NOTE F7 Income taxes - 2017 Annual Integrated Report

Accounting policy

Current taxes

The current tax payable is based on taxable profit of the year. Taxable profit differs from profit as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred taxes

Deferred tax is recognized for temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and their corresponding tax bases used in the computation of taxable profit.

Deferred tax assets are generally recognized for all deductible temporary differences, to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

Deferred tax liabilities are generally recognized for all taxable temporary differences.

No deferred tax liabilities are recognized following the initial recognition of goodwill. In addition, no deferred tax assets or liabilities are recognized with respect to the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, joint operations, joint ventures, and associates, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of the deferred tax assets is reviewed at each reporting date. The carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable that the Group will earn sufficient taxable profits against which the deductions can be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Deferred tax assets other than tax loss carryforwards are analyzed on a case-by-case basis, taking into account all relevant facts and circumstances. For example, a zero taxable profit, after deducting the amounts paid to retirees under a defined benefit plan and for which a deductible temporary difference existed, can justify the recognition of the underlying deferred tax assets. Recognition of deferred tax assets for tax loss carryforwards require a positive taxable profit during the year that enables the utilization of tax losses that originated in the past. Because of uncertainties inherent to predicting such positive taxable profit, recognition of deferred tax assets from tax loss carryforwards is based on a case-by-case analysis, which is usually based on five-year profit forecasts, except with respect to financial companies for which ten-year financial profit forecasts are considered highly predictable and are consequently used.

The corporate tax reporting team, which has the overview of the Group deferred tax positions, is involved in assessing deferred tax assets.

Further details are provided in note F7.B.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred taxes for the period

Current and deferred taxes for the period are recognized as an expense or income in profit or loss, except when they relate to items that are recognized outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognized outside profit or loss, or when they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in the accounting for the business combination.

F7.A. Income taxes

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In € million	2017	2016
Current taxes related to current year	(203)	(194)
Current taxes related to prior years	12	4
Deferred income taxes	234	263
Deferred tax impact of changes in the nominal tax rates	155	(5)
Total income taxes recognized in the consolidated income statement	197	68

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In € million		Notes		2017		2016
Income tax on items recognized in other comprehensive income		(F11)		37		56

The taxes related to current year include the estimate for the one-time transition tax due in 2019 in the United States (€(40) million) on unremitted foreign earnings after the enactment of the tax reform in 2017 (see below).

The current taxes related to prior years (€12 million) include mainly the net final tax adjustments for transfer pricing audits in Belgium and the closing of tax litigation in Spain.

The specific items of the year that significantly contribute to the deferred tax income (€234 million) comprise mainly:

the recognition of previously unrecognized deferred tax assets in France for a total of €202 million due to the statutory reorganization of French subsidiaries (leading to the merger of tax units), of which €184 million for employee benefits obligations and other temporary differences and €18 million for tax loss carryforwards,
the net derecognition of €(78) million for deferred tax assets related to tax losses carried forward in different countries mainly due to statutory reorganizations,
the tax impact of the impairment of retained assets for Polyamides in Brazil (€25 million), and
the deferred tax income resulting from the amortization of Purchase Price Allocation step-ups (€82 million).

Tax reforms were enacted in December 2017 in the United States, in France and in Belgium based on which the tax rates will be reduced as follows:

in the United States, reduction of the Federal tax rate from 35% to 21% as from 2018,
in France, reduction of the corporate tax rate as from 2019 and down to 25.825% in 2022,
in Belgium, reduction of the corporate tax rate as from 2018 and down to 25% in 2020.

The deferred tax impact of changes in the nominal tax rates of €155 million is composed mainly of the impact of the tax reforms enacted in the United States (€193 million), in Belgium (€(19) million), and in France (€(29) million), and other minor adjustments.

Reconciliation of the income taxes

The effective income taxes have been reconciled with the theoretical tax expense obtained by applying to the pre-tax profit of each Group entity the nominal tax rate prevailing in the country in which it operates.

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In € million	2017	2016
Profit for the year before taxes	678	524
Earnings from associates and joint ventures	44	85
Profit for the year before taxes excluding earnings from associates and joint ventures	634	439
Reconciliation of the tax charge
Total tax charge of the Group entitites computed on the basis of the respective local nominal rates	(169)	(91)
Weighted average nominal rate	27%	21%
Tax effect of permanent differences	97	42
Tax effect on distribution of dividends	(11)	(17)
Tax effect of changes in tax rates	155	(4)
Tax effect of current and deferred tax adjustments related to prior years	(1)	13
Changes in unrecognized deferred tax assets	126	127
Effective income taxes	197	68
Effective tax rate	(29%)	(13%)

The weighted average nominal rate was 6% higher in 2017 than in 2016 due to the higher weight of earnings before tax in countries with higher tax rates (mainly NAFTA, Italy, Germany) and the reversal of deferred tax liabilities in Egypt in 2016. The significant change in effective tax rate from (13)% in 2016 to (29)% in 2017 results mainly from:

the deferred tax impact of changes in the nominal tax rates (€155 million) due predominantly to the tax reforms enacted in the United States, in Belgium, and in France (see above),
the change in unrecognized deferred tax assets (€126 million) which includes the recognition of previously unrecognized deferred tax assets in France for a total of €202 million due to the statutory reorganization of French subsidiaries and net derecognition of €(78) million for deferred tax assets related to tax losses carried forward in different countries, and
the tax impact of increased permanent differences in 2017 for €97 million. The increase of €55 million versus 2016 is due mainly to:
- higher reversal of tax litigation provisions for €21 million (€37 million in 2017 versus €16 million in 2016),
- the one-off tax impact of the merger of both tax units in France (€(24) million), and
- higher non-taxable capital gains for €52 million (€18 million in 2017 versus €(34) million in 2016).

F7.B. Deferred taxes in the consolidated statement of financial position

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2017 In € million	Opening balance	Recognized in income statement	Recognized in other comprehensive income	Exchange rate effect	Acquisition/disposal	Transfer to asset held for sale	Other	Closing balance
Temporary differences
Employee benefits obligations	435	160	33	(20)	2	(9)	(2)	599
Provisions other than employee benefits	244	(36)		(19)				188
Property, plant and equipment and intangible assets	(1,246)	325		129	(38)	18	1	(810)
Goodwill	15							15
Tax losses	444	(81)		(15)	(10)	(1)	10	346
Tax credits	35	131		(7)				159
Assets held for sale		14					(14)
Other	55	(125)	4	(2)	34	13	2	(20)
Total (net amount)	(19)	389	37	66	(12)	21	(4)	476
Deferred tax assets in the consolidated statement of financial position	890							1,076
Deferred tax liabilities in the consolidated statement of financial position	(909)							(600)

With the enactment of the tax reform in the United States at the end of 2017,

foreign tax credits were recognized in the income statement for €124 million (out of a total of €131 million),
a one-time tax on unremitted earnings of €(163) million was recognized in other temporary differences in the consolidated income statement. The recognized foreign tax credits will reduce the one-time tax due in 2019. At this stage, the net amount due (€40 million) is an estimate, is subject to changes based on the 2018 tax return, and has been reclassified to other non-current liabilities and current tax expenses,
at this stage, the management has not changed his decision to permanently reinvest in overseas affiliates held by the US subsidiaries, except for Canada where local additional deferred tax liability of €(10) million for withholding taxes that will be due upon repatriation has been booked and is included in other temporary difference recognized in the consolidated income statement,
deferred taxes related to temporary differences on intangible assets have been adjusted in the consolidated income statement for an amount of €175 million.

After the statutory reorganization of French subsidiaries, deferred taxes related to temporary differences for employee benefits obligations have been recognized in the income statement for an amount of €184 million.

A net derecognition of €(78) million on deferred tax assets related to tax losses carried forward in different countries has been recognized in the consolidated income statement and is due to statutory reorganizations.

The closing balance for Other temporary differences (€(20) million) includes deferred tax liabilities related to local unremitted earnings from Solvay affiliates amounting to €27 million in 2017 (€23 million in 2016). An amount for local withholding tax for €54 million is not recognized as the Group controls the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.

In 2017, the total of deferred tax assets amounts to €2,938 million of which €1,862 million are not recognized.

The unrecognized deferred tax assets result from (i) losses carried forward (€7,044 million mainly in holding companies including Solvay SA and Solvay France SA) for which deferred tax assets (€1,737 million) have not been recognized and (ii) deferred tax assets on other temporary differences (€125 million across the Group).

Recognized deferred tax assets, for which utilization depends on future taxable profits in excess of the profit arising from the reversal of existing taxable temporary differences within entities that have suffered a tax loss in either current or preceding year in the related tax jurisdiction, amount to €680 million. This amount includes the newly recognized deferred taxes in France (€202 million). This recognition is justified by favorable expectations as to future taxable profits.

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2016 In € million	Opening balance	Recognized in income statement	Recognized in other comprehensive income	Exchange rate effect	Cytec acquisition	Other acquisition/disposal	Transfer to asset held for sale	Other	Closing balance
Temporary differences
Employee benefits obligations	328	92	71	3	(29)		(29)	1	435
Provisions other than employee benefits	199	35	(3)	9	7		(3)		244
Property, plant and equipment and intangible assets	(1,361)	58		(36)	16	(3)	76	5	(1,246)
Goodwill	23	(7)			(1)				15
Tax losses	373	46		7	6	(1)	(5)	18	444
Tax credits	86	(8)		(1)	(43)				35
Assets held for sale		(2)					(3)	6
Other	(44)	47	(11)	(1)	61		2	2	55
Total (net amount)	(396)	259	56	(19)	16	(4)	37	32	(19)
Deferred tax assets in the consolidated statement of financial position	1,059								890
Deferred tax liabilities in the consolidated statement of financial position	(1,456)								(909)

Other information

For the majority of the Group’s tax loss carryforwards, no deferred tax assets have been recognized. The unrecognized tax losses are located mainly in countries where they can be carried forward indefinitely.

The tax loss carryforwards generating deferred tax assets are given below by expiration date.

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In € million	2017	2016
Within 1 year	16	5
Within 2 years	15	17
Within 3 years	22	21
Within 4 years	20	42
Within 5 or more years	331	278
No time limit	930	1,035
Total of tax losses carried forward which have generated recognized deferred tax assets	1,334	1,397
Tax losses carried forward for which no deferred tax assets were recognized	7,044	7,190
Total of tax losses carried forward	8,378	8,587

The tax losses carryforwards (€1,334 million) have generated deferred tax assets for €346 million. In 2016, the tax losses carryforwards (€1,397 million) had generated deferred tax assets for €444 million. The decrease of deferred tax assets in 2017 versus 2016 is due mainly to the decrease in nominal tax rates in the United States, in Belgium, and in France.