B4. Income taxes

AP Accounting principles

The Group’s tax expense comprises current tax and deferred tax.

Current tax is calculated on the taxable profit for the period based on the tax rules prevailing in the countries where the Group operates. Since taxable profit excludes costs that are not tax deductible and income that is not taxable, this is differentiated from profit before tax in profit or loss. Current tax also includes adjustments relating to recognized current tax from prior years. Interest attributable to income tax and withholding taxes deducted at source on intra-Group transactions are also recognized as income tax.

Deferred tax is calculated based on temporary differences between the carrying amounts and the taxable values of assets and liabilities and for tax loss carryforwards in so far as it is probable that these can be utilized against future taxable profits. Deferred taxes are measured at their nominal amount and based on the tax rates enacted or substantively enacted on the balance sheet date. Deferred tax is not calculated on the initial recognition of goodwill or when an asset or liability is recognized for the first time, provided that the asset or liability is not attributable to an acquisition. Essity does not recognize tax that may arise on future dividends of the retained earnings of foreign subsidiaries. Any such future effects (withholding tax deducted at source and other deferred tax on profit-taking within the Group) are recognized when Essity can no longer control the reversal of such differences or when, for other reasons, it is probable that a reversal can take place in the foreseeable future.

The recognition of tax effects is determined by the manner in which the underlying transaction is recognized. For items in profit or loss, the tax effect is recognized in profit or loss. For transactions in equity or in other comprehensive income, the tax effect is recognized in equity or in other comprehensive income, respectively.

Tax liabilities and tax assets are recognized net when Essity has a legal right to offset.

KAA Key assessments and assumptions

For companies that operate globally and thus apply significantly different taxation legislation, determining deferred tax assets and tax liabilities is extremely complicated. This requires that assessments and assumptions be made to determine the value of the deferred tax asset and deferred tax liability on the balance sheet date. Future changes to taxation legislation and trends in the business climate will impact the company’s future taxable profits and thus its possibility to utilize deferred tax assets on loss carryforwards and other temporary differences. Accordingly, a changed assessment of the probability of future taxable profits could have a positive or negative effect.

Key assessments and assumptions are also made regarding recognition of provisions and contingent liabilities relating to tax risks. For further information, see Note D6 Other provisions and Note G3 Contingent liabilities and pledged assets.

Tax expense

Explanation of tax expense

The difference between the recognized tax expense and expected tax expense is explained below. The expected tax expense is calculated based on profit before tax in each country multiplied by the tax rate in effect in the country.

Current tax liability

TB4:1 Tax by country

TB4:2 Deferred tax liability

TB4:3 Deferred tax liability, prior periods

Tax loss carryforwards

Tax credits and tax loss carryforwards for which deferred tax assets were recognized have been reported at the tax amount on the line tax credits and tax loss carryforwards in TB4:2 in the amount of SEK 2,289m.

Loss carryforwards for which no deferred tax assets were recognized amounted to SEK 6,251m (4,648; 2,615), gross, at December 31, 2017. A large part of the change during the period is related to the acquisition of BSN medical. The change in uncapitalized loss carryforwards for the period includes SEK 1m that has expired and SEK 496m that was either utilized or capitalized. The tax value of uncapitalized tax loss carryforwards amounted to SEK 1,852m (1,373; 766). The expiry dates of these loss carryforwards are distributed as follows: