7 Income tax

The income tax expense on continuing operations was €168 million, which represents an effective income tax rate of 18.4% (2020: €106 million, representing an effective income tax rate of 17.9%). The amount excludes tax expense from discontinued operations of €77 million (2020: €23 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 can be explained as follows.

The total effective tax rate on the taxable result in 2021 was 18.4% (2020: 17.9%), excluding APM adjustments this was 19.2% (2020: 18.5%).

The effective tax rate in 2021 was positively impacted by the geographical spread and the tax-exempt income under local tax law in various countries.

The increase of the effective tax rate excluding APM adjustments was mainly due to uncertainties under local laws, partly compensated by higher tax-exempt income in several countries and the higher tax rate in the Netherlands as of 2022.

The balance of the deferred tax assets and deferred tax liabilities increased by €91 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 €203 million (2020: €267 million). Unrecognized loss carryforwards amounting to €98 million will expire in the years up to and including 2026 (2020: €134 million up to and including 2025), €37 million between 2027 and 2031 (2020: €71 million between 2026 and 2030) and the remaining €68 million in 2032 and beyond (2020: €62 million between 2031 and beyond). In addition, an amount of €23 million (2020: €15 million) of withholding taxes were unrecognized.

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. As of 1 January 2022, tax losses may be carried forward indefinitely in the Netherlands, and loss compensation is allowed up to €1 million a year. Above €1 million, losses can be compensated only for 50%. 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.