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

In € million

 

Notes

 

2016

 

2015

Current taxes related to current year

 

 

 

(213)

 

(178)

Current taxes related to prior years

 

 

 

4

 

112

Deferred income taxes

 

 

 

270

 

(6)

Deferred tax impact of changes in the nominal tax rates

 

 

 

(5)

 

2

Total income taxes recognized in the consolidated income statement

 

 

 

56

 

(69)

In € million

 

Notes

 

2016

 

2015

Income tax on items recognized in other comprehensive income

 

(F11)

 

56

 

(20)

The current taxes relating to prior years (€ 4 million) include the net tax adjustments for transfer pricing audits in Belgium and in Spain.

The specific items of the year that significantly contribute to the deferred tax income include mainly:

  • the deferred tax income resulting from the amortization of the Purchase Price Allocation step-up (€ 100 million);
  • the recognition of previously unrecognized deferred tax assets on (a) employee benefits obligations and other temporary differences in Solvay SA (€ 65 million) and (b) tax loss carryforwards (€ 39 million) due to improved profitability expectations at the level of Solvay SA for future years; and
  • the recognition of previously unrecognized deferred tax assets on employee benefits obligations and other temporary differences in the United Kingdom (€ 93 million) due to the Group Relief regime which allows the deduction of the losses of Solvay Solutions UK from the post-acquisition profits of Cytec companies.

In 2015, the current taxes relating to prior years (€ 112 million) include the reversal of provisions for tax risks (€ 66 million) and true-ups in the United States after significant changes in portfolio.

Reconciliation of the income tax expense

The effective income tax expense has 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.

In € million

 

2016

 

2015

Profit for the year before taxes

 

624

 

472

Earnings from associates and joint ventures

 

85

 

21

Profit for the year before taxes excluding earnings from associates and joint ventures

 

539

 

451

Reconciliation of the tax charge

 

 

 

 

Total tax charge of the Group entitites computed on the basis of the respective local nominal rates

 

(141)

 

(173)

Weighted average nominal rate

 

26%

 

38%

Tax effect of permanent differences

 

36

 

136

Tax effect on distribution of dividends

 

(17)

 

(4)

Tax effect of changes in tax rates

 

(4)

 

1

Tax effect of current and deferred tax adjustments related to prior years

 

12

 

5

Changes in unrecognized deferred tax assets

 

170

 

(35)

Effective tax charge

 

56

 

(69)

Effective tax rate

 

(9)%

 

15%

The weighted average nominal rate in 2016 was 12% lower than in 2015, due to the lower weight of earnings before tax in countries with a higher tax rate (mainly United States) and to the higher weight of earnings before tax (including results from portfolio management and reassessment) in countries with a lower tax rate.

Significant changes in effective tax rate from 15% in 2015 to (9)% in 2016 result from:

  • recognition of higher deferred tax assets in 2016 (€ 205 million versus 2015) mainly for previously unrecognized deferred tax assets in Belgium (€ 104 million) and in the United Kingdom (€ 93 million)
  • partially offset by the negative tax impact of lower permanent differences in 2016 (€ (100) million versus 2015), due to the reversal of provisions for tax litigation for € 66 million in 2015 and non-deductible capital losses in 2016.

The gain arising from the early exit in 2016 from the joint venture with INEOS (€ 76 million in Solvay Chlorovinyls Holding) and the € 19 million reversal of a provision in Solvay Pharmaceuticals had no tax impact in the consolidated income statement as they were offset against unrecognized prior year tax losses.

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

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)

 

0

 

(29)

 

1

 

435

Provisions other than employee benefits

 

199

 

36

 

(3)

 

9

 

7

 

0

 

(3)

 

(1)

 

244

Tangible and intangible assets

 

(1,361)

 

64

 

 

 

(36)

 

16

 

(3)

 

76

 

(1)

 

(1,246)

Goodwill

 

23

 

(7)

 

 

 

0

 

(1)

 

 

 

 

 

 

 

15

Tax losses

 

373

 

44

 

 

 

7

 

6

 

(1)

 

(5)

 

19

 

444

Tax credits

 

86

 

(8)

 

 

 

(1)

 

(43)

 

 

 

 

 

0

 

35

Assets held for sale

 

 

 

(2)

 

 

 

 

 

 

 

 

 

(3)

 

6

 

 

Other

 

(44)

 

48

 

(11)

 

(1)

 

61

 

0

 

2

 

1

 

55

Total (net amount)

 

(396)

 

266

 

56

 

(19)

 

16

 

(4)

 

37

 

25

 

(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)

In 2016, the total of deferred tax assets amounts to € 3,667 million of which € 2,777 million are not recognized.

The unrecognized deferred tax assets result from (i) losses carried forward (€ 7,190 million mainly in holding companies including Solvay SA and Rhodia SA since 2011) for which deferred tax assets (€ 2,235 million) have not been recognized and (ii) deferred tax assets on other temporary differences (€ 542 million across the Group), mainly on employee benefits obligations in France (€ 351 million).

The line Other includes deferred tax liabilities relating to unremitted earnings from Solvay affiliates, and amounting to € 23 million in 2016 (€ 23 million in 2015). In that respect, an amount of € 62 million (excluding Cytec) is not recognized, as the Group controls the timing of the reversal of the temporary differences and as it is probable that they will not reverse in the foreseeable future. The Cytec unremitted earnings will be permanently reinvested, including for pre-acquisition and post-acquisition profits, and accordingly no deferred tax liabilities have been recognized.

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 € 475 million. This recognition is justified by favorable expectations as to future taxable profits.

2015
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

 

234

 

(13)

 

(13)

 

7

 

97

 

(2)

 

6

 

11

 

328

Provisions other than employee benefits

 

136

 

(19)

 

1

 

3

 

59

 

7

 

13

 

(1)

 

199

Tangible and intangible assets

 

(521)

 

29

 

(7)

 

(6)

 

(862)

 

1

 

4

 

1

 

(1,361)

Goodwill

 

31

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

23

Tax losses

 

386

 

1

 

 

 

(6)

 

2

 

0

 

(12)

 

 

 

373

Tax credits

 

11

 

29

 

 

 

1

 

44

 

 

 

2

 

 

 

86

Assets held for sale

 

 

 

8

 

 

 

 

 

 

 

3

 

(14)

 

3

 

 

Other

 

57

 

(28)

 

(1)

 

3

 

(76)

 

(2)

 

 

 

3

 

(44)

Total (net amount)

 

333

 

0

 

(20)

 

2

 

(735)

 

7

 

0

 

17

 

(396)

Deferred tax assets in the consolidated statement of financial position

 

710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,059

Deferred tax liabilities in the consolidated statement of financial position

 

(378)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,456)

In 2015, the total of deferred tax assets amounts to € 4,129 million of which € 3,070 million are not recognized.

The unrecognized deferred tax assets result from (i) losses carried forward (€ 7,070 million mainly in holding companies including Solvay SA and Rhodia SA since 2011) for which relative deferred tax assets (€ 2,283 million) were not recognized and (ii) deferred tax assets on other temporary differences (€ 787 million across the Group), mainly on employee benefits obligations (€ 502 million, most of them in Belgium (€ 70 million), France (€ 333 million), and the United Kingdom (€ 82 million)).

The deferred taxes on tangible and intangible assets relating to the Cytec acquisition relate mainly to the step-up to fair value on intangible assets.

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.

In € million

 

2016

 

2015

Within 1 year

 

5

 

8

Within 2 years

 

17

 

16

Within 3 years

 

21

 

28

Within 4 years

 

42

 

32

Within 5 or more years

 

278

 

174

No time limit

 

1,035

 

937

Total of tax losses carried forward which have generated recognized deferred tax assets

 

1,397

 

1,194

Tax losses carried forward for which no deferred tax assets were recognized

 

7,190

 

7,070

Total of tax losses carried forward

 

8,587

 

8,263

In 2016, the tax losses carryforwards (€ 1,397 million) have generated deferred tax assets of € 444 million.

In 2015, the tax losses carryforwards (€ 1,194 million) have generated deferred tax assets of € 373 million.