Note 9: Income tax

Pre-tax income from continuing operations amounted to a profit of €919 million (2019: €785 million). The net tax charges related to continuing operations are included in the statement of income as shown in this Note.

The total deferred tax charge including discontinued operations was €108 million (2019: €55 million). The total tax charge including discontinued operations was €249 million (2019: €229 million).

Effective tax rate reconciliation

In 2020, the effective income tax rate based on the statement of income is 26.2% (2019: 29.3%).

The second table in this Note presents the effective consolidated tax rate excluding the impact of results on discontinued operations. Including these results, the effective consolidated tax rate is 27.1% (2019: 28.4%).

Non-deductible expenses are mainly related to base erosion, non-deductible interest and the effects of Argentina hyperinflation accounting. The non-taxable income is mainly related to the Innovation box in the Netherlands, R&D credits and the tax exemption for investments.

The impact of non-refundable withholding tax on the tax rate is dependent on our relative share in the profit of subsidiaries in countries that levy withholding tax on dividends and on the timing of the remittance of such dividends. Based on the Dutch tax system there is a limited credit for such taxes.

Deferred tax assets and liabilities

In assessing the recognition of the deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of deferred tax assets considered realizable, however, could change in the near term if future estimates of projected taxable income during the carryforward period are revised. The majority of the amount of the non-current portion of deferred or current taxes will be recovered or settled after more than 12 months.

In 2020, deferred tax asset recoverability has been assessed using taxable profit forecasts, which take the potential impact of the COVID-19 pandemic on future results into account. These assessments showed sufficient taxable profit to recover previously recognized deferred tax assets in most jurisdictions, whilst in some jurisdictions this resulted in minor derecognitions or re-recognitions, with a net effect of a re-recognition of deferred tax assets of €4 million. Deferred tax assets not recognized relate to tax loss carryforwards.

Due to the divestment of the Specialty Chemicals business in 2018, the company has been reorganizing itself into a focused Paints and Coatings company. In 2019, this resulted in a simplification of the intercompany financing structure, enlarging the scope of the global business support services, centralizing R&D and supply chain functions and implementing other cost saving initiatives. This has substantially affected the income generated and expenses incurred by subsidiaries in most countries, because intercompany interest, cost sharing and royalty flows, albeit all remaining at arm’s length, have changed following these changes in the business set up. For subsidiaries in several countries in Europe, these changes in future profitability led to the derecognition or re-recognition of deferred tax assets. In aggregate, the net effect of the derecognition and re-recognition of deferred tax assets in 2019 was a charge of €47 million.

From the total amount of recognized net deferred tax assets, €196 million (2019: €345 million) is related to entities that have suffered a loss in either 2020 or 2019 and where utilization is dependent on future taxable profit in excess of the profit arising from the reversal of existing taxable temporary differences. This assessment is based on management’s long-term projections and tax planning strategies.

A deferred tax liability is recognized for taxable temporary differences related to investments in subsidiaries, branches and associates and interests in joint arrangements, to the extent that it is probable that these will reverse in the foreseeable future. The expected net tax impact of the remaining differences for which no deferred tax liabilities have been recognized is €33 million (2019: €30 million). Deferred tax assets not recognized fully relate to tax loss carryforwards in 2020.

The losses in the tables on tax losses carried forward are gross amounts, with the tax impact included in the last column of the table.