9.1 Income taxes
Income tax expense includes current income taxes and deferred taxes of consolidated companies.
Taxes relating to items recognized directly in other comprehensive income are also recognized in other comprehensive income and not in income.
9.1.1
Breakdown of income tax expense
(in millions of euros) 2014 2013 restated(1)
Current taxes (171) (163)
Deferred taxes 42 50
income tax expense (129) (113)
(1) Income tax expense shown for 2013 differs from that presented in the 2013 consolidated financial statements published in February 2014 since it has been adjusted to reflect the impacts of applying the new consolidation standards as from January 1, 2014 on a retrospective basis (see Notes 1.1.1 and 1.3).
The Group recognized income tax expense of 129 million euros in 2014, corresponding to an effective tax rate of 19.2%. This includes a positive impact of 52 million euros relating to the recognition of deferred tax assets in Mexico and a positive impact of 22 million euros arising on the partial recognition of deferred tax assets on the tax consolidation group in the United States.
No deferred tax assets had been recognized in the past few years in respect of Valeo’s tax consolidation group in the United States. The earnings of this scope and the five-year profitability
outlook according to the tax plan improved significantly as from 2013. In 2014, Valeo therefore recognized a deferred tax asset of 22 million euros on this tax consolidation (51 million euros recognized in 2013).
In Mexico, deferred tax assets were recognized in 2014 owing to the ongoing legal reorganization process.
These positive impacts on income tax expense were partly offset by the cancellation of 20 million euros in deferred taxes previously recognized in Brazil, due to the particularly tough economic climate in the country.
9.1.2
tax proof
(in millions of euros) 2014 2013 restated(1)
net income before income taxes excluding share in net earnings (losses) of associates 671 555
Standard tax rate in France(2) (34.4%) (34.4%)
theoretical income tax expense (231) (191)
Impact of:
y
y
unrecognized deferred tax assets and unused tax losses (current year) (87) (23)y
y
recognition of previously unrecognized deferred tax assets 57 61y
y
other tax rates 52 41y
y
utilization of prior-year tax losses 90 4y
y
permanent differences between accounting income and taxable income 3 7y
y
tax credits 2 2y
y
Cotisation sur la Valeur Ajoutée des Entreprises (CVAE) (15) (14)Group income tax expense (129) (113)
(1) The amounts shown for 2013 differ from those presented in the 2013 consolidated financial statements published in February 2014 since they have been adjusted to reflect the impacts of applying the new consolidation standards as from January 1, 2014 on a retrospective basis (see Notes 1.1.1 and 1.3).
(2) The temporary additional 10.7% levy applied in France has not been included for the purposes of calculating the standard tax rate as Valeo does not believe it will be liable for French corporate income tax during the application period.
2014 Consolidated finanCial statements
notes to the consolidated financial statements
In 2014, unrecognized deferred tax assets and tax losses for the period not utilized by the Group’s main countries relate essentially to France for 26 million euros (20 million euros in 2013) and Brazil for 36 million euros (20 million euros on previously recognized deferred taxes and 16 million euros in respect of deferred taxes for the period).Previously unrecognized deferred tax assets for 57 million euros essentially relate to deferred tax assets recognized in Mexico in 2014.
The positive 52 million euro impact relating to other tax rates is broken down by major country in the table below:
Country Tax rate 2014 2013 restated(1)
China 25.0% 22 10 Poland 19.0% 13 12 South Korea 24.2% 12 8 Thailand 20.0% 5 7 Turkey 20.0% 5 5 Czech Republic 19.0% 5 4 Japan 35.6%/38.0%(2) (5) (1) United States 40.0% (8) (1) Other 3 (3) TOTAL 52 41
(1) Data shown for 2013 differ from those presented in the 2013 consolidated financial statements published in February 2014 since they have been adjusted to reflect the impacts of applying the new consolidation standards as from January 1, 2014 on a retrospective basis (see Notes 1.1.1 and 1.3).
(2) The tax rate in Japan takes into account the decrease in the rate applicable as from 2015. Utilizations of prior-year tax losses for which no deferred tax assets had been recognized chiefly reflect the use of 63 million euros in tax losses on the US tax consolidation group, 15 million euros in Mexico, and 11 million euros in Japan.
At the end of 2009, Valeo considered that the Cotisation sur la Valeur Ajoutée des Entreprises (CVAE) tax on Company value added met the definition of income tax set out in IAS 12. Income tax in 2014 therefore includes a net expense of 15 million euros in respect of the CVAE tax (14 million euros in 2013).
9.2 Deferred taxes
Deferred taxes are accounted for using the liability method for all temporary differences between the tax base and the carrying amount of assets and liabilities in the consolidated financial statements, and for all tax loss carryforwards. The main temporary differences relate to tax loss carryforwards, provisions for pensions and other employee benefits, other temporarily non-deductible provisions and capitalized development costs. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the temporary differences reverse, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax assets are only recognized to the extent that it appears probable that the Valeo Group will generate future taxable profits against which these tax assets will be able to be recovered. The Group reviews the probability of future recovery of deferred tax assets on a periodic basis for each tax entity. This review can, if applicable, lead the Group to
approach deemed most appropriate in light of the entity's legal and tax organization, tax history and projected taxable earnings outlook. These are assessed on the basis of a tax plan which uses assumptions consistent with those used in the medium-term business plans and budgets prepared by the Group’s entities and approved by General Management. Taxes payable and tax credits receivable on planned dividend distributions by subsidiaries are recorded in the statement of income.
Deferred tax assets and liabilities are offset when a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities concern income taxes levied by the same taxation authority. In France, Valeo elected for tax consolidation. The tax group includes the parent company and its principal French subsidiaries that are eligible for tax consolidation. Valeo also elected for tax consolidation for its subsidiaries in other countries where this is permitted by local legislation
Deferred taxes broken down by temporary differences are shown below:
(in millions of euros) December 31, 2014
December 31, 2013 restated(1)
Loss carryforwards 1,035 1,045
Capitalized development expenditure (177) (154)
Pensions and other employee benefits 236 175
Other provisions 74 59
Inventories 42 39
Provisions for restructuring costs 12 10
Tooling (1) 4
Non-current assets 46 40
Other 98 105
total deferred taxes, gross 1,365 1,323
Unrecognized deferred tax assets (1,043) (1,111)
total deferred taxes 322 212
o/w:
y
y
Deferred tax assets 359 238y
y
Deferred tax liabilities (37) (26)(1) Deferred taxes shown for December 31, 2013 differ from those presented in the 2013 consolidated financial statements published in February 2014 since they have been adjusted to reflect the impacts of applying the new consolidation standards as from January 1, 2014 on a retrospective basis (see Notes 1.1.1 and 1.3).
No net deferred tax assets were recognized on either tax loss carryforwards or temporary differences arising on the tax consolidation group in France, representing an amount of 525 million euros at December 31, 2014.
A total of 89 million euros in deferred tax assets was recognized in Mexico at December 31, 2014 (51 million euros at December 31, 2013), due to an improved economic outlook. Residual unrecognized net deferred tax assets in connection with this tax consolidation group total 341 million euros at December 31, 2014 (383 million euros at December 31, 2013).
A total of 66 million euros in deferred tax assets was recognized in Mexico at December 31, 2014 owing to the ongoing legal reorganization and Valeo’s acquisition of a controlling interest in Valeo Sylvania Iluminacion.
In contrast, due to particularly tough economic conditions in Brazil, no deferred assets were recognized for this country at December 31, 2014. Net deferred tax assets recognized at December 31, 2013 totaled 20 million euros. Unrecognized net deferred tax assets represented 36 million euros at December 31, 2014.
At December 31, 2014, deferred tax assets not recognized by the Group can be analyzed as follows:
(in millions of euros) Tax basis Potential tax saving
Tax losses available for carryforward from 2015 through 2019 49 11
Tax losses available for carryforward in 2020 and thereafter 1,034 400
Tax losses available for carryforward indefinitely 1,701 559
Current tax loss carryforwards 2,784 970
Unrecognized deferred tax assets on temporary differences 73