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

Syngenta AG – Financial report – 31 December 2017

Industry: manufacturing

Notes to the Syngenta Group Consolidated Financial Statements (extracts)

  1. Significant accounting policy judgments and estimates (extract)

Critical accounting estimates (extract)

Deferred tax assets

At December 31, 2017, Syngenta’s deferred tax assets are $1,099 million (2016: $941 million), as further analysed in Note 7. Included in this balance are deferred tax assets for unused tax losses and tax credits of $31 million (2016: $35 million), of which $13 million (2016: $19 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, 2017, 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.

For Argentina, no net deferred tax assets were recognized at December 31, 2016, but Syngenta has fully recognized its deferred tax asset at December 31, 2017 because the combined effect of improved local business performance and recent changes in tax legislation have increased the likelihood that Syngenta will be able to utilize that asset against future taxable profits. Recognition of this asset reduced 2017 deferred income tax expense by $37 million. The principal jurisdictions where deferred tax assets have not been recognized at December 31, 2017 and 2016 are Brazil and Belgium. At December 31, 2017, Syngenta has recognized $131 million (2016: $160 million) of net deferred tax assets in Brazil and has not recognized $73 million (2016: $24 million) of deferred tax assets. This further restriction of the amount recognized, which increased 2017 deferred income tax expense by $49 million, takes into account the further deterioration in business performance in 2017 which reduced local profitability, and assumes moderate recovery in 2018 and future years, resulting in local profitability 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. Non recognition in Belgium relates to the impact of the post-acquisition integration of Devgen on actual tax losses and expected future taxable profits.

Syngenta has remeasured its US deferred tax assets to take account of the tax reforms enacted in December 2017, assuming that a 21% US federal tax rate will apply in the periods when Syngenta realizes those assets. This remeasurement has increased Syngenta’s 2017 deferred tax expense by $96 million. The reforms are complex and significant management judgment has been required to estimate the effect of the tax reforms on Syngenta’s US entities given the short time between enactment and Syngenta’s December 31 year end. It is reasonably possible that the rate applicable to those entities in accordance with the newly enacted US federal tax legislation will vary from the 21% in one or more future periods.

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 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, 2017, Syngenta’s balance sheet includes assets of $168 million (2016: $189 million), and liabilities of $474 million (2016: $526 million), for current income taxes. These liabilities include $413 million in respect of the uncertain tax positions described above (2016: $400 million).

Releases of uncertain tax liabilities during 2017 related to changes in tax legislation and closure of previously open tax computations through expiry and settlement of tax audits (2016: favorable tax court decisions in India, relating among other points to the taxation of so called location specific advantages and tax deduction of royalties). The liability for uncertain income tax positions that Syngenta expects will be resolved in 2018 is approximately 12 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 provision described in Note 20 because the Syngenta entities named as parties to the litigation are incorporated in different tax jurisdictions. Syngenta’s estimates assume that all the provision will be deductible for income taxes but that deductions will be claimed in more than one jurisdiction. Syngenta has estimated the benefit using an average of the tax rates of the relevant jurisdictions. 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 2018.

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. Syngenta believes its appeal will succeed and has recognized no liability for the estimated aggregate $93 million contingent liabilities in these disputes.

  1. Provisions, commitments and contingencies (extract)

Contingencies (extract)

Tax matters

Significant management judgment is required to estimate the tax provisions 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. 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. In Syngenta’s opinion, the likelihood is remote that a material amount in excess of current provisions will result from the resolution of any such examination or case. 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.