7. Income Tax
The Group does not constitute a group for tax purposes within the meaning of the Polish regulations. Each member of the Group is a separate taxpayer for tax purposes.
7.1. Income tax expense disclosed in the income statement
in PLN m
| Note | Period from Jan 1 – Dec 31 2012 | Period from Jan 1 – Dec 31 2011 | |
|---|---|---|---|
| Profit/(loss) before tax | 2,542 | 1,898 | |
| Tax rate applicable in the period | 0 | 0 | |
| Tax calculated at the applicable tax rate | (483) | (361) | |
| Difference in tax rates | (7) | (7) | |
| Investment tax credit (Norway) | 212 | 295 | |
| Permanent differences between pre-tax profit/(loss) and tax base | (30) | (70) | |
| Tax expense in the consolidated income statement | (308) | (143) | |
| Current tax expense | 7.2. | (533) | (432) |
| Deferred tax expense | 7.3. | 225 | 289 |
| Effective tax rate | 12% | 8% |
7.2. Current tax expense
in PLN m
| Period from Jan 1 – Dec 31 2012 | Period from Jan 1 – Dec 31 2011 | |
|---|---|---|
| Profit/(loss) before tax (consolidated) | 2,542 | 1,898 |
| Consolidation adjustments | 65 | 491 |
| Differences between pre-tax profit/loss and income tax base | (309) | (644) |
| Taxable income not recognised as income for accounting purposes | 433 | 219 |
| Tax deductible expenses, not recognised as expenses for accounting purposes | (2,602) | (2,268) |
| Income not recognised as taxable income | 2,024 | 1,972 |
| Non-tax deductible expenses | (4,207) | (3,367) |
| Deductions from income | (323) | 10 |
| Income tax base | 2,298 | 1,745 |
| Tax rate applicable in period | 0 | 0 |
| Income tax expense | (437) | (332) |
| Increases, reliefs, exemptions, allowances and reductions in/of income tax | (96) | (100) |
| Current tax expense disclosed in tax return for the period | (533) | (432) |
| Current tax expense disclosed in the consolidated income statement | (533) | (432) |
7.3. Deferred tax expense
in PLN m
| Period from Jan 1 – Dec 31 2012 | Period from Jan 1 – Dec 31 2011 | |
|---|---|---|
| Deferred tax expense disclosed in the consolidated income statement | 225 | 289 |
| Origination and reversal of deferred tax expense due to deductible temporary differences | 255 | 356 |
| Impairment losses on financial assets, receivables and tangible assets under construction | (11) | (5) |
| Provisions for future liabilities | 42 | 1 |
| Costs of FX risk and interest rate risk hedges | - | 63 |
| Foreign exchange losses | 1 | 4 |
| Investment tax credit (Norway) | 212 | 295 |
| Tax loss for period | 3 | - |
| Other | 8 | (2) |
| Origination and reversal of deferred tax due to taxable temporary differences | (30) | (67) |
| Difference between tax and accounting value of non-current assets | (2) | (61) |
| Positive valuation of FX and interest rate risk hedges | (26) | (7) |
| Foreign exchange gains | (2) | (2) |
| Accrued interest | - | - |
| Income on tax obligation arising in subsequent month | (5) | 9 |
| Other | 5 | (6) |
| Deferred tax expense disclosed in other net comprehensive income, including: | 48 | (16) |
| Hedge accounting | 48 | (26) |
| Remeasurement of financial assets available for sale | - | 10 |
| Exchange differences on translating deferred tax attributable to foreign operations | (5) | 43 |
| Tax refund - investment tax credit (Norway) | - | (129) |
| Deferred tax expense charged to non-current assets (Norway) | 13 | - |
| Transfer to current income tax receivable (Norway) | (89) | - |
| Changes in the Group | (354) | - |
| Reclassification to assets held for sale | 2 | - |
| Total changes | (160) | 187 |
The current reporting period covered the tax period from January 1st to December 31st 2012. A 19% corporate income tax rate was applicable in Poland in 2012. In the comparative period, i.e. in 2011, the rate was also 19%.
Regulations on value added tax, corporate and personal income tax or social security contributions change, and as a consequence it is often not possible to rely on established regulations or legal precedents. The regulations in effect tend to be unclear, thus leading to differences in opinions as to legal interpretation of fiscal regulations, both between state authorities themselves and between state authorities and entrepreneurs. Tax and other settlements (customs duty or foreign exchange settlements) may be inspected by authorities empowered to impose penalties, and any additional amounts assessed following an inspection must be paid together with interest. Consequently, the tax risk in Poland is higher than in other countries where tax systems are more developed. In Poland, there are no formal procedures for determination of the final amount of tax due. Tax settlements may be inspected for a period of five years. Therefore, the amounts disclosed in the financial statements may change at a later date, following final determination of their amount by the competent tax authorities.
Foreign subsidiaries and foreign branches of the Parent and of Polish subsidiaries are subject to tax regulations in force in the countries where they trade and the provisions of double tax treaties. In the case of foreign branches of subsidiaries, the tax rates effective in 2012 and 2011 ranged from 10% to 41%. Foreign branches of the Parent did not generate any taxable income in 2012 or 2011.
In the case of PGNiG Norway AS, the marginal tax rate is 78% of the tax base. PGNiG Norway AS’s activities in the continental shelf are subject to taxation under two separate tax systems:
- The corporate income tax system (28% tax rate);
- The petroleum tax system (additional tax rate of 50%).
Such a high tax rate applicable in Norway is accompanied by a wide range of investment incentives and additional allowances, in line with the following principles:
- The company may apply a high depreciation/amortisation rate (the annual depreciation/amortisation rate is 16.67%) and commence depreciation/amortisation immediately after capital expenditure is incurred. In the first year, the company is entitled to full annual depreciation/amortisation, regardless of the date when capital expenditure is actually incurred.
- The company may apply an investment incentive of 7.5% per annum for the period of four years under the petroleum tax regime. The incentive relates to capital expenditure made in the Norwegian Continental Shelf (NCS) (excluding expenditure on exploration) and amounts to 30% of expenditure subject to depreciation/amortisation (7.5% in each of the four years). The incentive is deducted only from the income subject to the petroleum tax (50% rate) and does not apply to income tax. If the incentive amount exceeds income generated in a given year, it becomes deductible in subsequent years.
- Total expenditure on exploration activities may be deducted from revenue. If a company does not generate income from which expenditure on exploration could be deducted, it is entitled to a reimbursement of 78% of expenditure on exploration. The funds are returned in cash, and the transfer to the company’s bank account is made by the end of the year following the year covered by the tax return.
- Finance costs may be deducted in both taxation systems.
PGNiG Norway AS has been amortising its investment expenditure since 2008 and has been applying its investment incentive by recognising it as deferred tax expense (in the amount recorded under “Investment incentive (Norway)” in table 7.3.); such deferred tax expense will be used when taxable income (subject to income tax) is generated.
Under the Norwegian tax system the use of tax losses is not time-barred and, what is more, interest accrues on losses incurred after 2002. The interest rate applicable to such losses is calculated as a risk-free interest rate plus by a margin, net of income tax (28%). Losses incurred by PGNiG Norway AS since 2007, increased by the interest, will in future reduce its current tax expense.
The balance of deferred tax presented in the financial statements is reduced by a valuation adjustment due to temporary differences whose realisation for tax purposes is not entirely certain.
Previous note