Notes on the consolidated statement of income

(35) Taxes on income

This item includes domestic income tax as well as comparable taxes on income incurred by foreign subsidiaries. The determination of the income tax includes the calculation of deferred taxes. The principles used to recognize deferred taxes are set out in the subsection entitled “Summary of major accounting policies”. Deferred taxes are established on retained earnings of major affiliated companies in cases where a distribution is concretely planned.

The actual and deferred taxes on income can be broken down as follows:

Income tax

2010

2009 1)

Figures in EUR million

   

Actual tax for the year under review

416

370

Actual tax for other periods

–79

24

Deferred taxes due to temporary differences

–27

74

Deferred taxes from loss carry-forwards

–82

1

Change in deferred taxes due to changes in tax rates

2

Recognized tax expenditure

228

471


1) Adjusted on the basis of IAS 8

Domestic/foreign breakdown of recognized tax expenditure/income

2010

2009 1)

Figures in EUR million

   

Current taxes

337

394

Germany

249

306

Outside Germany

88

88

Deferred taxes

–109

77

Germany

–123

100

Outside Germany

14

–23

Total

228

471


1) Adjusted on the basis of IAS 8

The revenue authority took the view that not inconsiderable investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland was subject to taxation as foreign-sourced income at the parent company in Germany on the basis of the provisions of the Foreign Transactions Tax Act. Appeals were filed against the relevant tax assessments – also with respect to amounts already recognized as a tax expense. Our opinion that the investment income was not subject to taxation in Germany was confirmed in lower court proceedings and in a procedure before the Federal Fiscal Court (BFH) for the 1996 assessment period. The corresponding basic assessments have in some cases already been cancelled by the revenue authority, and the remaining cancellation assessments will be issued shortly.

The actual and deferred taxes recognized directly in equity in the financial year – resulting from items charged or credited directly to equity – amounted to –EUR 20 (–94) million.

The following table presents a reconciliation of the expected expense for income taxes that would be incurred upon application of the German income tax rate to the pre-tax profit with the actual expense for taxes.

 

2010

2009 1)

Figures in EUR million

   

Profit before income taxes

898

1,364

Expected tax rate

31.6%

31.6%

Expected expense for income taxes

284

431

Change in deferred rates of taxation

1

Taxation differences affecting foreign subsidiaries

–42

–115

Non-deductible expenses

115

152

Tax-exempt income

–83

–65

Value adjustment

25

10

Tax expense not attributable to the reporting period

–84

45

Other

13

12

Recognized expense for income taxes

228

471


1) Adjusted on the basis of IAS 8

The calculation of the expected expense for income taxes is based on the German income tax rate of 31.6%. This tax rate is made up of corporate income tax including the German reunification charge and a mixed trade tax rate.

The tax ratio, i.e. the ratio of the recognized tax expense to the pre-tax profit, stood at 25.4 (34.5)% in the year under review. The tax rate corresponds to the average income tax load borne by all Group companies.