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Note 8 Income Taxes
Profit before Tax and Minority Interests
| Year Ended 31 December | |||
| EUR million | 2002 | 2003 | 2004 |
| Finnish companies | 327.6 | 174.6 | 310.3 |
| Swedish companies | 539.4 | 329.5 | 337.2 |
| German companies | 107.9 | 25.8 | -6.3 |
| Other companies | -1 344.2 | -319.2 | -2.2 |
| Total | -369.3 | 210.7 | 639.0 |
Income Tax Expense
| Year Ended 31 December | |||
| EUR million | 2002 | 2003 | 2004 |
| Current Tax Expense | |||
| Finnish companies | -98.6 | 5.2 | 13.4 |
| Swedish companies | 106.4 | 77.5 | 32.0 |
| German companies | 50.0 | 1.1 | 13.9 |
| Other companies | 58.6 | 31.4 | 41.7 |
| Change in Deferred Taxes | |||
| Finnish companies | -110.8 | 48.6 | 49.6 |
| Swedish companies | 47.7 | 14.4 | -225.7 |
| German companies | -2.1 | 11.1 | -8.8 |
| Other companies | -179.4 | -120.6 | -33.3 |
| Associated Company Taxes | -0.3 | -1.7 | 8.4 |
| Total | -128.5 | 67.0 | -108.8 |
Income Tax Reconciliation
| Year Ended 31 December | |||
| EUR million | 2002 | 2003 | 2004 |
| Tax at domestic rates applicable to profits in the country concerned | -257.2 | 22.2 | 164.8 |
| Non-deductible expenses 'and tax exempt income | 34.5 | -6.8 | -45.6 |
| Losses where no deferred 'tax benefit is recognised | 33.7 | 48.9 | 34.8 |
| Impairment of North American assets | 363.2 | - | - |
| Write-down of shares in Stora Enso North America Corp. | -298.4 | - | - |
| Sale of Swedish forests | - | - | -240.5 |
| Change in tax rates and tax laws | -4.3 | 2.7 | -22.3 |
| Income Taxes in the Income Statement | -128.5 | 67.0 | -108.8 |
| Effective Tax Rate | 34.8% | 31.8% | 17.0% |
| Underlying tax rate on normal operations | 31.4% | 31.8% | 28.9% |
When IAS 41 Agriculture came into effect on 1 January 2003, the opening balance in deferred tax for fair value adjustments was restated to take into account deferred tax of EUR 240.4 million relating to the initial valuation surplus of the Group’s forest assets; this tax would have been payable had the forest holdings been subject to an asset sale. However, in 2004 the company owning the Swedish assets was divested, thus the tax provision on those assets was not required and SEK 2 195 (EUR 240.5) million was credited to the Income Statement.
Also in 2004, Finland passed new tax legislation providing for a reduction in corporate tax rates and changes in capital gains tax. Whilst the reduction in the tax rate from 29% to 26% had a beneficial effect of EUR 44.3 million as at 31 December 2004 when the Group’s Finnish deferred tax balances were restated to the new rate, the other changes resulted in a loss of deferred tax assets in 2004 of EUR 24.1 million. Group tax excluding these effects represented an underlying tax rate of 28.9%.
In 2002 Stora Enso wrote down the surplus acquisition value of its North American assets by USD 1 081.0 (EUR 1 143.3) million, and a related write-down of EUR 1 028.8 million was also made in the books of Stora Enso Oyj in respect of the reduced value of its investment in Stora Enso North America Corp. Tax relief on this amounted EUR 298.4 million, of which EUR 253.4 million was utilised in 2002 and the balance of EUR 45.0 million in 2003. Group tax excluding these effects represented a tax rate of 31.5% in 2002.
The Group has recognised a deferred tax asset for its net operating loss carry-forwards and established a valuation allowance against this amount based on an analysis of the probability for set-off against future profits in the relevant tax jurisdictions. At 31 December 2004 Stora Enso had losses carried forward, mainly attributable to foreign subsidiaries, of EUR 1 227 (EUR 982) million of which some EUR 440 (EUR 509) million had no expiry date, EUR 76 (EUR 52) million expire during the years 2005–2009 and the remainder expire thereafter. Tax loss carry-forwards are netted against deferred tax liabilities within each jointly taxed group of companies and are only shown separately as an asset to the extent that they exceed such liabilities.
No deferred tax liability has been recognised for the undistributed earnings of Finnish subsidiaries as such earnings may be transferred to the Parent Company without any tax consequences. The Group does not provide for deferred taxes on undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are intended to be permanently reinvested in those operations.
Income Tax Reconciliation
| Year Ended 31 December | |||||||||||
| 2002 | 2003 | 2004 | 2002 | 2003 | 2004 | 2002 | 2003 | 2004 | |||
| EUR million | Current Tax | Deferred Tax | Total Tax | ||||||||
| At 31 December | 264.4 | 294.6 | 169.9 | 1 940.6 | 1 684.7 | 1 765.2 | 2 205.0 | 1 979.3 | 1 935.1 | ||
| IAS 41 Agriculture | - | - | - | - | 240.4 | - | - | 240.4 | - | ||
| At 1 January | 264.4 | 294.6 | 169.9 | 1 940.6 | 1 925.1 | 1 765.2 | 2 205.0 | 2 219.7 | 1 935.1 | ||
| Translation difference | 1.3 | 1.1 | 2.4 | -91.7 | -71.5 | -17.1 | -90.4 | -70.4 | -14.7 | ||
| Companies acquired | -3.0 | -5.4 | 1.7 | 2.2 | 5.2 | 17.5 | -0.8 | -0.2 | 19.2 | ||
| Companies divested | -4.6 | - | 8.8 | 4.4 | - | -231.7 | -0.2 | - | -222.9 | ||
| OCI | - | - | - | 73.8 | -47.1 | -6.6 | 73.8 | -47.1 | -6.6 | ||
| Equity hedging (Note 25) | 89.3 | 42.4 | 21.0 | - | - | - | 89.3 | 42.4 | 21.0 | ||
| Income Statement | |||||||||||
| Current year | 92.3 | 138.8 | 106.8 | -240.9 | -51.6 | 18.5 | -148.6 | 87.2 | 125.3 | ||
| Prior year adjustments | 24.1 | -23.6 | -5.8 | -3.7 | 5.1 | -236.6 | 20.4 | -18.5 | -242.4 | ||
| Tax paid | -169.2 | -278.0 | -114.2 | - | - | - | -169.2 | -278.0 | -114.2 | ||
| At 31 December | 294.6 | 169.9 | 190.6 | 1 684.7 | 1 765.2 | 1 309.2 | 1 979.3 | 1 935.1 | 1 499.8 | ||
| Liabilities | 537.7 | 352.4 | 351.5 | 1 737.4 | 1 777.3 | 1 320.6 | 2 275.1 | 2 129.7 | 1 672.1 | ||
| Assets | -243.1 | -182.5 | -160.9 | -52.7 | -12.1 | -11.4 | -295.8 | -194.6 | -172.3 | ||
| Net Tax | 294.6 | 169.9 | 190.6 | 1 684.7 | 1 765.2 | 1 309.2 | 1 979.3 | 1 935.1 | 1 499.8 | ||
Reconciliation of Deferred Tax Balances in 2004
| EUR million | As at 1 Jan 2004 |
Translation Difference |
Acquisitions and Disposals |
Charge in Income Statement |
OCI | As at 31 Dec 2004 |
| Fixed asset depreciation differences | 1 377.4 | -31.7 | 1.1 | -20.4 | - | 1 326.4 |
| Untaxed reserves | 169.1 | 1.1 | -66.8 | 13.0 | - | 116.4 |
| Pension provisions (1) | 4.9 | -6.0 | -0.7 | 53.0 | - | 51.2 |
| Other provisions | -3.9 | - | - | -4.0 | - | -7.9 |
| Fair value gains less losses (2) | 416.4 | -0.2 | -159.8 | -241.4 | - | 15.0 |
| Unrealised internal profits | -23.1 | - | - | 17.6 | - | -5.5 |
| Tax losses carried forward | -339.5 | 19.0 | -0.2 | -42.2 | - | -362.9 |
| Other | 7.0 | 0.7 | 12.2 | -15.1 | - | 4.8 |
| Less valuation allowance (Note 9) | 107.9 | - | - | 21.4 | - | 129.3 |
| 1 716.2 | -17.1 | -214.2 | -218.1 | - | 1 266.8 | |
| Fair value of available-for-sale investments | 24.1 | - | - | - | 4.1 | 28.2 |
| Fair value of derivative financial instruments | 24.9 | - | 5.3 | - | -16.0 | 14.2 |
| Change in Net Deferred Tax | 1 765.2 | -17.1 | -208.9 | -218.1 | -11.9 | 1 309.2 |
| Shown on the Balance Sheet as | ||||||
| Liabilities | 1 777.3 | -17.1 | -208.9 | -218.8 | -11.9 | 1 320.6 |
| Assets | -12.1 | - | - | 0.7 | - | -11.4 |
| 1 765.2 | -17.1 | -208.9 | -218.1 | -11.9 | 1 309.2 |
OCI = Other Comprehensive Income Statement - see note 24
1) The opening balance for pension provisions has been restated to take into account deferred tax of EUR 53.5 million relating to the restatement of prior years in respect
of the Finnish Statutory Pension Scheme.
2) The Income Statement credit includes EUR 240.5 million relating to the disposal of Swedish forest interests, of which EUR 240.4 million related to the adjustment to the 2003
opening balance for the deferred tax on the fair value surplus on the adoption of IAS 41 Agriculture.
Reconciliation of Deferred Tax Balances in 2003
| EUR million | As at 1 Jan 2003 |
Translation Difference |
Acquisitions and Disposals |
Charge in Income Statement |
OCI | As at 31 Dec 2003 |
| Fixed asset depreciation differences | 1 625.3 | -104.8 | 23.8 | -166.9 | - | 1 377.4 |
| Untaxed reserves | 156.4 | 1.2 | - | 11.5 | - | 169.1 |
| Pension provisions (1) | -0.3 | -11.3 | - | 16.5 | - | 4.9 |
| Other provisions | -37.0 | - | - | 33.1 | - | -3.9 |
| Fair value gains less losses | 411.3 | 2.7 | - | 2.4 | - | 416.4 |
| Unrealised internal profits | -17.1 | - | - | -6.0 | - | -23.1 |
| Tax losses carried forward | -351.5 | 29.5 | -2.9 | -14.6 | - | -339.5 |
| Other | -50.3 | 11.2 | -15.7 | 61.8 | - | 7.0 |
| Less valuation allowance (Note 9) | 92.2 | - | - | 15.7 | - | 107.9 |
| 1 829.0 | -71.5 | 5.2 | -46.5 | - | 1 716.2 | |
| Fair value of available-for-sale investments | 7.6 | - | - | - | 16.5 | 24.1 |
| Fair value of derivative financial instruments | 88.5 | - | - | - | -63.6 | 24.9 |
| Change in Net Deferred Tax | 1 925.1 | -71.5 | 5.2 | -46.5 | -47.1 | 1 765.2 |
| Shown on the Balance Sheet as | ||||||
| Liabilities | 1 977.8 | -70.7 | 5.2 | -87.9 | -47.1 | 1 777.3 |
| Assets | -52.7 | -0.8 | - | 41.4 | - | -12.1 |
| 1 925.1 | -71.5 | 5.2 | -46.5 | -47.1 | 1 765.2 |
OCI = Other Comprehensive Income Statement - see Note 24
1) The opening balance for Fair Value Gains Less Losses has been adjusted for the addition of deferred tax of EUR 240.4 million relating to the initial valuation surplus
on the adoption of IAS 41 Agriculture; the revised total thus differs from the Balance Sheet by this amount.
Under IFRS, all deferred tax is shown as non-current even though a proportion will be reversed within twelve months; the table below shows the deferred tax considered to be current and non-current.
Deferred Tax Allocated into Current & Non-Current Balances
| As at 31 December | |||||||||||
| 2002 | 2003 | 2004 | 2002 | 2003 | 2004 | 2002 | 2003 | 2004 | |||
| EUR million | Non-Current | Current | Total Deferred Tax | ||||||||
| Depreciation differences | 1 656.5 | 1 389.7 | 1 311.4 | -31.2 | -12.3 | 15.0 | 1 625.3 | 1 377.4 | 1 326.4 | ||
| Untaxed reserves | 151.5 | 35.3 | 116.4 | 4.9 | 133.8 | - | 156.4 | 169.1 | 116.4 | ||
| Pension provisions | 13.2 | 14.3 | 61.1 | -13.5 | -9.4 | -9.9 | -0.3 | 4.9 | 51.2 | ||
| Other provisions | -37.0 | -3.9 | -5.0 | - | - | -2.9 | -37.0 | -3.9 | -7.9 | ||
| Fair value gains less losses | 411.3 | 15.9 | 15.0 | - | 400.5 | - | 411.3 | 416.4 | 15.0 | ||
| Unrealised internal profits | -7.3 | -13.7 | - | -9.8 | -9.4 | -5.5 | -17.1 | -23.1 | -5.5 | ||
| Tax losses carried forward | -291.9 | -334.2 | -354.1 | -59.6 | -5.3 | -8.8 | -351.5 | -339.5 | -362.9 | ||
| Other | -71.0 | -33.6 | 16.0 | 20.7 | 40.6 | -11.2 | 92.2 | 107.9 | 4.8 | ||
| Less valuation allowance | 92.2 | 107.9 | 129.3 | - | - | - | -50.3 | 7.0 | 129.3 | ||
| 1 917.5 | 1 177.7 | 1 290.1 | -88.5 | 538.5 | -23.3 | 1 829.0 | 1 716.2 | 1 266.8 | |||
| OCI | 21.9 | 33.0 | 35.4 | 74.2 | 16.0 | 7.0 | 96.1 | 49.0 | 42.4 | ||
| Total | 1 939.4 | 1 210.7 | 1 325.5 | -14.3 | 554.5 | -16.3 | 1 925.1 | 1 765.2 | 1 309.2 | ||
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