Annual Report 2021

Operating Activities

(15) Income tax

Accounting and measurement policies

Current income taxes

Current income taxes for the reporting period and, where applicable, for prior periods are calculated in the amounts that the tax authorities are expected to demand or reimburse. The calculation is based on the company-specific tax rate applicable in the relevant tax year.

Uncertain income tax assets and liabilities

Factual assessments are made to calculate uncertain income tax assets and liabilities. Uncertain income tax matters are recognized depending on the likelihood that the responsible tax authorities will accept the respective income tax treatment. If recognition by the tax authorities is considered unlikely, the respective uncertain tax asset or uncertain tax liability is measured at the most likely amount. Uncertain income tax liabilities are reported within income tax liabilities. Expected income tax-related penalties and interest that do not fall within the scope of IAS 12 are treated as provisions in line with IAS 37.

Deferred taxes

Deferred tax assets resulting from deductible temporary differences that exceed deferred tax liabilities relating to the same taxation authority and the same taxable entity are recognized if it is considered probable that taxable profit will be available against which they can be utilized. This corresponds to the procedure for recognizing deferred tax assets on unused tax credits and tax loss and interest carryforwards.

The recognition of deferred tax assets requires an estimate of the probability of future use. The influencing factors considered as part of this assessment include the following:

  • temporary differences relating to the same taxation authority and the same taxable entity that will be subject to taxation in the future,
  • results history,
  • results planning, and
  • existing tax planning of the respective Group company.

Deferred tax liabilities are recognized for planned dividend payments of subsidiaries within the next 12 months.

Significant discretionary decisions and sources of estimation uncertainty

Income taxes

The calculation of the reported assets and liabilities from current and deferred income taxes requires extensive discretionary judgments, assumptions and estimates.

When assessing income tax assets and liabilities, the interpretation of tax provisions may be subject to particular uncertainty. The possibility that the relevant tax authorities will take a differing view concerning the application and interpretation of tax standards cannot be ruled out. Changes to the assumptions underlying the interpretation of tax standards, for example as a result of changes in legislation, are recognized in the balance sheet when the change comes into force.

Regarding deferred tax items, there is uncertainty as to when an asset will be realized or a liability settled. This applies in particular to deferred taxes recognized in the course of company acquisitions. Assessing the recoverability, particularly of tax credits and tax loss and interest carryforwards, requires assumptions and estimates concerning the future taxable income of the respective Group company. Furthermore, the extent to which a subsidiary’s planned dividend distribution is probable within the next twelve months is discretionary.

Income taxes in the consolidated income statement were broken down as follows:

€ million

 

2021

 

2020

Current income taxes in the period

 

-1,078

 

-959

Income taxes for previous periods

 

45

 

-11

Deferred taxes in the period

 

174

 

333

thereof: from temporary differences

 

206

 

334

thereof: from changes in tax rates

 

-23

 

6

thereof: from tax loss carryforwards

 

-9

 

-7

Income taxes

 

-859

 

-637

Tax reconciliation

The following table presents the reconciliation from the theoretical income tax expense to the income tax expense according to the consolidated income statement. The theoretical income tax expense is determined by applying the statutory tax rate of a corporation headquartered in Darmstadt of 31.7% (2020: 31.7%).

€ million

 

2021

 

2020

Profit before income tax

 

3,924

 

2,630

 

 

 

 

 

Tax rate

 

31.7%

 

31.7%

Theoretical income tax expense

 

-1,245

 

-834

Tax rate differences

 

424

 

307

Tax effect of companies with a negative contribution to consolidated profit

 

-33

 

-31

Income tax for previous periods

 

45

 

-11

Tax credits

 

-30

 

-32

Tax effect on tax loss carryforwards

 

29

 

5

Tax effect of non-deductible expenses/Tax-free income/Other tax effects

 

-49

 

-41

Income tax expense according to consolidated income statement

 

-859

 

-637

 

 

 

 

 

Tax ratio according to consolidated income statement

 

21.9%

 

24.2%

Income taxes consisted of corporation and trade taxes for the German companies and comparable income taxes for non-German companies. Income taxes relating to previous periods recognized in fiscal 2021 resulted mainly from completed tax audits and mutual agreement procedures as well as from additions to liabilities for risks from tax audits.

Deferred taxes (consolidated income statement)

The reconciliation between deferred taxes on the consolidated balance sheet and deferred taxes on the consolidated income statement is presented in the following table:

€ million

 

2021

 

2020

Change in deferred tax assets (consolidated balance sheet)

 

-40

 

121

Change in deferred tax liabilities (consolidated balance sheet)

 

30

 

384

Deferred taxes credited/debited to equity

 

119

 

-116

Changes in scope of consolidation/Currency translation/other changes

 

66

 

-58

Deferred taxes (consolidated income statement)

 

174

 

333

As in the previous year, the item “Changes in consolidated group/currency translation/other changes” mainly comprised exchange rate effects for items translated from U.S. dollars to the reporting currency (euro).

Changes in tax loss carryforwards

Tax loss carryforwards were structured as follows:

 

 

Dec. 31, 2021

 

Dec. 31, 2020

€ million

 

Germany

 

Outside Germany

 

Total

 

Germany

 

Outside Germany

 

Total

Tax loss carryforwards

 

136

 

1,023

 

1,159

 

94

 

1,110

 

1,204

Tax loss carryforwards for which a deferred tax asset is recognized

 

2

 

60

 

62

 

4

 

161

 

165

Tax loss carryforwards for which no deferred tax asset is recognized

 

134

 

963

 

1,097

 

90

 

949

 

1,039

 

 

 

 

 

 

 

 

 

 

 

 

 

Potential deferred tax assets for tax loss carryforwards

 

41

 

251

 

292

 

27

 

257

 

284

Recognized deferred tax assets on tax loss carryforwards

 

 

11

 

11

 

 

20

 

20

Not recognized deferred tax assets on tax loss carryforwards

 

41

 

240

 

281

 

27

 

237

 

264

The majority of the tax loss carryforwards either has no expiry date or can be utilized for up to 20 years.

Deferred taxes (consolidated balance sheet)

Deferred tax assets and liabilities related to the following balance sheet items:

 

 

Dec. 31, 2021

 

Dec. 31, 2020

€ million

 

Assets

 

Liabilities

 

Assets

 

Liabilities

Intangible assets

 

99

 

1,527

 

114

 

1,600

Property, plant and equipment

 

35

 

103

 

27

 

101

Current and non-current financial assets

 

1

 

7

 

 

26

Inventories

 

757

 

20

 

679

 

13

Current and non-current receivables/Other assets

 

90

 

9

 

19

 

6

Current and non-current provisions

 

859

 

57

 

948

 

35

Current and non-current liabilities

 

85

 

68

 

94

 

22

Tax loss carryforwards

 

11

 

 

20

 

Tax refund claims/Other

 

42

 

99

 

51

 

48

Deferred taxes (before offsetting)

 

1,980

 

1,889

 

1,951

 

1,849

Offset deferred tax assets and liabilities

 

-478

 

-478

 

-408

 

-408

Deferred taxes (consolidated balance sheet)

 

1,502

 

1,411

 

1,543

 

1,441

In fiscal 2021, net deferred tax assets increased by € 174 million as a result of items recognized in profit or loss, which primarily related to the reduction in deferred taxes recognized for temporary differences on intangible assets. This development was more than offset by items not recognized in profit or loss, which related to deferred tax effects resulting from items recognized through other comprehensive income such as the remeasurement of the net defined benefit obligation, changes in the fair value of financial assets and derivatives held for hedging purposes and currency translation effects. In both fiscal 2021 and 2020, the latter were attributable in particular to deferred tax liabilities recognized for temporary differences on intangible assets.

Given the positive earnings forecasts, it was assumed that it will be possible to realize recognized deferred tax assets of € 82 million (December 31, 2020: € 72 million), which exceeded deferred tax liabilities relating to the same taxation authority and the same taxable entity, even though there was a loss in the current or previous period.

For deductible temporary differences in the amount of € 57 million (December 31, 2020: € 0 million) no deferred tax assets were recognized in the balance sheet.

Deferred tax liabilities from outside basis differences for planned dividend payouts were recognized in the amount of € 93 million (December 31, 2020: € 46 million). Retained earnings of subsidiaries for which no deferred taxes are recognized amounted to € 8,553 million as of December 31, 2021 (December 31, 2020: € 12,609 million). The resulting temporary differences that will be taxable in future periods in the event of dividend payments amounted to € 476 million as of December 31, 2021 (December 31, 2020: € 672 million).

Income tax receivables and income tax liabilities

Income tax receivables amounted to € 502 million as of December 31, 2021 (December 31, 2020: € 530 million) and mainly resulted from tax prepayments that exceeded the actual amount of tax payable for the past fiscal year and earlier fiscal years, from refund claims for previous years, and from withholding tax claims. As of December 31, 2021, income tax liabilities including liabilities for uncertain tax obligations totaled € 1,462 million (December 31, 2020: € 1,505 million).

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