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7.5 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” are recognised under this item.
The reader is referred to the remarks in Section 3.2 “Summary of major accounting policies”.
Effective 1 January 2016 the raising of the trade tax multiplier for the City of Hannover from 460.0% to 480.0% was approved.
A tax rate of 32.63% (rounded to 32.7%; previous year: 31.93%, rounded to 32.0%) was therefore used to calculate the deferred taxes of the major domestic companies. It is arrived at from the unchanged corporate income tax rate of 15.0%, the unchanged German solidarity surcharge of 5.5% and a trade earnings tax rate of 16.8% (16.1%). The Group tax rate showed a corresponding increase to 32.7% (32.0%). 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 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.
Breakdown of taxes on income
The breakdown of actual and deferred income taxes was as follows:
| Income tax | ||
|---|---|---|
| in EUR thousand | 2016 | 2015 |
| Actual tax for the year under review | 460,017 | 261,328 |
| Actual tax for other periods | 20,425 | 16,620 |
| Deferred taxes due to temporary differences | (76,024) | 186,579 |
| Deferred taxes from loss carry-forwards | 7,482 | (24,905) |
| Change in deferred taxes due to changes in tax rates | (2,676) | 21,548 |
| Value adjustments on deferred taxes | (17,995) | (4,963) |
| Total | 391,229 | 456,207 |
| Domestic / foreign breakdown of recognised tax expenditure / income | ||
|---|---|---|
| in EUR thousand | 2016 | 2015 |
| Current taxes | ||
| Germany | 413,063 | 195,884 |
| Abroad | 67,379 | 82,064 |
| Deferred taxes | ||
| Germany | (97,845) | 186,898 |
| Abroad | 8,632 | (8,639) |
| Total | 391,229 | 456,207 |
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 | 2016 | 20151 |
| Deferred tax assets | ||
| Tax loss carry-forwards | 105,940 | 118,379 |
| Loss and loss adjustment expense reserves | 325,929 | 229,865 |
| Benefit reserve | 135,794 | 156,980 |
| Other technical / non-technical provisions | 71,228 | 55,897 |
| Funds withheld | 21,060 | 22,780 |
| Deferred acquisition costs | 44,434 | 41,907 |
| Accounts receivable / reinsurance payable | 45,183 | 13,989 |
| Valuation differences relating to investments | 36,748 | 6,787 |
| Contract deposits | 3,196 | – |
| Other valuation differences | 46,841 | 41,680 |
| Value adjustments2 | (27,527) | (45,352) |
| Total | 808,826 | 642,912 |
| Deferred tax liabilities | ||
| Loss and loss adjustment expense reserves | 215,852 | 55,223 |
| Benefit reserve | 149,531 | 124,232 |
| Other technical / non-technical provisions | 108,894 | 98,954 |
| Equalisation reserve | 1,119,135 | 1,214,395 |
| Funds withheld | 15,850 | 18,551 |
| Deferred acquisition costs | 186,623 | 205,227 |
| Accounts receivable / reinsurance payable | 71,446 | 63,613 |
| Valuation differences relating to investments | 255,699 | 239,012 |
| Contract deposits | 76,859 | – |
| Present value of future profits on acquired life reinsurance portfolios (PVFP) | 9,574 | 9,783 |
| Other valuation differences | 34,044 | 113,144 |
| Total | 2,243,507 | 2,142,134 |
| Deferred tax liabilities | 1,434,681 | 1,499,222 |
| 1 For the year under review expanded netting opportunities arose in the calculation of deferred taxes. The previous year’s figures were restated
accordingly
for the sake of comparability. There are no implications for recognition in the balance sheet. 2 Thereof on tax loss carry-forwards: -EUR 26,880 thousand (-EUR 44,737 thousand) | ||
The deferred tax assets and deferred tax liabilities are shown according to their origin in the above table. Deferred taxes resulting from a single transaction and with respect to which the corresponding temporary valuation differences are simultaneously reversed were already netted on recognition. Further netting was made based on the timing of the reversal of temporary differences and other offsetting possibilities, ultimately resulting in the following disclosure of deferred tax assets and deferred tax liabilities in the balance sheet:
| Netting of deferred tax assets and deferred tax liabilities | ||
|---|---|---|
| in EUR thousand | 2016 | 2015 |
| Deferred tax assets | 408,292 | 433,500 |
| Deferred tax liabilities | 1,842,973 | 1,932,722 |
| Net deferred tax liabilities | 1,434,681 | 1,499,222 |
In view of the unrealised gains on investments and on currency translation recognised directly in equity in the financial year, actual and deferred tax expenditure – including amounts attributable to non-controlling interests – of EUR 4.8 million (EUR 142.8 million) was also recognised directly in 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 | 2016 | 2015 |
| Profit before taxes on income | 1,617,655 | 1,670,920 |
| Group tax rate | 32.7% | 32.0% |
| Expected expense for income taxes | 528,973 | 534,694 |
| Change in tax rates | (2,677) | 21,548 |
| Differences in tax rates affecting subsidiaries | (112,973) | (120,541) |
| Non-deductible expenses | 44,122 | 66,902 |
| Tax-exempt income | (41,654) | (39,216) |
| Tax expense / income not attributable to the reporting period | 30,435 | 16,117 |
| Value adjustments on deferred taxes / loss carry-forwards | (17,995) | (4,963) |
| Trade tax modifications | (39,645) | (24,597) |
| Other | 2,644 | 6,263 |
| Actual expense for income taxes | 391,229 | 456,207 |
The expense for income taxes in the financial year was EUR 65.0 million lower than in the previous year at EUR 391.2 million (EUR 456.2 million).
The effective tax rate amounted to 24.2% (27.3%).
Availability of non-capitalised loss carry-forwards
Unused tax loss carry-forwards and tax credits of EUR 459.4 million (EUR 455.4 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 109.7 million (EUR 164.4 million) thereof was not capitalised since realisation is not sufficiently certain.
No deferred taxes were established on liabilities- side taxable temporary differences amounting to EUR 40.2 million (EUR 57.5 million) in connection with interests in Group companies because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.
Availability of loss carry-forwards that have not been capitalised:
| Expiry of non-capitalised loss carry-forwards and temporary differences | |||||
| in EUR thousand | One to five years | Six to ten years | More than ten years | Unlimited | Total |
|---|---|---|---|---|---|
| Temporary differences | – | – | – | 3,804 | 3,804 |
| Loss carry-forwards | – | – | – | 105,876 | 105,876 |
| Total | – | – | – | 109,680 | 109,680 |