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(10) Income Tax

 

Tax Expense According to Region

€ millions   2016   2015   2014
Current tax expense            
Germany   853   859   770
Foreign   537   408   422
Total current tax expense   1,390   1,267   1,192
Deferred tax expense/income            
Germany   −38   −74   84
Foreign   −123   −258   −201
Total deferred tax income   −161   −332   −117
Total income tax expense   1,229   935   1,075

 

 

Major Components of Tax Expense

€ millions   2016   2015   2014
Current tax expense/income            
Tax expense for current year   1,412   1,278   1,168
Taxes for prior years   −22   −11   24
Total current tax expense   1,390   1,267   1,192
Deferred tax expense/income            
Origination and reversal of temporary differences   −403   −428   −126
Unused tax losses, research and development tax credits, and foreign tax credits   242   96   9
Total deferred tax income   −161   −332   −117
Total income tax expense   1,229   935   1,075

 

 

Profit Before Tax

€ millions   2016   2015   2014
Germany   3,109   3,161   3,338
Foreign   1,754   830   1,017
Total   4,863   3,991   4,355

 

The following table reconciles the expected income tax expense, computed by applying our combined German tax rate of 26.4% (2015: 26.4%; 2014: 26.4%), to the actual income tax expense. Our 2016 combined German tax rate includes a corporate income tax rate of 15.0% (2015: 15.0%; 2014: 15.0%), plus a solidarity surcharge of 5.5% (2015: 5.5%; 2014: 5.5%) thereon, and trade taxes of 10.6% (2015: 10.6%; 2014: 10.6%).

 

Relationship Between Tax Expense and Profit Before Tax

€ millions, unless otherwise stated   2016   2015   2014
Profit before tax   4,863   3,991   4,355
Tax expense at applicable tax rate of 26.4% (2015: 26.4%; 2014: 26.4%)   1,284   1,055   1,151
Tax effect of:            
Foreign tax rates   −105   −126   −117
Non-deductible expenses   78   61   63
Tax exempt income   −106   −103   −86
Withholding taxes   112   115   111
Research and development and foreign tax credits   −36   −31   −41
Prior-year taxes   −43   −55   −10
Reassessment of deferred tax assets, research and development tax credits, and foreign tax credits   43   43   41
Other   2   −24   −37
Total income tax expense   1,229   935   1,075
Effective tax rate (in %)   25.3   23.4   24.7

 

 

Recognized Deferred Tax Assets and Liabilities

€ millions   2016   2015
Deferred tax assets        
Intangible assets   81   99
Property, plant, and equipment   32   24
Other financial assets   18   15
Trade and other receivables   72   64
Pension provisions   108   98
Share-based payments   207   163
Other provisions and obligations   517   431
Deferred income   118   104
Carryforwards of unused tax losses   377   621
Research and development and foreign tax credits   235   187
Other   102   149
Total deferred tax assets   1,867   1,955
Deferred tax liabilities        
Intangible assets   1,162   1,234
Property, plant, and equipment   66   62
Other financial assets   158   389
Trade and other receivables   125   93
Pension provisions   7   5
Share-based payments   3   4
Other provisions and obligations   122   112
Deferred income   39   40
Other   26   11
Total deferred tax liabilities   1,708   1,950
Total deferred tax assets/liabilities, net   159   5

 

Items Not Resulting in a Deferred Tax Asset

€ millions 2016 2015 2014
Unused tax losses
Not expiring 338 279 140
Expiring in the following year 32 95 63
Expiring after the following year 649 704 672
Total unused tax losses 1,019 1,078 875
Deductible temporary differences 33 122 96
Unused research and development and foreign tax credits
Not expiring 33 34 32
Expiring in the following year 1 0 0
Expiring after the following year 30 20 22
Total unused tax credits 64 54 54

€309 million (2015: €429 million; 2014: €441 million) of the unused tax losses relate to U.S. state tax loss carryforwards.

In 2016, subsidiaries that suffered a tax loss in either the current or the preceding period recognized deferred tax assets in excess of deferred tax liabilities amounting to €189 million (2015: €129 million; 2014: €73 million), because it is probable that sufficient future taxable profit will be available to allow the benefit of the deferred tax assets to be utilized.

We have not recognized a deferred tax liability on approximately €10.81 billion (2015: €9.95 billion) for undistributed profits of our subsidiaries, because we are in a position to control the timing of the reversal of the temporary difference and it is probable that such differences will not reverse in the foreseeable future.

Total Income Tax

€ millions 2016 2015 2014
Income tax recorded in profit 1,229 935 1,075
Income tax recorded in share premium −5 −14 −3
Income tax recorded in other comprehensive income that will not be reclassified to profit and loss
Remeasurements on defined benefit pension plans −2 −2 −7
Income tax recorded in other comprehensive income that will be reclassified to profit and loss
Available-for-sale financial assets −1 2 0
Cash flow hedges −4 4 −10
Exchange differences 25 −16 −21
Total 1,242 909 1,034

We are subject to ongoing tax audits by domestic and foreign tax authorities. Currently, we are in dispute mainly with the German and only a few foreign tax authorities. The German dispute is in respect of intercompany financing matters and certain secured capital investments, while the few foreign disputes are in respect of intercompany financing matters and the deductibility of license fees and intercompany services. In all cases, we expect that a favorable outcome can only be achieved through litigation. For all of these matters, we have not recorded a provision as we believe that the tax authorities’ claims have no merit and that no adjustment is warranted. If, contrary to our view, the tax authorities were to prevail in their arguments before the court, we would expect to have an additional tax expense (including related interest expenses and penalties) of approximately €1,749 million (2015: €1,045 million) in total.

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