15 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:

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:

For the year ended 31 December 2019, the Group reported a tax charge of USD 140 million on a pre-tax income of USD 909 million, compared to a charge of USD 69 million on a pre-tax income of USD 550 million for 2018. This translates into an effective tax rate in the current and prior year reporting periods of 15.4% and 12.5%, respectively.

For the year ended 31 December 2019, the tax rate was largely driven by tax benefits from effective settlement of tax audits and tax-exempt income, partially offset by tax charges from other income-based taxes and non-deductible expenses. The lower rate in the year ended 31 December 2018 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.

Deferred and other non-current taxes

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

As of 31 December 2019, a tax benefit of USD 6 million arises from revaluing the Swiss deferred assets and liabilities to the new Swiss statutory tax rate (combined federal and cantonal) of 19.7% (from 21% for ordinary companies and 7.8% for holding companies), under the Swiss tax reform. Accordingly, the revaluing reduced the Swiss deferred tax assets by USD 35 million and the Swiss deferred tax liabilities by USD 41 million (net USD 6 million). Moreover, the transitional impact of Swiss tax reform had led to the recognition of an intangible deferred tax asset of USD 142 million (included within “Other“ above) which has been fully offset by a valuation allowance.

As of 31 December 2019, 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 3.2 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 2019, the Group had USD 10 553 million net operating tax loss carryforwards, expiring as follows: USD 12 million in 2020, USD 8 million in 2021, USD 7 million in 2022, USD 6 million in 2023, USD 6 171 million in 2024 and beyond, and USD 4 349 million never expire.

As of 31 December 2019, the Group had capital loss carryforwards of USD 1 080 million that never expires.

For the year ended 31 December 2019, net operating tax losses of USD 4 051 million and net capital tax losses of USD 43 million were utilised.

Income taxes paid in 2018 and 2019 were USD 740 million and USD 611 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:

As of 31 December 2018 and 2019, the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 257 million and USD 170 million, respectively.

Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. For the years ended 31 December 2018 and 2019, such expenses were USD 7 million and USD 5 million, respectively. For the years ended 31 December 2018 and 2019, USD 60 million and USD 55 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2019 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 2019 presented in the table above excludes accrued interest and penalties (USD 55 million).

During the year, certain tax positions and audits in Switzerland, the United States, France, the United Kingdom, Brazil, Germany, Japan and Malaysia 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: