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| B. NOTES TO THE CONSOLIDATED STATEMENTS OF INCOME |
11. Income Taxes
Income tax for the years ended December 31 is comprised of the following components:
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2003 |
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2002 |
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2001 |
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€(000) |
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€(000) |
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€(000) |
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Current taxes – Germany |
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382,786 |
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302,533 |
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461,890 |
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Current taxes – Foreign |
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217,232 |
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221,452 |
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170,878 |
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600,018 |
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523,985 |
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632,768 |
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Deferred taxes – Germany |
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90,925 |
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56,155 |
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- 124,552 |
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Deferred taxes – Foreign |
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1,697 |
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18,565 |
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- 31,923 |
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92,622 |
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74,720 |
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- 156,475 |
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Income tax expense |
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692,640 |
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598,705 |
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476,293 |
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In December 2003, the German government enacted new tax legislation (“Gesetz zur Umsetzung der Protokollerklärung der Bundesregierung zur Vermittlungsempfehlung zum Steuervergünstigungsabbaugesetz”) effective January 1, 2004. A significant change is the limitation of the exemption from tax for domestic dividends and certain gains from the sale of shares in affiliated and unaffiliated companies. Beginning January 2004, only 95% of such dividends received and gains realized will be tax-free while 5% will be treated as non deductible expenses. The effect of this and other changes in tax laws on the Consolidated Statements of Income in 2003 was not material.
The effects of the German tax law changes that were enacted prior to 2003 are as follows: New tax legislation enacted in September 2002 and effective January 1, 2003 increased the statutory corporate income tax rate from 25% to 26.5% for 2003 only. This change in tax law affected the amount of deferred tax assets and liabilities of German entities within the Group as of December 31, 2002 for temporary differences that were expected to be recovered or settled in 2003. The impact of this tax law change increased the deferred income tax expense in 2002 by €1,558 thousand.
Income before income tax, minority interest and extraordinary gain (see Note 12) consists of the following:
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2003 |
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2002 |
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2001 |
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€(000) |
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€(000) |
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€(000) |
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Germany |
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1,179,891 |
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450,864 |
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802,375 |
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Foreign |
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596,724 |
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656,834 |
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266,382 |
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1,776,615 |
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1,107,698 |
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1,068,757 |
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The effective income tax rate for the years ended December 31, 2003, 2002 and 2001 was 39.0%, 53.8% and 44.6% respectively. The following table reconciles the expected income tax expense computed by applying the Company’s combined German corporate tax rate of 37.71% in 2003 (2002: 36.39%; 2001: 36.51%) to the actual income tax expense. The Company’s 2003 combined German corporate tax rate includes a corporate income tax rate after the benefit of deductible trade tax, of 22.91% (2002: 21.60%; 2001: 21.56%) plus a solidarity surcharge of 5.5% thereon and trade taxes of 13.54% (2002: 13.60%; 2001: 13.77%).
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2003 |
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2002 |
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2001 |
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€(000) |
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€(000) |
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€(000) |
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Income before income taxes |
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1,776,615 |
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1,107,698 |
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1,068,757 |
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Expected income taxes 37.71% in 2003 (36.39% in 2002, 36.51% in 2001) |
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669,961 |
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403,091 |
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390,203 |
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Foreign tax rate differential |
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– 14,735 |
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- 4,316 |
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30,993 |
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Tax on non-deductible expenses |
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28,564 |
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11,450 |
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5,705 |
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Tax effect on losses |
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– 1,507 |
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- 130 |
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3,611 |
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Tax effect on equity investments and securities |
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7,110 |
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177,639 |
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54,766 |
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Other |
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3,247 |
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10,971 |
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- 8,985 |
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Income taxes |
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692,640 |
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598,705 |
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476,293 |
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Deferred income tax assets and liabilities as of December 31, 2003 and 2002 are summarized (referring to the underlying item) as follows:
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2003 |
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2002 |
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€(000) |
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€(000) |
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Deferred tax assets |
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Property plant & equipment and intangibles |
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87,127 |
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172,051 |
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Financial assets |
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14,125 |
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22,249 |
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Accounts receivable |
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7,761 |
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22,177 |
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Net operating loss carryforwards |
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17,914 |
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25,874 |
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Pension liabilities |
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12,337 |
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28,028 |
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Stock-based compensation |
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12,099 |
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0 |
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Other liabilities |
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78,537 |
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86,004 |
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Deferred income |
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35,942 |
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48,156 |
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Other |
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115 |
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762 |
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265,957 |
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405,301 |
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Less: Valuation allowance |
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– 1,504 |
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- 3,011 |
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Deferred tax assets |
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264,453 |
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402,290 |
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Deferred tax liabilities |
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Property plant & equipment and intangibles |
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3,215 |
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35,417 |
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Financial assets |
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21,396 |
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5,774 |
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Accounts receivable |
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86,490 |
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35,918 |
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Pension liabilities |
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0 |
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5,537 |
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Other liabilities |
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320 |
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25,168 |
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Deferred income |
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9 |
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3,134 |
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Other |
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550 |
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147 |
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Deferred tax liabilities |
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111,980 |
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111,095 |
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Net deferred tax assets/liabilities |
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152,473 |
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291,195 |
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With regard to their duration, deferred tax assets and liabilities as of December 31, are classified as follows:
On December 31, 2003, certain foreign subsidiaries of the Company had net operating loss carryforwards amounting to €90,854 thousand (2002: €140,452 thousand), which may be used to offset future taxable income. Of this amount €32,586 thousand relates to state net operating loss carryforwards in the United States that will expire if not used over the next 20 years. Further €25,467 thousand relates to other net operating loss carryforwards that will expire if not used within three to seven years. The remaining €32,801 thousand relates to other net operating loss carryforwards that do not expire and therefore can be utilized indefinitely.
Deferred tax assets at December 31, 2003 and 2002 relating to net operating loss carryforwards have been reduced by a valuation allowance of €1,504 thousand and €3,011 thousand, respectively, to a net amount that management believes is more likely than not to be realized.
The decrease of this valuation allowance in 2003 from €3,011 thousand to €1,504 thousand is mainly caused by the utilization of losses.
The Company recorded tax liabilities of €872 thousand (2002: €3,816 thousand) for taxes on future dividend distributions from foreign subsidiaries, which is based on €48,000 thousand (2002: €205,298 thousand) of cumulative undistributed earnings of those foreign subsidiaries because such earnings are intended to be repatriated. The Company has not recognized an income tax liability on €1,716,116 thousand (2002: €1,646,258 thousand) of undistributed earnings of its foreign subsidiaries that arose in 2003 and prior years because the Company plans to permanently reinvest the undistributed earnings. It is not practicable to estimate the amount of unrecognized tax liabilities for these undistributed foreign earnings.
Total income taxes for the years ended December 31, 2003, 2002 and 2001 including those not affecting the Consolidated Statements of Income (charged or credited to Other comprehensive income) were allocated as follows:
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