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 requires 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 any financial company 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.

Current tax assets and liabilities are offset when there is a legally enforceable right to set off the recognized amounts and when the Group intends to settle its current tax assets and liabilities on a net basis.

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

The tax income 2017 (€ 197 million) resulted mainly from the change in tax rates in the United States, from the statutory reorganization in France and from other one-offs.

In € million

 

2018

 

2017

 

 

(1)

The Underlying tax expense includes mainly part of the Current taxes related to current year and part of the Other deferred income taxes, as well as the tax impact on the perpetual hybrids bonds classified as equity under IFRS. See Business Review for reconciliation.

Current taxes related to current year(1)

 

(158)

 

(170)

 

a)

Provisions for tax litigations

 

4

 

16

 

b)

Other current taxes related to prior years

 

30

 

(37)

 

c)

Current taxes

 

(124)

 

(191)

 

 

Changes in unrecognized deferred tax assets

 

88

 

126

 

d)

Deferred tax income on amortization of PPA step-ups

 

50

 

63

 

e)

Deferred tax impact of changes in the nominal tax rates

 

(2)

 

155

 

f)

Deferred taxes related to prior years

 

2

 

57

 

g)

Other deferred taxes(1)

 

(109)

 

(12)

 

h)

Deferred taxes

 

30

 

389

 

 

Income taxes recognized in the consolidated income statement

 

(95)

 

197

 

 

Income taxes on items recognized in other comprehensive income

 

1

 

37

 

 

Main comments regarding the current taxes

The current taxes relating to current year (item a) in the previous table) decreased slightly (€ 12 million).

The other current taxes relating to prior years (item c) in the previous table) are impacted mainly by the 2017 accrual for the one-time tax on unremitted earnings resulting from the US tax reform enacted at year-end 2017 (€ (33) million). This accrual was reversed in 2018 (€ 31 million) following the application of new IRS guidance in 2018.

Main comments regarding the deferred taxes

(see column “Recognized in income statement” in the table in section F7.C. – Deferred taxes in the consolidated statement of financial position for changes in deferred taxes by nature)

  • Changes in unrecognized deferred tax assets (item d) in the previous table):
  • In 2017, this change amounted to € 126 million resulting from the statutory reorganization in France (€ 202 million) and from other net de-recognitions for deferred tax assets related to tax losses carried forward in different countries for € (78) million;
  • In 2018, this change amounts to € 88 million resulting mainly from the statutory reorganization in Brazil (€ 38 million) and from the expected capital gain on the Polyamides divestment in 2019 (€ 67 million).
  • The deferred tax impact of changes in the nominal tax rates (item f) in the previous table):
  • In 2017, the income of € 155 million resulted mainly from the changes in the nominal tax rates enacted in the United States.
  • The deferred taxes related to prior years (item g) in the previous table):
  • In 2017, the deferred tax income due to the reversal of valuation allowances in Italy after the positive outcome of a tax litigation (€ 17 million) and from various true-ups on deferred taxes in different countries (€ 40 million).
  • Other deferred taxes (item h) in the previous table):
  • In 2017, the other deferred income taxes (€ (12) million) included:
  • deferred taxes income on “Results from portfolio management and reassessments, legacy remediation, and major litigations” (see note F5 Results from portfolio management and reassessments, legacy remediation, and major litigations for pre-tax net expense) for € 75 million;
  • the utilization of tax losses carried forward for € (26) million;
  • other net increase and reversal of other temporary differences for € (61) million.
  • In 2018, the other deferred income taxes (€ (109) million) included:
  • deferred taxes income on “Results from portfolio management and reassessments, legacy remediation and major litigations” (see note F5 Results from portfolio management and reassessments, legacy remediation, and major litigations for pre-tax net expense) for € 56 million;
  • the utilization of tax losses carried forward for € (99) million;
  • other net increase and reversal of other temporary differences for € (66) million.

New guidance relating to the US tax reform could be issued in 2019 and trigger a review, if applicable to Solvay, of some estimates at year-end 2018.

F7.B. 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

 

2018

 

2017

 

 

Profit for the year before taxes

 

791

 

678

 

 

Earnings from associates and joint ventures

 

43

 

44

 

 

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

 

748

 

634

 

 

Reconciliation of the tax charge

 

 

 

 

 

 

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

 

(201)

 

(169)

 

 

Weighted average nominal rate

 

27%

 

27%

 

 

Tax effect of changes in nominal tax rates

 

(2)

 

155

 

a)

Changes in unrecognized deferred tax assets

 

88

 

126

 

b)

Tax effect of permanent differences

 

9

 

61

 

c)

Gains and losses with no tax expense and income

 

7

 

(1)

 

 

US taxes disconnected from profit for the year before taxes

 

(21)

 

 

 

d)

Provisions for tax litigations

 

4

 

16

 

 

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

 

32

 

21

 

e)

Tax effect on distribution of dividends

 

(11)

 

(11)

 

 

Effective tax income (charge)

 

(95)

 

197

 

 

Effective tax rate

 

12%

 

(29%)

 

 

The weighted average nominal rate was stable at 27% in 2018 and in 2017. A decrease of (4)% results from the US tax rate reduction to 21%. This decrease has been offset by:

  • higher earnings before taxes in Brazil at a higher nominal tax rate (34%) which impacts the weighted nominal tax rate by +1.5%;
  • change of mix in taxable profits which impacts the weighted nominal tax rate by +2.5%.

The significant change in effective tax rate from (29)% in 2017 to 12% in 2018 results mainly from:

  • The deferred tax impact of changes in the nominal tax rates (see comments on item f) in section F.7.A. Income taxes);
  • The changes in unrecognized deferred tax assets (see comments on item d) in section F.7.A. Income taxes);
  • The tax impact of decreased permanent differences in 2018 versus 2017 for € (52) million mainly due to the impact of non-taxable capital gains in 2017;
  • The impact of the US tax reform in 2018 (€ (21) million) on various taxes disconnected from the earnings before taxes (including the US Base Erosion and Anti-Abuse Tax (BEAT));
  • The other tax effects of current and deferred tax adjustments relating to prior years (see comments on items c) and g) in section F.7.A. Income taxes).

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

2018
In € million

 

Opening balance

 

Recognized in income statement

 

Recognized in other com­pre­hensive income

 

Ex­change rate effect

 

IFRS 9

 

Transfer to asset held for sale

 

Other

 

Closing balance

Temporary differences

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax losses (gross amount)

 

2,083

 

2

 

 

 

1

 

 

 

 

 

2

 

2,088

Of which unrecognized tax losses

 

(1,737)

 

8

 

 

 

 

 

 

 

 

 

 

 

(1,729)

Employee benefits obligations

 

599

 

(41)

 

(1)

 

1

 

 

 

(7)

 

(1)

 

549

Provisions other than employee benefits

 

188

 

63

 

 

 

1

 

 

 

 

 

 

 

252

Property, plant and equipment and intangible assets

 

(810)

 

14

 

 

 

(29)

 

 

 

24

 

 

 

(801)

Goodwill

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

15

Tax credits(1)

 

159

 

(126)

 

 

 

 

 

 

 

 

 

 

 

32

Assets held for sale

 

 

 

13

 

 

 

 

 

 

 

 

 

(13)

 

 

Other(2)

 

(20)

 

96

 

2

 

 

 

2

 

4

 

16

 

101

Total (net amount)

 

476

 

30

 

1

 

(26)

 

2

 

20

 

4

 

505

Deferred tax assets in the consolidated statement of financial position

 

1,076

 

 

 

 

 

 

 

 

 

 

 

 

 

1,123

Deferred tax liabilities in the consolidated statement of financial position

 

(600)

 

 

 

 

 

 

 

 

 

 

 

 

 

(618)

(1) Of which reversal of US foreign tax credits due to reversal of one-time tax

 

123

 

(123)

 

 

 

 

 

 

 

 

 

 

 

 

(2) Of which reversal of US one-time tax

 

(123)

 

123

 

 

 

 

 

 

 

 

 

 

 

 

The net deferred tax assets at year-end 2018 amount to € 505 million.

At year-end 2018, the total deferred tax assets on losses amounts to € 2,088 million of which € 1,729 million are not recognized. The recognized amount is € 359 million.

The deferred tax assets/liabilities on other temporary differences at year-end 2018 relate mainly to:

  • Employee benefits obligations for € 549 million;
  • Provisions for € 252 million (mainly remediation);
  • Property, plant and equipment and intangible assets for € (801) million of which € (474) million for step-ups of intangible assets resulting from Purchase Price Allocations (Rhodia and Cytec);
  • Other items (€ 101 million) of which:
  • € (51) million for deferred tax liabilities on unremitted earnings of which € 20 million were not recognized because 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;
  • € 133 million for other temporary differences (inventories, 2018 disallowed interest in the United States due to the latest guidance for the tax reform, etc.).

With the enactment of the US tax reform at the end of 2017, a one-time tax on unremitted earnings was recognized together with foreign tax credits in the income statement for € 123 million. Based on the 2017 tax return filed in 2018, these foreign tax credits have been utilized.

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 € 745 million. This recognition is justified by favorable expectations as to future taxable profits.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax losses (gross amount)

 

2,679

 

(579)

 

 

 

(15)

 

(10)

 

(1)

 

10

 

2,083

Of which unrecognized tax losses

 

(2,235)

 

498

 

 

 

 

 

 

 

 

 

 

 

(1,737)

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 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)

F7.D. 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

 

2018

 

2017

Within 1 year

 

19

 

16

Within 2 years

 

18

 

15

Within 3 years

 

6

 

22

Within 4 years

 

18

 

20

Within 5 or more years

 

202

 

331

No time limit

 

1,037

 

930

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

 

1,302

 

1,334

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

 

6,916

 

7,044

Total of tax losses carried forward

 

8,217

 

8,378

The tax losses carryforwards (€ 1,302 million) have generated deferred tax assets for € 359 million. In 2017, the tax loss carryforwards (€ 1,334 million) had generated deferred tax assets for € 346 million.