Income tax for the period includes current and deferred taxes. Current taxes are calculated on the basis of the tax regulations prevailing in the countries in which the Parent Company and subsidiaries are active and generate taxable income.
Deferred taxes are recognized on differences that arise between the taxable value and recognized value of assets and liabilities as well as on tax-loss carryforwards. However, with regard to the measurement of deferred tax assets, that is, the value of future tax reductions, these items are recognized provided that it is probable that the amounts can be utilized against future taxable income.
Deferred taxes on temporary differences on participations in subsidiaries and associated companies are only recognized when it is probable that the difference will be recovered in the near future.
Tax laws in Sweden and certain other countries allow companies to defer payment of taxes through allocations to untaxed reserves. These items are treated as temporary differences in the consolidated balance sheet, meaning that deferred tax liability and equity capital are separated. In the consolidated income statement an allocation to, or withdrawal from, untaxed reserves is divided between deferred taxes and net income for the year.
Volvo recognizes valuation allowances for deferred tax assets where management does not expect such assets to be realized based upon current forecasts. In the event that actual results differ from these estimates or adjustments are made to future periods in these estimates, changes in the valuation allowance may be required, which could materially impact the financial position and the income for the period. At December 31, 2011, the valuation allowance amounted to 263 (339) of the value of deferred tax assets. Most of the reserve consists of unused loss carryforwards. Net of this valuation allowance, deferred tax assets of 18,552 (20,109) were recognized in the Group’s balance sheet.
Volvo has significant tax-loss carryforwards that are related to countries with long or indefinite periods of utilization, mainly Sweden, Japan and France. Volvo considers it to be most certain that the Group will be able to generate sufficient income in the coming years to utilize the tax-loss carryforwards.
|Current taxes relating to the period||(5,331)||(3,668)|
|Adjustment of current taxes for prior periods||76||180|
|Deferred taxes originated or reversed during the period||(1,584)||(747)|
|Remeasurements of deferred tax assets||25||(67)|
|Total income taxes||(6,814)||(4,302)|
Provisions have been made for estimated tax charges that may arise as a result of prior tax audits in the Volvo Group. Volvo evaluates tax processes on a regular basis and makes provisions for possible outcome when it is probable that Volvo will have to pay more taxes and when it is possible to make a reasonably assessment of the possible outcome. Tax claims for which no provision was deemed necessary were recognized as contingent liabilities.
Deferred taxes amounting to 1 (93) have been recognized in other comprehensive income, attributable to fair value of derivative instruments.
At year-end 2011, the Group had unused tax-loss carryforwards amounting to 22,462 (24,869). These loss carryforwards expire according to the table below:
The Swedish corporate income tax rate is 26.3%. The table below shows the principal reasons for the difference between this rate and the Group's tax rate, based on income after financial items.
|2011, %||2010, %|
|Swedish corporate income tax rate||26||26|
|Difference in tax rate in various countries||3||4|
|Other non-taxable income||(3)||(3)|
|Other non-deductible expenses||1||1|
|Current taxes attributable to prior years||0||(1)|
|Remeasurement of deferred tax assets||0||1|
|Income tax rate for the Group||27||28|
|Specification of deferred tax assets and tax liabilities||2011||2010|
|Deferred tax assets:|
|Unused tax-loss carryforwards||6,907||7,327|
|Other unused tax credits||141||121|
|Intercompany profit in inventories||780||711|
|Allowance for inventory obsolescence||368||439|
|Valuation allowance for doubtful receivables||482||587|
|Provisions for warranties||2,067||1,722|
|Provisions for residual value risks||288||306|
|Provisions for restructuring measures||42||61|
|Adjustment to fair value during corporate acquisitions||0||12|
|Market value of derivative instruments||28||45|
|Other deductible temporary differences||4,320||4,594|
|Deferred tax assets before deduction for valuation allowance||18,815||20,448|
|Deferred tax assets after deduction for valuation allowance||18,552||20,109|
|Netting of deferred tax assets/liabilities||(5,714)||(7,799)|
|Deferred tax assets, net||12,838||12,310|
|Deferred tax liabilities:|
|Accelerated depreciation on property,|
|plant and equipment||3,811||4,094|
|Accelerated depreciation on leasing assets||1,959||2,111|
|LIFO valuation of inventories||270||224|
|Capitalized product and|
|Adjustment to fair value at company acquisitions||31||0|
|Market value of derivative instruments||1||20|
|Other taxable temporary differences||1,464||2,178|
|Deferred tax liabilities||11,349||12,321|
|Netting of deferred tax assets/liabilities||(5,714)||(7,799)|
|Deferred tax liabilities, net||5,636||4,522|
|Deferred tax assets/liabilities, net(1||7,203||7,788|
1) The deferred tax assets and liabilities above are partially recognized in the balance sheet on a net basis after taking into account offsetting possibilities. Deferred tax assets and liabilities have been measured at the tax rates that are expected to apply during the period when the asset is realized or the liability is settled, according to the tax rates and tax regulations that have been resolved or announced at the balance-sheet date.
Tax-loss carryforwards are largely attributable to countries with long or indefinite periods of utilization, mainly Sweden, Japan and France. Of the total deferred tax assets of 6,907 (7,327) attributable to tax-loss carryforwards, 2,914 (3,665) pertains to Sweden, with an indefinite period of utilization.
The cumulative amount of undistributed earnings in foreign subsidiaries, which Volvo currently intends to indefinitely reinvest outside of Sweden and upon which deferred income taxes have not been provided is approximately SEK 62 billion (47) at year end. The main part of the undistributed earnings is pertaining to countries where the dividends are not taxable.
Refer to Note 4 for information on how Volvo handles equity currency risk.