Fortum as a tax payer
Fortum’s policy is to pay taxes on the production, employment, property and earnings of its businesses in the operating country in question and in compliance with local regulations.
We have published our tax footprint as part of our annual reporting since 2012. We aim to communicate about our operations and its impacts in an open and consistent manner with our stakeholders. We also continuously develop our tax footprint reporting.
The Finnish State is the majority shareholder in Fortum, with a 50.8% stake. In October 2014, the Ownership Steering Department of the Prime Minister’s Office published guidelines on the country-specific tax reporting of State-majority-owned companies. For 2014, we report the country-specific key indicators required by the Ownership Steering Department as part of our financial statements. See also note 14 Income tax expense. This section focuses on Fortum’s role as a tax payer.
We operate internationally, but the taxes are always paid locally. As an international company operating in a capital-intensive sector, it is important to us that we can effectively operate and finance our operations and investments, like new power plant construction projects, in different countries. At the same time, we need manage financing risks. Because taxes are a consequence of business activities, we pay taxes in the country where our business operations are located. Taxes are paid in each operating country in accordance with the local regulations.
For every EUR 1 of corporate tax, Fortum pays EUR 1.59 other taxes."
Fortum has operations in more than 15 countries. In addition to income taxes, we pay taxes related to production, employment and property. Our investments are long-term, so we hope for long-term predictability in e.g. energy production-related taxes. The total taxes we pay have a significant impact in our operating countries and in local communities.
Economic instability has decreased the predictability of taxation, and the tax environment has become tighter in all our operating countries. The focus of taxation is shifting from income taxes to other taxes. Income tax rates have decreased in Finland and Sweden and in some of our other operating countries. Meanwhile, for example, property taxes have increased, particularly in Sweden. There are discussions under way in Sweden to also increase the tax rate on nuclear power capacity. In Finland, the Government revoked in the end of the year its 2013 decision to levy a tax on hydro, nuclear and wind power plants built prior to 2004 (the
so-called windfall tax). The decision took effect in January 2015.
At an international level, the OECD and EU create new recommendations and regulations, often making tax predictability more difficult. Likewise, the interpretation of national regulations can suddenly change, creating challenges for Fortum in the taxation of operations and the related earnings.
Key tax indicators in 2014
In 2014, Fortum’s total tax rate was 14.3% (2013: 31.8%). The total tax rate indicates the share of taxes borne on Fortum’s pre-tax earnings for the financial period. Taxes borne for the financial period totalled EUR 525 (2013: 558) million. One-time tax exempt capital gains on the sale of subsidiaries, mainly in Finland, Norway and Great Britain, reduced the total tax rate in 2014. Capital gains from the divestment of these companies totalled EUR 2.2 billion. The total tax rate,
excluding the share of profits from associated companies and joint ventures and tax exempt capital gains, was 38.2% (2013: 36.6%).
Changes to the income tax rate and the restructuring of Fortum’s operations can cause big fluctuations in the effective income tax rate on an annual level. Fortum’s effective income tax rate in 2014 was 5.9% (2013: 13.3%).
In our biggest production countries, Finland and Sweden, we are among the biggest tax payers. In Finland, taxes borne was EUR 156 (2013: 174) million for the financial period, and in Sweden EUR 279 (2013: 297) million.
Management of tax issues
We aim to manage and mitigate tax-related uncertainties. In our operating countries we seek preliminary rulings from tax authorities, we pay special attention to tax declarations and to transfer pricing documentation, and we strive to protect our rights also through legal measures. Our goal is to manage tax issues so that collaboration with authorities is as effective as possible, potential challenges can be responded to in time and surprises avoided.
Taxation is always a consequence of business operations, so tax solutions too must be based on business needs. We support Fortum’s operations by managing tax issues in a sustainable manner and by identifying simple and cost-efficient solutions. This way, we aim to ensure that we pay the appropriate taxes in all our operating countries on time. Fortum’s Corporate Tax function is responsible also for instructing and guiding the business units in all taxation-related matters in line with the agreed principles that
the business units must follow.
We regularly assess the compliance with regulations and guidelines. The key findings and actions related to tax issues and tax risks are reported annually to the Audit and Risk Committee of Fortum’s Board of Directors. Tax-related uncertainties are assessed annually in accordance with the Group’s tax principles.
The risk analysis done in 2014 indicated that, in particular, business mobility and the related risk of permanent establishment as well as increasing issues related to non-income and indirect taxes create uncertainty in the management of tax issues. To mitigate risks, we aim to integrate tax issues as part of the business processes and to raise management’s awareness of them. Consequently, the handling of tax issues in 2014 was reorganised to provide better business support.
Internal financing in support of business
External financing may be needed for the construction of new power plants and for maintenance investments in existing plants. We have centralised our external financing to the Group’s parent company. The Group’s Finance functions and entities are also responsible for arranging internal financing for our different companies in our countries of operations. This typically consists of equity or loan financing. The terms for intra-Group loans are determined on the basis of market terms. Typically, the interest rate on an intra-Group loan in, for example, Nordic countries was 1-5% in 2014, which corresponds to external interest rate levels. Related to our financing activities, we pay the appropriate taxes in all our operating countries in line with OECD guidelines. See also note 14 Income tax expense.
Our international financing operations are, as usual, located in EU countries with stable operating environment and predictable taxation.
Other payments to and from the public sector
In addition to taxes borne and taxes collected, we make other compulsory tax-like payments to the public sector, payments that are not compensation for goods or services received. For example, in 2014, we paid EUR 46 (2013: 51) million in employer’s statutory pension contributions. On the other hand, the public-sector subsidies (worth over EUR 0.5 million) we received for production, investments, R&D and other matters totalled EUR 3 (2013: 8) million. These figures exclude the free emission allowances and electricity certificates received.
We are also a significant dividend payer. Fortum’s Board of Directors proposes to the 2015 Annual General Meeting that a total amount of dividend of EUR 1,155 (2014: 977) million be paid for 2014. The Finnish State’s share of this would be about EUR 586 (2014: 496) million.
Tax reporting transparency
We aim for increased transparency in tax reporting and an increased understanding of our tax footprint. We ensure that all tax-related information is reported on time and correctly to tax authorities, shareholders and other stakeholders. We openly communicate all important tax-related decisions concerning, for example, tax audits and appeals.
The purpose of transfer pricing rules is to ensure the correct allocation of income to each function in different countries for taxation. Our policy is to apply arm’s length transfer pricing principles according to OECD guidelines in all intra-Group (product, service and financing) transactions. We document these transactions in line with the existing regulation.
|Taxes borne in 2013‑2014|
|EUR million||Finland||Sweden||Russia||Poland||Estonia||Norway||Netherlands||Other countries||Total|
|Corporate income tax 1)||93||105||57||54||3||‑1||1||1||2||1||4||2||32||31||12||11||203||203|
|Production taxes 2)||45||51||82||93||2||2||1||1||0||0||0||0||0||0||0||1||131||150|
|Taxes on property||13||13||124||131||15||19||5||5||0||0||1||1||0||0||1||2||159||170|
|Cost of indirect taxes||2||2||0||0||0||0||0||0||0||0||1||0||1||1||0||0||4||4|
|Excluding custom duties|
|1) Corporate income tax includes current taxes booked as cost for the year and adjustments to the previous year's current taxes.|
|2) Production taxes include also taxes on production and property paid through electricity purchased from associated companies.|
|Taxes collected in 2013‑2014|
|VAT on Purchases||323||403||463||481||303||373||40||35||18||14||21||35||1||0||24||43||1,192||1,385|
|Net VAT 1)||29||52||90||93||9||0||11||14||2||5||11||21||0||1||8||5||161||190|
|1) If net VAT is negative, included as zero.|