7.
Income tax
The PGNiG Tax Group (PTG), set up for the purpose of accounting for corporate income tax (CIT), was registered on February 24th 2014, and commenced operations on April 1st 2014.
The PGNiG Tax Group comprises the following companies: PGNiG S.A. – specified in the agreement on the establishment of the tax group as the Representative Company, PGNiG Obrót Detaliczny Sp. z o.o., PSG Sp. z o.o., PGNiG Termika S.A., OSM Sp. z o.o., PGNiG SPV 5 Sp. z o.o., PGNiG SPV 6 Sp. z o.o. and PGNiG SPV 7 Sp. z o.o.
The PTG agreement covers three consecutive tax years, i.e.:
- the first tax year − from April 1st 2014 to December 31st 2014;
- the second tax year − from January 1st 2015 to December 31st 2015;
- the third tax year − from January 1st 2016 to December 31st 2016;
Other Group companies are separate CIT taxpayers.
7.1. Income tax expense disclosed in the statement of profit or loss
| Year ended Dec 31 2014 | Year ended Dec 31 2013 | |
|---|---|---|
| Profit/(loss) before tax | 3,626 | 2,709 |
| Tax rate applicable in the period | 19% | 19% |
| Tax calculated at the applicable tax rate | (689) | (515) |
| Permanent differences between profit/(loss) before tax and taxable income and the difference in tax rates | (115) | (274) |
| Tax expense in the consolidated statement of profit or loss | (804) | (789) |
| Current tax expense (Note 7.2) | (726) | (687) |
| Deferred tax expense (Note 7.3) | (78) | (102) |
| Effective tax rate | 22% | 29% |
7.2. Current tax expense
| Year ended Dec 31 2014 | Year ended Dec 31 2013 | |
|---|---|---|
| Profit/(loss) before tax (consolidated) | 3,626 | 2,709 |
| Consolidation adjustments | (42) | 359 |
| Differences between profit/(loss) before tax and tax base | (259) | 404 |
| Taxable income not recognised as income for accounting purposes | 356 | 407 |
| Tax deductible expenses not recognised as expenses for accounting purposes | (3,534) | (2,464) |
| Income not recognised as taxable income | 2,233 | 2,162 |
| Non-tax deductible expenses | (5,630) | (4,779) |
| Deductions from income | (478) | (156) |
| Income tax base | 3,325 | 3,472 |
| Tax rate applicable in the period | 19% | 19% |
| Income tax | (632) | (660) |
| Increases, reliefs, exemptions, allowances and reductions in/of income tax | (94) | (27) |
| Current tax expense disclosed in tax return for the period | (726) | (687) |
| Current tax expense disclosed in the consolidated statement of profit or loss | (726) | (687) |
7.3. Deferred tax expense
| Year ended Dec 31 2014 | Year ended Dec 31 2013 | |
|---|---|---|
| I. Deferred tax expense disclosed in the consolidated statement of profit or loss | (78) | (102) |
|
Recognition and reversal of deferred tax due to deductible temporary differences |
35 | (85) |
| Impairment losses on financial assets, receivables and tangible assets under construction | 58 | 25 |
| Provisions for future liabilities | 58 | 60 |
| Costs of FX risk and interest rate risk hedges | 97 | (49) |
| Foreign exchange losses | (1) | - |
| Investment tax credit (Norway) | (169) | (156) |
| Tax loss for the period | 10 | 20 |
| Other deductible temporary differences | (18) | 15 |
|
Recognition and reversal of deferred tax due to taxable temporary differences |
(113) | (17) |
| Difference between tax and accounting value of non-current assets | 85 | 6 |
| Positive valuation of FX and interest rate risk hedges | (127) | (13) |
| Foreign exchange gains | 3 | - |
| Income on tax obligation arising in subsequent month | (13) | 14 |
| Other taxable temporary differences | (61) | (24) |
| II. Deferred tax expense disclosed in other comprehensive income, net, including: | 58 | (33) |
| Hedge accounting | 50 | (14) |
| Actuarial gains/(losses) on employee benefits | 8 | (19) |
| III. Other changes | (470) | (42) |
| Exchange differences on translating deferred tax attributable to foreign operations | 22 | (40) |
| Tax used - investment tax credit (Norway) | (492) | - |
| Reclassification to assets held for sale | - | (2) |
| Total changes (I - III) | (490) | (177) |
The current reporting period covered the tax period from January 1st to December 31st 2014. The CIT rate applicable in Poland in 2014 was 19%. In the comparative period, i.e. in 2013, the rate was also 19%.
Foreign subsidiaries and foreign branches of the Parent and of Polish subsidiaries are subject to tax regulations in force in the countries where they conduct their business and the provisions of double tax treaties. In the case of foreign branches of subsidiaries, the tax rates effective in 2014 ranged from 12% to 42% (in 2013: from 11% to 41%). Foreign branches of the Parent did not generate any taxable income in 2013 and 2012.
In the case of PGNiG Upstream International AS (“PUI”), the marginal tax rate is 78%. PUI’s activities in the Norwegian Continental Shelf are subject to taxation under two separate tax systems:
- The corporate income tax system (tax rate of 27%);
- The petroleum tax system (additional tax rate of 51%).
Such a high tax rate in Norway comes with a wide range of investment incentives and additional allowances.
- For instance, 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 benefit from an investment incentive of 5.5% 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 exploration expenditure) and amounts to 22% of depreciable expenditure (5.5% over four years; however, for projects commenced before May 2013 the incentive is 30%, i.e. 7.5% over four years). The incentive is deducted only from the income taxable with the petroleum tax (51% 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, by the end of the year following the year covered by the tax return.
- Finance costs may be deducted under both taxation systems.
PUI has been amortising its investment expenditure since 2007 and has been using its investment incentive by recognising it as deferred tax expense; such deferred tax expense is used when taxable income is earned.
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 a margin, net of income tax (27%). Tax losses, including interest, incurred by PUI since 2013 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.