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. The weighted average tax rate was 14.6% in 2023 (2022: 14.6%). The 30% rate used to calculate deferred taxes for German Group companies remained unchanged in 2023. The income of foreign Group companies is assessed using the tax rates applicable in their respective countries.

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 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 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.

BASF falls within the scope of the OECD Pillar Two Model Rules. The relevant Pillar Two legislation was enacted in Germany and will be applicable in the fiscal year beginning January 1, 2024. BASF expects the application of the OECD Pillar Two Model Rules to result in an increase in taxes on income and earnings by a low to mid double-digit million euro amount since the relevant tax rate is under 15% in a small number of jurisdictions. The actual impact may differ from this projection.

BASF applies the exception in IAS 12 whereby no deferred tax assets or liabilities are recognized in connection with Pillar Two income taxes under the OECD Model Rules; nor are any disclosures made on the matter.

Tax expense and tax rate

The BASF Group tax rate amounted to 73.3% in 2023. It was impacted by non-recognition of deferred tax assets, especially in Germany. The higher tax rate from the previous year of 132.9% resulted mainly from non-tax-effective impairments of Wintershall Dea AG, which is accounted for using the equity method, particularly from the deconsolidation of its Russian exploration and production activities.

The tax effects of various underlying matters are presented in the following reconciliation of income taxes and the effective tax rate. This reconciliation was changed with respect to the expected tax rate from the previous 15% (the applicable corporate income tax rate in Germany) to 30% (a tax rate combining corporate income and trade tax). This is intended to better illustrate the effects of not recognizing deferred tax assets, because otherwise only the amounts relevant to corporate income tax would be included in the corresponding line. This change made a separate disclosure of trade tax and the solidarity surcharge superfluous. The prior-year figures were adjusted accordingly.

Deferred taxes are shown in the following table based on the corresponding balance sheet items.

Deferred taxes

Deferred tax assets on deductible temporary differences in the amount of €1,057 million were not recognized in 2023 (2022: €466 million), as their utilization at reversal was not reasonably certain.

Undistributed earnings of subsidiaries resulted in temporary differences of €5,015 million in 2023 (2022: €8,699 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.

Tax loss carryforwards

No deferred tax assets were recognized for tax loss carryforwards of €9,062 million (of which €4,113 million relate to German corporate income tax and €4,376 million to German trade tax) in 2023 (2022: €3,260 million). Of these, €2 million will expire in 2024, €0 million in 2025, €0 million in 2026, €56 million in 2027, €135 million in 2028, and €5 million in 2029 and thereafter. The remaining €8,863 million will not expire.

Net surpluses of deferred tax assets for companies that reported tax losses in 2023 or 2022 totaled €254 million as of December 31, 2023 (December 31, 2022: €376 million). Deferred taxes were recognized because, due to planned earnings, the 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.