22.1 Income Taxes
Major Components of Tax Expenses
|Deferred tax (income) / expense relating to the origination and reversal of temporary differences||(96)||20|
|Deferred tax (income) / expense resulting from tax rate changes||(220)||(2)|
Lonza Group Ltd and the operating company Lonza Ltd are domiciled in Switzerland. The maximum rate of all income taxes on companies domiciled in Switzerland is 8% (2016: 8%) for holding companies and 22% for operating companies in the Canton of Valais (2016: 22%).
Since the Group operates across the world, it is subject to income taxes in several different tax jurisdictions. Lonza uses, as the Group’s tax rate, the ordinary tax rate for a legal entity in the Canton of Valais in Switzerland. The Group’s effective tax rate for 2017 is -25% (2016: 19%).
The enactment of the United States Tax Cuts and Jobs Act (TCJA) and the Belgium Tax Reform, both in December 2017, reduced, among other provisions, the US Federal tax rate from 35% to 21% and the Belgium tax rate from 34% to 29.6% (for the years 2018 and 2019) and 25% (for year 2020 and following years). As a result of the changes in tax law, Lonza recognized substantial non-recurring adjustments to its current tax payables and its deferred tax assets and liabilities resulting in a net income tax benefit of CHF 187 million resulting in a negative group effective tax rate. Excluding the impacts of tax reform, Lonza Group would have had an effective tax rate of 6.8% for 2017.
The following table represents the key components of the aforementioned adjustments on deferred tax assets and liabilities and current tax payables:
|Revaluation of deferred tax assets and liabilities due to U.S. tax rate changes||(90)|
|Revaluation of deferred tax assets and liabilities due to Belgium tax rate changes||(123)|
|Recognition of tax payables due to U.S. mandatory repatriation transition tax||50|
|Release of deferred tax liabilities on unremitted earnings||(24)|
|Total revaluation of deferred tax assets and liabilities and current income tax liabilities||(187)|
The enacted U.S. tax reform legislation includes a provision that requires the U.S. parent company’s foreign subsidiaries’ unremitted earnings to be subject to an immediate toll tax on the qualifying amount of unremitted earnings (mandatory repatriation transition tax). Previously, these earnings were only taxable upon distribution to the U.S. parent company. Lonza had provided deferred tax liabilities amounting to CHF 24 million related to certain of its non-US domiciled affiliates’ unremitted earnings in the past, which have been released as a result of the TCJA. Conversely, Lonza recorded an estimate of CHF 50 million repatriation tax liability on accumulated post-1986 foreign earnings that is reported in taxes payable, as the toll tax amount owed is payable over eight years through 2026 (with the first of eight installments due in April 2019), independent from the effective distribution of deemed repatriated earnings.
The TCJA subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by certain foreign subsidiaries. Under IFRS, an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-taxed income in future years or provide for the tax expense related to such income in the year the tax is incurred. We have elected to provide for the tax expense related to such income in the year the tax is incurred. As a result, there is no recorded impact from the global intangible low-taxed income in the current year.
The estimated tax payables for the mandatory repatriation transition tax are considered to be Lonza’s best estimate at this point in time and are based on several assumptions (e.g. earnings and profits in the Group’s foreign subsidiaries (including the portion in cash), foreign tax credits and other foreign losses available, and assertions on any remaining outside basis differences as of 31 December 2017). The estimate for the repatriation tax contains information that was readily available to us.
Certain information necessary to complete our evaluation of the financial statement impacts of TCJA was not readily available and Lonza will revise these estimates during 2018. Such revisions could be material as additional information to complete the tax returns is gathered and as any interpretation or clarification of the TCJA occurs through legislation, U.S. Treasury actions or other means.
Capital taxes of CHF 19 million (2016: CHF 12 million) are included in “Administration and general overheads”.
Reconciliation of Tax Expense
|Profit before income taxes||581||373|
|Tax at the group rate (2017: 22 % / 2016: 22 %)||128||82|
|Deviation from average group tax rate||(89)||3|
|Deferred tax effect from tax rate changes||(220)||(2)|
|Changes in prior year estimates (including valuation allowances)||28||9|
|Tax on unremitted earnings||26||(9)|
|Effect of non-recognition of deferred tax assets||7||3|
|Deferred tax expenses (charged) / credited directly to equity||0||0|
|Current tax expenses (charged) / credited directly to equity||(5)||(2)|
Lonza’s 2017 effective tax rate is affected by certain positive one-time tax impacts of items that deviate from the Group tax rate, including tax deductible capital transaction costs (CHF 99 million) recognized directly in equity, certain changes to Lonza’s legal and financing structure as well as by the geographical source of income which shifted on a year over year basis consistent with Lonza’s business performance.
The components of deferred income tax balances are included in the following captions in the consolidated balance sheet:
Components of Deferred Income Tax Balances
|Non-current provisions / Employee benefit liability||270||80||305||86|
|Property, plant and equipment||14||217||12||156|
|Tax loss carry-forwards||159||0||39||0|
|Netting of deferred tax assets and deferred tax liabilities||(450)||(450)||(339)||(339)|
The development of deferred tax (expenses) / income can be explained as follows:
|Deferred tax assets||33||38|
|Deferred tax liabilities||(760)||(329)|
|Net deferred tax liability, at 31 December||(727)||(291)|
|Less deferred tax liabilities net, at 1 January||291||208|
|(Increase) / decrease in deferred tax liabilities, net||(436)||(83)|
|Currency translation differences||36||7|
|Acquisition of subsidiaries||666||64|
|Movements of deferred (tax assets) / liabilities recognized in other comprehensive income||50||(10)|
|Reclassification to assets held for sale||0||4|
|Income / (expense) recognized in income statement||316||(18)|
Unrecognized Tax Losses: Expiry
|Within 1 year||0||0|
|Between 2 to 5 years||25||72|
|After 5 years||148||32|
In assessing whether it is probable that future taxable profit will be available to utilize these tax loss carry-forwards, management considers whether such benefits are recoverable on the basis of the current situation of the company and the future economic benefits outlined in specific business plans for each relevant subsidiary.
Deferred tax liabilities have not been established for the withholding tax and other taxes that would be payable on the remittance of earnings of foreign subsidiaries, where such amounts are currently regarded as permanently reinvested. The total unremitted earnings of the Group, regarded as permanently reinvested, were CHF 416 million at 31 December 2017 (2016: CHF 543 million).
22.2 Disclosure of Tax Effects to Each Component of Other Comprehensive Income
|Before-tax amount||Tax (expense) benefit||Net-of-tax amount||Before-tax amount||Tax (expense) benefit||Net-of-tax amount|
|Exchange differences on translating foreign operations||227||(4)||223||4||(1)||3|
|Cash flow hedges||9||(1)||8||(1)||(1)||(2)|
|Remeasurement of defined-benefit liability||119||(50)||69||(37)||10||(27)|
|Other comprehensive income||355||(55)||300||(34)||8||(26)|