tax assets were recognized for loss carryforwards amounting to €273 million (2018: €237 million). Unrecognized loss carryforwards amounting to €104 million will expire in the years up to and including 2024 (2018: €58 million up to and including 2023), €87 million between 2025 and 2029 (2018: €112 million between 2024 and 2028) and the remaining €82 million in 2030 and beyond (2018: €67 million between 2029 and beyond).
The valuation of deferred tax assets depends on the probability of the reversal of temporary differences and the utilization of tax loss carryforwards, tax credits and withholding tax. 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 six years. 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.