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. (XLSX:) XLS 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 (XLSX:) XLS 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 (XLSX:) XLS 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 (XLSX:) XLS 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: (XLSX:) XLS 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. back next