6.5 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” and deferred tax assets and liabilities are recognised under this item.
The reader is referred to Section 3.2 “Summary of major accounting policies” regarding the basic approach to the recognition and measurement of deferred taxes.
The tax rate used to calculate the deferred taxes of the domestic companies was unchanged from the previous year at 31.93% (rounded to 32%). It is arrived at from the corporate income tax rate of 15.0%, the German reunification charge of 5.5% and a uniform trade earnings tax rate of 16.1%. 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 of 32% 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 | 2011 | 2010 |
---|---|---|
Actual tax for the year under review | 191,911 | 307,519 |
Actual tax for other periods | (124,812) | (52,498) |
Deferred taxes due to temporary differences | 42,515 | (2,792) |
Deferred taxes from loss carry-forwards | (43,830) | 6,299 |
Change in deferred taxes due to changes in tax rates | (324) | (899) |
Total | 65,460 | 257,629 |
Domestic/foreign breakdown of recognised tax expenditure/income | in EUR thousand | |
---|---|---|
2011 | 2010 | |
Current taxes | ||
Germany | 8,045 | 198,204 |
Outside Germany | 59,053 | 56,817 |
Deferred taxes | ||
Germany | 34,072 | (22,189) |
Outside Germany | (35,710) | 24,797 |
Total | 65,460 | 257,629 |
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 | |
---|---|---|
2011 | 2010 | |
1 Thereof on tax loss carry-forwards: –EUR 42,760 thousand (–EUR 43,787 thousand) |
||
Deferred tax assets | ||
Tax loss carry-forwards | 81,178 | 45,433 |
Loss and loss adjustment expense reserves | 271,615 | 201,132 |
Benefit reserve | 54,846 | 36,148 |
Other technical/non-technical provisions | 216,240 | 170,844 |
Funds withheld | 586,554 | 308,411 |
Accounts receivable/reinsurance payable | 7,156 | 6,243 |
Valuation differences relating to investments | 19,210 | 14,517 |
Contract deposits | 5,230 | 84 |
Other valuation differences | 79,000 | 278,904 |
Value adjustments1 | (43,203) | (44,377) |
Total | 1,277,826 | 1,017,339 |
Deferred tax liabilities | ||
Loss and loss adjustment expense reserves | 22,542 | 13,228 |
Benefit reserve | 515,207 | 190,521 |
Other technical/non-technical provisions | 125,659 | 95,284 |
Equalisation reserve | 933,711 | 802,480 |
Funds withheld | 39,951 | 51,402 |
Deferred acquisition costs | 372,436 | 363,468 |
Accounts receivable/reinsurance payable | 62,800 | 53,593 |
Valuation differences relating to investments | 174,914 | 183,523 |
Present value of future profits on acquired life reinsurance portfolios (PVFP) | 11,873 | 12,155 |
Other valuation differences | 59,110 | 262,076 |
Total | 2,318,203 | 2,027,730 |
Deferred tax liabilities | 1,040,377 | 1,010,391 |
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting:
Netting of deferred tax assets and deferred tax liabilities in EUR thousand | 2011 | 2010 |
---|---|---|
Deferred tax assets | 682,888 | 622,136 |
Deferred tax liabilities | 1,723,265 | 1,632,527 |
Net deferred tax liabilities | 1,040,377 | 1,010,391 |
The actual and deferred taxes recognised directly in shareholders’ equity in the financial year amounted to –EUR 36.4 million (–EUR 37.5 million). They resulted from items that were charged or credited directly to 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 |
2011 | 2010 |
---|---|---|
Profit before income taxes | 742,248 | 1,088,534 |
Expected tax rate | 32% | 32% |
Expected expense for income taxes | 237,519 | 348,331 |
Change in deferred tax rates | (324) | (899) |
Taxation differences affecting foreign subsidiaries | (37,199) | (54,112) |
Non-deductible expenses | 56,022 | 9,777 |
Tax-exempt income | (66,664) | (14,174) |
Tax income not attributable to the reporting period | (127,547) | (54,026) |
Other | 3,653 | 22,732 |
Actual expense for income taxes | 65,460 | 257,629 |
On the basis of a decision of the Federal Fiscal Court (BFH) from the previous year regarding the taxation of investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland as foreign-sourced income pursuant to the Foreign Transactions Tax Act, taxes already paid for earlier years were in large measure refunded in the first quarter of the year under review. Assessments regarding the taxation of foreign-sourced income for the companies Hannover Reinsurance (Ireland) Ltd. and Hannover Life Reassurance (Ireland) Ltd. were rendered immaterial by cancellation notices dated 8 February 2011 and 31 March 2011 respectively. Subsequent assessment notices regarding corporation tax were issued for Hannover Re and E+S Rück in the year under review. The trade tax effects were offset in the third quarter of 2011 by the controlling company HDI Haftpflichtverband der Deutschen Industrie V.a.G. In total, the refund of taxes and interest resulted in an improvement of EUR 128.0 million in Group net income in the year under review.
Availability of non-capitalised loss carry-forwards
Unused tax loss carry-forwards of EUR 286.9 million (EUR 161.9 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 151.5 million (EUR 156.5 million) thereof was not capitalised since realisation is not sufficiently certain.
In addition, tax credits of EUR 4.4 million (EUR 5.9 million) which were not capitalised are still available. There were no other temporary differences which had not been capitalised (previous year: none).
No deferred taxes were established on taxable temporary differences in connection with interests in Group companies amounting to EUR 73.2 million (EUR 50.7 million) because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.
Availability of loss carry-forwards and tax credits that have not been capitalised:
Expiry of non-capitalised loss carry-forwards | in EUR thousand | ||||
---|---|---|---|---|---|
One to five years |
Six to ten years |
More than ten years |
Unlimited | Total | |
Loss carry-forwards | 3,527 | — | — | 147,937 | 151,464 |
Tax credits | 4,425 | — | — | — | 4,425 |
Total | 7,952 | — | — | 147,937 | 155,889 |