13 Income taxes

The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which it operates. The components of the income tax expense were:

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USD millions

2017

2018

Current taxes

727

636

Deferred taxes

–595

–567

Income tax expense

132

69

Tax rate reconciliation

The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement:

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USD millions

2017

2018

1

Other, net includes tax return to tax provision adjustments from various jurisdictions.

Income tax at the Swiss statutory tax rate of 21.0%

110

115

Increase (decrease) in the income tax charge resulting from:

 

 

Foreign income taxed at different rates

11

122

Impact of foreign exchange movements

71

–64

Tax exempt income/dividends received deduction

–51

–61

Change in valuation allowance

–77

–92

Non-deductible expenses

57

55

Change in statutory rate

–60

25

Change in liability for unrecognised tax benefits including interest and penalties

13

72

Intra-entity transfers

16

–68

Other, net1

42

–35

Total

132

69

For the year ended 31 December 2018, the Group reported a tax charge of USD 69 million on a pre-tax income of USD 550 million, compared to a charge of USD 132 million on a pre-tax income of USD 525 million for 2017. This translates into an effective tax rate in the current and prior-year reporting periods of 12.5% and 25.1%, respectively.

For the year ended 31 December 2018, the tax rate was largely driven by tax benefits from foreign currency translation differences between statutory and US GAAP accounts, the releases of valuation allowances on net operating losses and tax benefits from intra-entity transfers, partially offset by the impact of different rates in various jurisdictions and tax charges from unrecognised tax benefits. The higher rate in the year ended 31 December 2017 was largely driven by tax charges from currency translation differences between statutory and US GAAP accounts, impacts from unrecognised tax benefits and recognition of deferred tax charges from intra-entity transfers, partially offset by tax benefits from US tax law changes.

Deferred and other non-current taxes

The components of deferred and other non-current taxes were as follows:

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USD millions

2017

2018

Deferred tax assets

 

 

Income accrued/deferred

259

212

Technical provisions

488

560

Pension provisions

313

293

Benefit on loss carryforwards

2 296

2 675

Currency translation adjustments

490

423

Unrealised gains in income

487

424

Other

981

1 212

Gross deferred tax asset

5 314

5 799

Valuation allowance

–475

–366

Unrecognised tax benefits offsetting benefits on loss carryforwards

–22

–22

Total deferred tax assets

4 817

5 411

 

 

 

Deferred tax liabilities

 

 

Present value of future profits

–322

–294

Income accrued/deferred

–473

–199

Investment valuation in income

–535

–382

Deferred acquisition costs

–918

–1 071

Technical provisions

–2 191

–2 264

Unrealised gains on investments

–984

–584

Foreign exchange provisions

–507

–602

Other

–807

–780

Total deferred tax liabilities

–6 737

–6 176

 

 

 

Liability for unrecognised tax benefits including interest and penalties

–238

–295

Total deferred and other non-current tax liabilities

–6 975

–6 471

As of 31 December 2018, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised amount to approximately USD 3 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.

As of 31 December 2018, the Group had USD 11 649 million net operating tax loss carryforwards, expiring as follows: USD 5 million in 2019, USD 17 million in 2020, USD 9 million in 2021, USD 7 million in 2022, USD 7 128 million in 2023 and beyond, and USD 4 483 million never expire.

As of 31 December 2018, the Group had capital loss carryforwards of USD 1 084 million, expiring as follows: USD 3 million in 2020, USD 4 million in 2021, USD 39 million in 2023, and USD 1 038 million never expire.

For the year ended 31 December 2018, net operating tax losses of USD 487 million and net capital tax losses of USD 117 million were utilised.

Income taxes paid in 2017 and 2018 were USD 720 million and USD 740 million, respectively.

Unrecognised tax benefits

A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows:

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USD millions

2017

2018

Balance as of 1 January

216

206

Additions based on tax positions related to current year

24

49

Additions based on tax positions related to prior years

16

57

Reductions for tax positions of current year

–9

–8

Reductions for tax positions of prior years

–12

–15

Statute expiration

–9

–19

Settlements

–29

–7

Other (including foreign currency translation)

9

–6

Balance as of 31 December

206

257

As of 31 December 2017 and 2018, the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 206 million and USD 257 million, respectively.

Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. For the years ended 31 December 2017 and 2018, such expenses were USD 2 million and USD 7 million, respectively. For the years ended 31 December 2017 and 2018, USD 54 million and USD 60 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2018 is included within the deferred and other non-current taxes section reflected above and in the balance sheet.

The balance of gross unrecognised tax benefits as of 31 December 2018 presented in the table above excludes accrued interest and penalties (USD 60 million).

During the year, certain tax positions and audits in Switzerland, Australia and France were effectively settled.

The Group continually evaluates proposed adjustments by taxing authorities. The Group believes that it is reasonably possible (more than remote and less than likely) that the balance of unrecognised tax benefits could increase or decrease over the next 12 months due to settlements or expiration of statutes. However, quantification of an estimated range cannot be made at this time.

The following table summarises jurisdictions and tax years that remain subject to examination:

Australia

2013–2018

 

Korea

2013–2018

Brazil

2013–2018

 

Luxembourg

2014–2018

Canada

2011–2018

 

Malaysia

2009–2018

China

2009–2018

 

Mexico

2013–2018

Colombia

2012–2018

 

Netherlands

2014–2018

Denmark

2013–2018

 

New Zealand

2013–2018

France

2016–2018

 

Nigeria

2016–2018

Germany

2014–2018

 

Singapore

2013–2018

Hong Kong

2013–2018

 

Slovakia

2014–2018

India

2006–2018

 

South Africa

2014–2018

Ireland

2014–2018

 

Spain

2014–2018

Israel

2014–2018

 

Switzerland

2015–2018

Italy

2013–2018

 

United Kingdom

2008, 2011–2018

Japan

2013–2018

 

United States

2011–2018