12 – Income Taxes

Accounting policies

In Germany, a uniform corporate income tax rate of 15.0% as well as a solidarity surcharge of 5.5% thereon are levied on all distributed and retained earnings. In addition to corporate income tax, income generated in Germany is subject to a trade tax. It varies depending on the municipality in which the company is represented. As in the previous year, the weighted average tax rate was 14.5% in 2020. The 30% rate used to calculate deferred taxes for German Group companies remained unchanged in 2020. The income of foreign Group companies is assessed using the tax rates applicable in their respective countries. These are also generally used to calculate deferred taxes to the extent that tax rate adjustments for the future have not yet been enacted.

Deferred taxes are recorded for temporary differences between the carrying amount of assets and liabilities in the financial statements according to IFRS and the carrying amounts for tax purposes as well as for tax loss carryforwards and unused tax credits. These also comprise temporary differences arising from business combinations, with the exception of goodwill. Deferred tax assets and liabilities are calculated using the respective country-specific tax rates applicable for the period in which the asset or liability is realized or settled. Tax rate changes enacted or substantively enacted on or before the balance sheet date are taken into consideration.

Deferred tax assets are offset against deferred tax liabilities provided they are related to the same taxation authority. Surpluses of deferred tax assets are only recognized provided that the tax benefits are likely to be realized. The valuation of deferred tax assets is based on the probability of a reversal of the differences and the assessment of the ability to utilize tax loss carryforwards and unused tax credits. This depends on whether future taxable profits will exist during the period in which temporary differences are reversed and in which tax loss carryforwards and unused tax credits can be claimed. The assessment of recoverability of deferred tax assets is based on internal projections of the future earnings of the particular Group company.

Changes in deferred taxes in the balance sheet are recorded as deferred tax expense or income unless the underlying transaction is not to be recognized directly in equity or in income and expenses recognized in equity. For those effects which have been recognized in equity, changes to deferred tax assets and tax liabilities are also recognized directly in equity.

Deferred tax liabilities are recognized for differences between the proportional IFRS equity and the tax base of the investment in a consolidated subsidiary if a reversal of these differences is expected in the foreseeable future. Deferred tax liabilities are recognized for dividend distributions planned for the following year if these distributions lead to a reversal of temporary differences.

Provisions for German trade tax, corporate income tax and similar income taxes are calculated and recognized based on the expected taxable income of the consolidated companies less any prepayments that have been made. Provisions are set up for interest accrued. This interest is reported under other financial result, not tax expense. Other taxes to be assessed are considered accordingly.

IFRIC 23 clarifies the application of the recognition and measurement policies from IAS 12 when there is uncertainty regarding income tax-related treatment of individual transactions. They are accounted for with the assumption that tax authorities will examine the questionable transaction and have all relevant information. The amount of risk provisions is calculated and reviewed with consideration for the results of past tax audits as well as the legal assessment of not yet audited transactions and the risk of a deviating tax-related interpretation by the tax authorities. The most probable value of the individual risks is recognized.

Tax expense and tax rate

The decline in current tax expense was due mainly to tax income for previous years, especially from incentives offered by the CARES Act in the United States, and lower earnings, mainly in Germany and North America.

Changes in valuation allowances on deferred tax assets for tax loss carryforwards resulted in income of €5 million in 2020 (2019: expense of €1 million).

The BASF Group tax rate amounted to 5.8% in 2020 (2019: 22.9%). The relatively low tax income in relation to pre-tax result in 2020 resulted primarily from a rise in nondeductible operating expenses due to the non-tax-effective impairment of goodwill and the overall negative earnings contribution from companies accounted for using the equity method, mainly due to impairments of assets of the Wintershall Dea Group, Kassel/Hamburg, Germany. This was partially offset by a rise in tax income for previous periods, due mainly to incentives offered by the CARES Act in the United States.

Other taxes included real estate taxes and other comparable taxes totaling €106 million in 2020 and €101 million in 2019.

Tax expense (Million €)

 

2020

2019

Current tax expense

398

1,053

Corporate income tax, solidarity surcharge and trade taxes (Germany)

73

114

Foreign income tax

739

929

Taxes for prior years

–414

10

Deferred tax expense (+) / income (–)

–489

–297

From changes in temporary differences

–129

–298

From changes in tax loss carryforwards/unused tax credits

–372

23

From changes in the tax rate

32

–26

From valuation allowances on deferred tax assets

–20

4

Income taxes

–91

756

Other taxes as well as sales and consumption taxes

228

224

Tax expense

137

980

Reconciliation of income taxes and the effective tax rate

 

2020

2019

 

Million €

%

Million €

%

Income before income taxes

–1,562

 

3,302

 

Expected tax based on German corporate income tax rate (15%)

–234

15.0

495

15.0

Solidarity surcharge

2

–0.1

2

0.1

Trade taxes

–255

16.3

12

0.4

Foreign tax rate differential

55

–3.5

257

7.8

Tax-exempt income

–64

4.1

–41

–1.2

Nondeductible expenses

339

–21.7

61

1.8

Income of companies accounted for using the equity method (Income after taxes)

106

–6.8

–17

–0.5

Taxes for prior years (current and deferred taxes)

–103

6.6

10

0.3

Deferred tax liabilities for the future reversal of temporary differences associated with shares in participating interests

–66

4.2

–6

–0.2

Changes in the tax rate

32

–2.1

–26

–0.8

Other

97

–6.2

9

0.2

Income taxes/effective tax rate

–91

5.8

756

22.9

The item Other in the reconciliation for 2020 included tax effects from deferred tax assets not recognized on additions to loss carryforwards in the amount of €14 million and on deductible temporary differences in the amount of €17 million.

Deferred taxes result from temporary differences between tax balances and the measurement of assets and liabilities according to IFRS as well as from tax loss carryforwards and unused tax credits. The remeasurement of all the assets and liabilities associated with acquisitions according to IFRS 3 has resulted in significant deviations between fair values and the values in the tax accounts. This primarily leads to deferred tax liabilities.

Deferred taxes

Deferred tax assets and liabilities 2020 (Million €)

 

January 1, 2020, net

Effects recog­nized in income

Effects recog­nized in equity (OCI)

Business combi­nations

Other

December 31, 2020, net

Deferred tax assets

Deferred tax liabilities

Intangible assets

–934

–8

33

–42

–4

–955

89

–1,044

Property, plant and equipment

–1,081

–65

101

–36

13

–1,068

246

–1,314

Financial assets

–136

64

5

–7

–74

44

–118

Inventories and accounts receivable

–199

82

–31

–3

–18

–169

232

–401

Provisions for pensions and similar obligations

2,424

28

384

14

1

2,851

3,342

–491

Other provisions and liabilities

841

42

–91

3

36

831

986

–155

Tax loss carryforwards

193

332

–11

1

–10

505

505

Other

15

14

–9

2

–4

18

82

–64

Deferred tax assets (liabilities) before netting

1,123

489

381

–61

7

1,939

5,526

–3,587

Netting

–2,140

2,140

Deferred tax assets (liabilities) after netting

1,123

489

381

–61

7

1,939

3,386

–1,447

Deferred tax assets and liabilities 2019 (Million €)

 

January 1, 2019, net

Effects recog­nized in income

Effects recog­nized in equity (OCI)

Business combi­nations

Other

December 31, 2019, net

Deferred tax assets

Deferred tax liabilities

Intangible assets

–1,265

149

–4

59

125

–934

148

–1,082

Property, plant and equipment

–976

–113

–16

–2

26

–1,081

122

–1,203

Financial assets

12

35

–1

–182

–136

54

–190

Inventories and accounts receivable

–203

48

–47

–14

17

–199

261

–460

Provisions for pensions and similar obligations

2,149

–48

354

–31

2,424

3,153

–729

Other provisions and liabilities

633

222

–23

9

841

942

–101

Tax loss carryforwards

205

13

1

5

–31

193

193

Other

0

–9

–5

–4

33

15

83

–68

Deferred tax assets (liabilities) before netting

555

297

259

44

–34

1,123

4,956

–3,833

Netting

–2,069

2,069

Deferred tax assets (liabilities) after netting

555

297

259

44

–34

1,123

2,887

–1,764

Deferred tax assets on deductible temporary differences in the amount of €182 million were not recognized in 2020 (2019: €124 million), as their utilization at reversal was not reasonably certain.

Undistributed earnings of subsidiaries resulted in temporary differences of €10,398 million in 2020 (2019: €13,335 million) for which deferred tax liabilities were not recognized, as they are either not subject to taxation on payout or they are expected to be reinvested for an indefinite period of time.

Valuation allowances on deferred tax assets amounted to €63 million in 2020 (2019: €88 million). Of this figure, €13 million pertained to tax loss carryforwards in 2020 (2019: €19 million).

Tax loss carryforwards

The distribution of tax loss carryforwards and the associated recognized deferred tax assets is as follows:

Tax loss carryforwards (Million €)

 

Tax loss carryforwards

Deferred tax assets

 

2020

2019

2020

2019

Germany

1,229

381

Foreign

688

950

124

195

Total

1,917

950

505

195

Tax loss carryforwards exist in all regions. Tax losses in Germany may be carried forward indefinitely. In some foreign countries, tax loss carryforwards are only possible for a limited period of time. No deferred tax assets were recognized for tax loss carryforwards of €257 million in 2020 (2019: €205 million). Of these, €52 million will expire in 2021, €9 million in 2022, €35 million in 2023, €22 million in 2024, €52 million in 2025 and €14 million in 2026 and thereafter. The remaining €73 million will not expire.

Surpluses of deferred tax assets for companies that reported tax losses in 2020 or 2019 totaled €2.645 million as of December 31, 2020 (December 31, 2019: €97 million). Deferred taxes were recognized because, due to the planned earnings, use of temporary differences or loss carryforwards is expected.

Tax liabilities

Tax liabilities primarily include assessed income taxes and other taxes as well as estimated income taxes not yet assessed for the current year. As of 2020, BASF reports tax provisions separately from deferred tax liabilities and no longer as a totals item. The prior-year figures have been restated accordingly.