7 Income tax

The income tax expense on continuing operations was €106 million, which represents an effective income tax rate of 17.9% (2019: €145 million, representing an effective income tax rate of 18.6%). The amount excludes tax expense from discontinued operations of €23 million (2019: €7 million) and can be broken down as follows.

The relationship between the income tax rate in the Netherlands and the effective tax rate on the taxable result excluding APM adjustments can be explained as follows.

The total effective tax rate on the taxable result in 2020 was 17.9% (2019: 18.6%), excluding APM adjustments this was 18.5% (2019: 19.1%).

The effective tax rate in 2020 was positively impacted by the geographical spread and the tax-exempt income under local tax law in various countries.

The decrease of the effective tax rate from 2019 to 2020 was mainly due to the one-time impact on the deferred tax position caused by the increase of the tax rate in Switzerland in 2019, partly compensated by the decreasing effect of the geographical spread and the lower tax benefits from innovation facilities.

The balance of the deferred tax assets and deferred tax liabilities increased by €115 million owing to the changes presented in the following table.

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.

No deferred tax assets were recognized for loss carryforwards amounting to €267 million (2019: €273 million). Unrecognized loss carryforwards amounting to €134 million will expire in the years up to and including 2025 (2019: €104 million up to and including 2024), €71 million between 2026 and 2030 (2019: €87 million between 2025 and 2029) and the remaining €62 million in 2031 and beyond (2019: €82 million between 2030 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 probable. 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 have an impact on the company’s financial position and profit for the year.