Note 22 – Taxes

22.1 Income Taxes

Major Components of Tax Expenses

million CHF

 

2018

 

12017

 

 

 

 

 

1

Restated to reflect the adoption of IFRS 15 (see note 1) and classification of the Water Care business as discontinued operation (see note 5.2)

Current taxes

 

(114)

 

(152)

Deferred tax expense relating to the origination and reversal of temporary differences

 

(33)

 

99

Deferred tax income resulting from tax rate changes

 

(1)

 

184

Total

 

(148)

 

131

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% (2017: 8%) for holding companies and 22% for operating companies in the Canton of Valais (2017: 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 2018 is 18% (2017: –25%). Capital taxes of CHF 23 million (2017: CHF 19 million) are included in administration and general overheads.

Reconciliation of Tax Expense

million CHF

 

2018

 

12017

 

 

 

 

 

1

Restated to reflect the adoption of IFRS 15 (see note 1) and classification of the Water Care business as discontinued operation (see note 5.2)

Profit before income taxes

 

807

 

535

 

 

 

 

 

Tax at the group rate (2018: 22% / 2017: 22%)

 

176

 

118

Deviation from average group tax rate

 

(8)

 

(84)

Non-deductible expenses

 

4

 

3

Tax-free earnings

 

(25)

 

(29)

Deferred tax effect from tax rate changes

 

1

 

(184)

Changes in prior-year estimates (including valuation allowances)

 

15

 

28

Tax on unremitted earnings

 

(19)

 

12

Effect of non-recognition of deferred tax assets

 

3

 

6

Other

 

1

 

(1)

Total

 

148

 

(131)

 

 

 

 

 

Deferred tax expenses (charged) / credited directly to equity

 

0

 

0

Current tax expenses (charged) / credited directly to equity

 

7

 

(5)

The components of deferred income tax balances are included in the following captions in the consolidated balance sheet:

Components of Deferred Income Tax Balances

million CHF

 

2018

 

12017

 

 

Assets

 

Liabilites

 

Assets

 

Liabilites

 

 

 

 

 

 

 

 

 

1

Restated to reflect the adoption of IFRS 15 (see note 1)

Current provisions

 

14

 

30

 

8

 

20

Non-current provisions / Employee benefit liabilities

 

211

 

72

 

270

 

80

Intangible assets

 

3

 

747

 

1

 

839

Inventories, net

 

4

 

46

 

9

 

41

Property, plant and equipment

 

18

 

214

 

14

 

217

Other assets

 

16

 

21

 

32

 

13

Tax loss carry-forwards and tax credits

 

182

 

0

 

159

 

0

Netting of deferred tax assets and deferred tax liabilities

 

(419)

 

(419)

 

(450)

 

(450)

Total

 

29

 

711

 

43

 

760

The development of deferred tax (expenses)/income can be explained as follows:

million CHF

 

2018

 

12017

1

Restated to reflect the adoption of IFRS 15 (see note 1)

 

 

 

 

 

Deferred tax assets

 

29

 

43

Deferred tax liabilities

 

(711)

 

(760)

Net deferred tax liability, at 31 December

 

(682)

 

(717)

Less deferred tax liabilities net, at 1 January

 

717

 

284

(Increase) / decrease in deferred tax liabilities, net

 

35

 

(433)

Currency translation differences

 

(18)

 

36

Acquisition of subsidiaries

 

35

 

666

Movements of deferred (tax assets) / liabilities recognized in other comprehensive income

 

1

 

50

Deferred tax expense related to discontinued operations

 

1

 

(36)

Reclassification from current to deferred taxes

 

5

 

0

Reclassification to assets held for sale

 

(93)

 

0

(Expense) / income recognized in income statement

 

(34)

 

283

Unrecognized Tax Losses: Expiry

million CHF

 

2018

 

2017

 

 

 

 

 

Within 1 year

 

0

 

0

From 2 to 5 years

 

14

 

11

After 5 years

 

216

 

146

Unlimited

 

335

 

320

Total

 

565

 

477

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 689 million at 31 December 2018 (2017: CHF 416 million).

The 2017 enacted U.S. tax reform legislation (Tax Cuts and Jobs Act «TCJA») 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. As of 31 December 2017 Lonza recorded an estimate of CHF 50 million repatriation tax liability on accumulated post-1986 foreign earnings that was reported in taxes payable. The estimated tax payables for the mandatory repatriation transition tax were considered to be Lonza’s best estimate at that point in time, based on information that was readily available as of 31 December 2017, and was 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 applicable tax returns for 2017 were completed and filed during 2018 based on additional information gathered, including available interpretation and clarification of the TCJA guidance through legislation, U.S. Treasury actions and other means which resulted in a tax benefit CHF 19 million recorded in 2018.

22.2 Disclosure of Tax Effects on Each Component of Other Comprehensive Income

million CHF

 

2018

 

2017

 

 

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

 

(221)

 

0

 

(221)

 

227

 

(4)

 

223

Cash flow hedges

 

(16)

 

2

 

(14)

 

9

 

(1)

 

8

Remeasurement of defined-benefit liability

 

7

 

(1)

 

6

 

119

 

(50)

 

69

Other comprehensive income

 

(230)

 

1

 

(229)

 

355

 

(55)

 

300