6.5 Taxes on income
Domestic taxes on income, comparable taxes on income at foreign subsidiaries as well as deferred taxes in accordance with IAS 12 “Income Taxes” and deferred tax assets and liabilities are recognised under this item.
The reader is referred to Section 3.2 “Summary of major accounting policies”regarding the basic approach to the recognition and measurement of deferred taxes.
The tax rate used to calculate the deferred taxes of the domestic companies was unchanged from the previous year at 31.93% (rounded to 32%). It is arrived at from the corporate income tax rate of 15.0% applicable since 1 January 2008, the German reunification charge of 5.5% and a uniform trade earnings tax rate of 16.1%. The deferred taxes at the companies abroad were calculated using the applicable country-specific tax rates.
Tax-relevant bookings on the Group level are made using the Group tax rate of 32% unless they refer specifically to individual companies.
Deferred tax liabilities on profit distributions of significant affiliated companies are established in the year when they are received.
Tax risks
In the previous year we reported that, contrary to a very clear opinion expressed by tax attorneys, the revenue authority is of the view that not inconsiderable investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland is subject to taxation of foreign sourced income at the parent companies in Germany on the basis of the provisions of the Foreign Transactions Tax Act. Insofar as tax assessments to this effect have already been received, appeals have been filed – also with respect to the amounts already recognised as a tax expense. After our opinion had already been confirmed in full by the court of the first instance in 2009, we evaluated as slight the risk that tax assessments containing taxation of foreign sourced investment income generated by Irish companies at the parent companies would be upheld.
In October 2010 the Federal Fiscal Court confirmed the decision of the lower court. Provisions constituted for these circumstances were therefore released. As a result, a non-capitalised contingent asset also existed as at 31 December 2010 in connection with the refund of prepaid taxes and interest in a substantial amount.
Breakdown of taxes on income
The breakdown of current and deferred income taxes was as follows:
| Income tax in EUR thousand | 2010 | 2009 |
|---|---|---|
| Current tax for the year under review | 307,519 | 146,887 |
| Current tax for other periods | (52,498) | 37,804 |
| Deferred taxes due to temporary differences | (2,792) | 105,239 |
| Deferred taxes from loss carry-forwards | 6,299 | 1,822 |
| Change in deferred taxes due to changes in tax rates | (899) | 18 |
| Total | 257,629 | 291,770 |
| Domestic/foreign breakdown of recognised tax expenditure/income in EUR thousand | ||
|---|---|---|
| 2010 | 2009 | |
| Current taxes | ||
| Germany | 198,204 | 124,921 |
| Abroad | 56,817 | 59,770 |
| Deferred taxes | ||
| Germany | (22,189) | 90,342 |
| Abroad | 24,797 | 16,737 |
| Total | 257,629 | 291,770 |
The following table presents a breakdown of the deferred tax assets and liabilities into the balance sheet items from which they are derived.
| Deferred tax assets and deferred tax liabilities of all Group companies in EUR thousand | ||
|---|---|---|
| 2010 | 20091 | |
1 adjusted on the basis of IAS 8
2 Thereof on tax loss carry-forwards: -EUR 43,787 thousand (-EUR 110,573 thousand) |
||
| Deferred tax assets | ||
| Tax loss carry-forwards | 45,433 | 117,918 |
| Loss and loss adjustment expense reserves | 201,132 | 193,175 |
| Benefit reserve | 36,148 | 43,126 |
| Other technical/non-technical provisions | 170,844 | 150,513 |
| Funds withheld | 308,411 | 531,016 |
| Accounts receivable/reinsurance payable | 6,243 | 15,926 |
| Valuation differences relating to investments | 14,517 | 21,739 |
| Contract deposits | 84 | 30,533 |
| Other valuation differences | 278,904 | 307,875 |
| Value adjustments2 | (44,377) | (146,651) |
| Total | 1,017,339 | 1,265,170 |
| Deferred tax liabilities | ||
| Loss and loss adjustment expense reserves | 13,228 | 15,494 |
| Benefit reserve | 190,521 | 390,521 |
| Other technical/non-technical provisions | 95,284 | 109,499 |
| Equalisation reserve | 802,480 | 753,431 |
| Funds withheld | 51,402 | 91,293 |
| Deferred acquisition costs | 363,468 | 380,562 |
| Accounts receivable/reinsurance payable | 53,593 | 52,493 |
| Valuation differences relating to investments | 183,523 | 138,533 |
| Present value of future profits on acquired life reinsurance portfolios (PVFP) | 12,155 | 12,297 |
| Other valuation differences | 262,076 | 290,337 |
| Total | 2,027,730 | 2,234,460 |
| Deferred tax liabilities | 1,010,391 | 969,290 |
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting:
| Netting of deferred tax assets and deferred tax liabilities in EUR thousand | 2010 | 2009 |
|---|---|---|
| Deferred tax assets | 622,136 | 515,867 |
| Deferred tax liabilities | 1,632,527 | 1,485,157 |
| Net deferred tax liabilities | 1,010,391 | 969,290 |
The current and deferred taxes recognised directly in shareholders’ equity in the financial year amounted to –EUR 37.5 million (–EUR 23.3 million). They resulted from items that were charged or credited directly to equity.
The following table presents a reconciliation of the expected expense for income taxes with the actual expense for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group’s expected expense for income taxes.
| Reconciliation of the expected expense for income taxes with the actual expense in EUR thousand | 2010 | 2009 |
|---|---|---|
| Profit before income taxes | 1,088,534 | 1,065,829 |
| Expected tax rate | 32% | 32% |
| Expected expense for income taxes | 348,331 | 341,065 |
| Change in deferred tax rates | (899) | 19 |
| Taxation differences affecting foreign subsidiaries | (54,112) | (118,700) |
| Non-deductible expenses | 9,777 | 41,567 |
| Tax-exempt income | (14,174) | (26,352) |
| Tax income not attributable to the reporting period (previous year: tax expense) | (54,026) | 27,559 |
| Utilisation of previously adjusted loss carry-forwards | - | 228 |
| Other | 22,732 | 26,384 |
| Actual expense for income taxes | 257,629 | 291,770 |
Availability of non-capitalised loss carry-forwards
Unused tax loss carry-forwards of EUR 161.9 million (EUR 370.8 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 156.5 million (EUR 345.0 million) thereof was not capitalised since realisation is not sufficiently certain.
In addition, tax credits of EUR 5.9 million (EUR 22.3 million) which were not capitalised are still available. There were no other temporary differences which had not been capitalised (previous year: EUR 82.0 million).
Significant elements of the unused tax loss carry-forwards, non-capitalised tax credits and other non-capitalised temporary differences were allocated to the disposal group as at the balance sheet date. This is reflected in a decrease relative to the previous year.
Availability of loss carry-forwards and tax credits that have not been capitalised:
| Expiry of loss carry-forwards in EUR thousand | |||||
|---|---|---|---|---|---|
| One to five years | Six to ten years | More than ten years | Unlimited | Total | |
| Loss carry-forwards | - | - | 350 | 156,130 | 156,480 |
| Tax credits | 5,897 | - | - | - | 5,897 |
| Total | 5,897 | - | 350 | 156,130 | 162,377 |