Notes to the Consolidated Financial Statements of the Covestro Group – Notes to the Income Statement

11. Taxes

The breakdown of tax expenses by type is shown in the table below:

The deferred tax assets and liabilities were allocated to the items in the statements of financial position as shown in the table below:

No deferred tax assets were recognized for tax deductible temporary differences in the amount of €665 million (previous year: €850 million) as it is unlikely that these can be utilized within a foreseeable period.

Of the total tax loss and interest carryforwards of €3,117 million (previous year: €1,494 million), an amount of €80 million (previous year: €292 million) is expected to be usable within a foreseeable period. The increase in loss carryforwards was due to additional loss carryforwards in the reporting year and tax reassessments for prior years. Deferred tax assets of €17 million (previous year: €48 million) were recognized for the amount of tax loss and interest carryforwards expected to be usable.

The use of €3,037 million (previous year: €1,202 million) of existing tax loss and interest carryforwards was subject to legal or economic restrictions. Of this amount, €1,232 million is attributable to German corporation tax, €1,375 million to German trade tax, and €32 million to interest carryforwards in Germany. A loss carryforward of €351 million is attributable to Switzerland.

In the reporting year, tax credits of €2 million (previous year: €2 million) were recognized.

In fiscal 2023, subsidiaries that reported losses for the reporting year or the previous year recognized net deferred tax assets totaling €6 million (previous year: €62 million) from temporary differences and tax loss carryforwards. Of this amount, €4 million (previous year: €30 million) was attributable to net deferred tax assets from tax loss and interest carryforwards. All deferred tax assets are considered to be unimpaired because the companies concerned are expected to generate taxable income and tax strategies ensure that the deferred tax assets will be utilized.

Deferred tax liabilities of €27 million (previous year: €74 million) were recognized in the reporting year for planned dividend payments by subsidiaries. No deferred tax liabilities were recognized for temporary differences of €22 million (previous year: €120 million) relating to shares in subsidiaries, as the parent company can control the timing of the reversal of the temporary differences, and it is unlikely that these temporary differences will reverse in the foreseeable future.

The reported tax expense of €275 million for fiscal 2023 (previous year: €411 million) was €288 million lower (previous year: €399 million lower) than the expected tax income of €13 million (previous year: expected tax expense of €12 million) that would have resulted from applying an expected weighted average tax rate to the pretax income of the Covestro Group. This average tax rate was derived from the nominal tax rates of the individual Group companies. Especially since different tax rates are applied to income of foreign Group companies, the average tax rate in the year 2023 was –17.0% (previous year: 9.2%). The effective tax rate was 376.7% (previous year: 316.2%).

The Covestro Group operates in various countries. As in the previous year, the tax rates ranged from 14.1% to 34.0% due to national regulations.

The reconciliation of expected to actual income tax expense and of the expected to the effective tax rate for the Covestro Group is shown in the following table:

Other tax effects are primarily the result of ineligible foreign withholding taxes, in particular on the dividend payments of subsidiaries totaling €62 million (previous year: €55 million) and of the change in deferred tax liabilities on planned dividend payments by subsidiaries in the amount of €–47 million (previous year: €61 million).

Global Minimum Taxation

The Covestro Group falls within the scope of the OECD’s Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two). The Pillar Two legislation was enacted in Germany, the jurisdiction in which Covestro is domiciled, and will come into force on January 1, 2024. As the Pillar Two legislation was not yet in force at the reporting date, the Group is not currently subject to any tax burden from this legislation.

Under the legislation, Covestro is required to pay an additional tax per country in the amount of the difference between the GloBE effective tax rate and a minimum tax rate of 15%. All Group companies (with the exception of the company being wound up in Switzerland) are subject to a nominal tax rate of more than 15%. Even if the nominal tax rate is more than 15%, the new legislation could theoretically result in a tax expense due to specific adjustments. Covestro is currently assessing the extent to which tax effects will arise in individual countries as a result of the Pillar Two legislation taking effect.