Uncertain tax positions, deferred tax, significant judgements, estimates, quantification of amounts

Syngenta AG – Financial report – 31 December 2019

Industry: manufacturing

Notes to the Syngenta AG Group Consolidated Financial Statements (extract)

2. Significant accounting policy changes, judgments and estimates (extract)

Critical accounting estimates (extract)

Income Taxes

Deferred tax assets

At December 31, 2019, Syngenta’s deferred tax assets are $1,187 million (2018: $1,086 million after the effects of accounting policy changes and restatements described below), as further analyzed in Note 7. Included in this balance are deferred tax assets for unused tax losses and tax credits of $89 million (2018: $101 million), of which $75 million (2018: $88 million) relates to tax losses. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or in which tax losses can be utilized. The tax effect of unused tax losses is recognized as a deferred tax asset when it becomes probable that the tax losses will be utilized. In making assessments regarding deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.

At December 31, 2019, based upon the level of historical taxable income and projections for future taxable income over the periods in which deferred tax assets are deductible, management believes that it is more likely than not that Syngenta will realize the benefits of these deductible differences. The amount of deferred tax assets considered realizable could however be reduced in subsequent years if estimates of future taxable income during their carry forward periods are reduced, or rulings by the tax authorities are unfavorable. Estimates are therefore subject to change due to both market-related and government related uncertainties, as well as Syngenta’s own future decisions on restructuring and other matters. Syngenta is unable to accurately quantify the future adjustments to deferred income tax expense that may occur as a result of these uncertainties.

The principal jurisdictions where deferred tax assets have not been recognized at December 31, 2019 are Brazil and the USA (2018: Brazil, the USA and Argentina). At December 31, 2019, Syngenta has recognized $83 million (2018: $87 million) of net deferred tax assets in Brazil and has not recognized $46 million (2018: $77 million) of deferred tax assets. The improved 2019 business performance in Brazil resulted in a lower restriction of the amount recognized, decreasing 2019 deferred income tax expense by $32 million (2018: $4 million). Syngenta has assumed local profitability in 2020 and future years similar to the historical average. In making this assessment, the forecast horizon used for taxable profits is 5 years. Taxable profits that may arise beyond the 5-year horizon are subject to greater uncertainty and have not been considered.

Interpretation of the US tax law enacted in December 2017 indicates that stricter criteria limiting interest deductions will apply. At December 31, 2019, Syngenta has recognized $228 million (2018: $170 million) of net deferred tax assets in the USA, and has not recognized $92 million (2018: $48 million) of deferred tax assets relating to a temporary difference for interest carryforwards. Syngenta has performed an analysis in order to determine the amount of deferred tax asset it should recognize, taking into account the current plans of debt financing Syngenta’s US subsidiaries.

At December 31, 2019 Syngenta has recognized all of the net deferred tax assets in Argentina due to tax law changes implemented in 2019 which accelerated Syngenta’s ability to claim deductions for financing expenses.

Swiss Corporate Income Tax Reform

The Swiss public voted on May 19, 2019 to adopt the Federal Act on Tax Reform and AHV Financing (“TRAF”) which reforms corporate taxation in Switzerland. The tax reform has several consequences including a change of the Swiss Cantonal and Communal Income Tax Harmonization Act (“CCITHA”) which provides guidance on provisions in the cantonal tax laws for income and capital taxes. The changed CCITHA entered into force at federal level on January 1, 2020. To the extent that the tax reform measures relate to cantonal and communal income tax law changes, the measures will effectively be implemented through modification of the cantonal tax law. The main mandatory tax measures for the cantons to implement within TRAF include:

  • Abolition of special tax regimes;
  • Transitional measures to consider the taxation of untaxed reserves;
  • Patent box – deduction of up to 90 percent of patent protected income from taxable income, with cantonal choice of percent deduction;
  • Overall limitation of certain measures on cantonal level to 70 percent (or less, at the choice of the canton) in order to ensure minimal taxation.

IFRS requires income taxes to be measured as follows:

  • current income taxes – using tax rates or laws substantively enacted at the reporting period end;
  • deferred income taxes – at the rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and laws substantively enacted at the reporting period end.

In Switzerland, after Federal parliament has approved a new law, Swiss citizens can initiate a referendum by collecting signatures within a specified timeframe. A similar process exists at cantonal level. Substantive enactment is typically the date at which the period for collecting signatures lapses or, in the case that a referendum is held, the date of the affirmative public vote. Syngenta has its headquarters in the canton of Basel-Stadt and has operations in several cantons including Aargau, Valais and Zurich.

On February 10, 2019, in a public vote, the population of the canton of Basel-Stadt accepted the revision of the cantonal tax law. As a result:

  • the ordinary pre-tax statutory effective income tax rate (including Federal income tax) has been reduced to 13 percent in the canton of Basel-Stadt, effective as per January 1, 2019;
  • at the same time a special statutory tax rate of 11 percent for the realization of previously untaxed reserves has been introduced;
  • with effect as of tax year 2020, the canton of Basel-Stadt has introduced a patent box regime, taxing qualifying income from patent protected revenues at a privileged rate. The overall relief limitation has been set at 40 percent. Therefore, the minimum effective income tax rate after patent box relief and including Federal income tax amounts to 11 percent.

As a result of the above changes, Syngenta has measured its 2019 current Swiss tax liability using the 13 percent rate on its ordinary income and the 11 percent special rate on realized untaxed reserves. As the impact of the patent box regime on Syngenta is expected to be stable and consistent across periods, Syngenta has revalued its Swiss deferred tax positions that will be settled or realized in tax year 2020 onwards using the minimum tax rate after patent box relief, recording an estimated $195 million favorable one-time impact (tax credit) within income tax expense for the year ended December 31, 2019, and a $71 million unfavorable one-time impact (tax charge) within OCI for deferred tax positions related to pension actuarial losses charged to OCI.

While the cantons Aargau and Zurich have finalized their new tax legislation in 2019 without any material impact to Syngenta’s overall tax position, the legislative process in Valais is still ongoing. Syngenta will consider tax changes in the canton Valais when it substantively enacts its changes.

Uncertain tax positions

Syngenta estimates and accrues taxes that will ultimately be payable when reviews or audits by tax authorities of tax returns are completed. These estimates include significant management judgments about the eventual outcome of the reviews and audits of all open years based on the latest information available about the positions expected to be taken by each tax authority. Actual outcomes and settlements may differ significantly from the estimates recorded in these consolidated financial statements. This may affect income tax expense reported in future years’ consolidated income statements.

Syngenta has a global supply chain, and intellectual property rights owned by Syngenta are used internationally within the Syngenta AG group. Transfer prices for the delivery of goods and charges for the provision of services, which include contract research and development, contract manufacturing and internal financing arrangements, by one Syngenta subsidiary to another may be subject to challenge by the national tax authorities in any of the jurisdictions in which Syngenta operates. Syngenta has a global transfer pricing policy in place and applies, to the maximum extent possible, a consistent methodology on a global basis. Transfer pricing determination in general, and the benchmarking process in particular, involve significant judgment and therefore a certain level of uncertainty remains as to whether tax authorities will challenge the pricing applied in the light of the new, complex transfer pricing guidelines in connection with the Base Erosion and Profit Shifting (BEPS) initiative.

At December 31, 2019, Syngenta’s balance sheet includes assets of $96 million (2018: $145 million), and liabilities of $551 million (2018: $539 million), for current income taxes. These liabilities include $458 million in respect of the uncertain tax positions described above (2018: $410 million).

Releases of uncertain tax liabilities during 2019 and 2018 related to changes in tax legislation, closure of previously open tax computations through expiry and settlement of tax audits. The liability for uncertain income tax positions that Syngenta expects will be resolved in 2020 is approximately 10 percent of total recognized current income tax liabilities.

Significant management judgment has been required to estimate the income tax benefits associated with the $1,500 million Viptera litigation settlement payments described in Note 20 because the Syngenta entities named as parties to the litigation are incorporated in different tax jurisdictions. Syngenta’s estimates at December 31, 2019 and 2018 assume that all of the Viptera settlement costs will be deductible for income taxes but that deductions will be claimed in more than one jurisdiction. Syngenta estimated the benefit using an average of the tax rates of the relevant jurisdictions and the amounts it has recognized in 2019 and 2018 for both current and deferred income taxes reflect this estimate. The ultimate benefit realized may be different from this estimate and this difference may have a material effect on Syngenta’s income tax expense for 2020 and/or future periods.

In Brazil, Syngenta received adverse rulings at administrative court level in transfer pricing disputes for fiscal years 2003 and 2011 and has filed appeals at civil court level. Additionally, Syngenta has appealed at administrative level against transfer pricing assessments for fiscal years 2013 to 2015. Syngenta believes these appeals will succeed and has recognized no liability for the estimated aggregate $170 million (2018: $104 million) contingent liabilities in these disputes.

20. Provisions, commitments and contingencies (extract)

Contingencies (extract)

Tax matters

Significant management judgment is required to estimate the tax liabilities related to the eventual outcome of reviews and audits by tax authorities of tax returns filed by Syngenta’s subsidiaries. Tax returns filed by many of Syngenta’s subsidiaries during the past several years are either currently under examination by tax authorities or are open for future examination until expiry under statutes of limitation. In Syngenta’s opinion, the likelihood is remote that a material amount in excess of recorded provisions will result from the resolution of any such examination or case. Syngenta is also subject to certain tax claims pending before the judiciary. See Note 2 “Uncertain tax positions” for detail regarding two on-going transfer pricing disputes in Brazil. Syngenta believes it will successfully defend its position in these disputes. However, it is reasonably possible that actual outcomes and settlements may differ significantly from the estimated liabilities shown in the consolidated balance sheet for income taxes and in Note 18 for other taxes.