18. Income tax
2019
Accounting policies
Corporate income tax is recognized as current tax and deferred tax. Current income tax is recognized in the income statement. Deferred income tax, depending on the source of temporary differences, is recorded in the income statement or in other comprehensive income.
Based on the contract dated 5 November 2018 PKO Bank Polski SA, jointly with its two subsidiaries: PKO Bank Hipoteczny SA and PKO Leasing SA, created a tax group: Podatkowa Grupa Kapitałowa Powszechnej Kasy Oszczędności Banku Polskiego Spółki Akcyjnej (“PGK PKO Banku Polskiego SA”). The respective contract was registered by the Head of the Second Masovian Tax Office in Warsaw.
A tax group is an institution of the tax law stipulated in the provisions of the Corporate Income Tax Act. Its creation means that the income of the Tax Group companies will be consolidated for corporate income tax purposes and that solutions will be available facilitating the application of other, in particular operational, regulations of the Corporate Income Tax Act, dedicated specifically to Tax Groups.
PKO Bank Polski SA is the parent of PGK PKO Banku Polskiego SA. PGK PKO Banku Polskiego SA was established for three tax years. The first tax year began on 1 January 2019.
Current income tax
Current income tax is calculated on the basis of gross accounting profit adjusted by non-taxable income, taxable income that does not constitute accounting income, non-tax deductible expenses and tax-deductible costs which are not accounting costs, in accordance with tax regulations. These items mainly include income and expenses relating to accrued interest receivable and payable, allowances for expected credit losses and provisions for offbalance financial liabilities granted.
Group Companies are Corporate Income Tax payers. The value of the Companies’ current tax liability is transferred to offices of the tax administration authorities competent for the Companies’ location.
Corporate Income Tax liabilities of particular Group Companies for 2019 will be paid in accordance with the schedules stipulated by the relevant tax regulations.
Pursuant to the principles governing the statute of limitations for tax liabilities, the correctness of income tax settlements may be audited within five years of the end of the year in which the deadline for the submission of the respective tax returns passed.
Deferred income tax
Deferred tax is recognized in the amount of the difference between the tax value of the assets and liabilities and their carrying amounts for the purpose of financial reporting. The Group records deferred tax provisions and assets, which are recognized in the statement of financial position. Changes in the balance of deferred tax provisions and assets are recognized in mandatory charges to profit, with the exception of the effects of the measurement of financial assets measured at fair value through other comprehensive income, hedging instruments which are recognized in other comprehensive income, where changes in the balance of deferred tax provisions and assets are recognized in other comprehensive income. In determining deferred income tax, the deferred tax assets and provisions as at the beginning and as at the end of the reporting period are taken into account.
The carrying amounts of deferred tax assets are verified at each balance sheet date and decreased adequately if it is no longer likely that taxable income sufficient to realize a deferred tax asset in part or in full will be earned.
Deferred tax assets and provisions are measured using the tax rates which are expected to be in force in the period in which the asset will crystallize or the provision will be utilized, based on the tax rates (and tax regulations) binding as at the balance sheet date or tax rates and tax regulations that as at the balance sheet date are believed to be binding in the future.
For deferred income tax calculation the Group uses the 19% tax rate for entities operating in the territory of Poland, 18% tax rate for entities operating in Ukraine and 22% tax rate for entities operating in Sweden.
Deferred tax assets are offset by the Group against deferred tax provisions only when the Group has an enforceable legal title to offset current income tax receivables against current income tax liabilities and deferred income tax is related to the same taxpayer and the same tax authority.
Financial information
| 2019 | 2018 | |
|---|---|---|
| Income tax expense recognized in the income statement | (1 787) | (1 336) |
| Current income tax expense | (1 675) | (1 626) |
| Deferred income tax on temporary differences | (112) | 290 |
| Income tax reported in other comprehensive income in respect of temporary differences | (40) | (96) |
| Total | (1 827) | (1 432) |
| 2019 | 2018 | |
|---|---|---|
| Profit or loss before tax | 5 819 | 5 078 |
| Tax calculated using the enacted rate in force in Poland (19%) | (1 106) | (965) |
| Effect of different tax rates of foreign entities | 1 | – |
| Effect of permanent timing differences, of which: | (687) | (377) |
| non-deductible allowances for expected credit losses | (31) | (84) |
| contributions and payments to the Bank Guarantee Fund | (97) | (80) |
| tax on certain financial institutions | (194) | (179) |
| cost of the legal risk of mortgage loans in convertible currencies other | (85) | – |
| nterest on foreign exchange gains in Sweden | (274) | – |
| difference between carrying amounts and tax values of fixed assets | 48 | – |
| 3% flat-rate income tax on interest for non-residents | (11) | – |
| other permanent differences | (43) | (34) |
| Effect of other timing differences, including new technologies tax relief and donations | 5 | 6 |
| Income tax expense recognized in the income statement | (1 787) | (1 336) |
| Effective tax rate | 30.71% | 26.31% |
| DEFERRED TAX PROVISION | 31.12.2018 | INCOME STATEMENT |
EFFECT OF ACQUISITION AND TAKING UP CONTROL OVER SUBSIDIARIES |
OTHER COMPREHENSIVE INCOME |
31.12.2019 |
|---|---|---|---|---|---|
| Interest accrued on receivables (loans) | 244 | (24) | – | – | 220 |
| Capitalized interest on performing housing loans | 40 | (16) | – | – | 24 |
| Interest on securities | 80 | 35 | – | – | 115 |
| Valuation of securities | 100 | 14 | – | (1) | 113 |
| Valuation of derivatives | 23 | (7) | – | 39 | 55 |
| Difference between carrying amount and tax value of property, plant and equipment and intangible assets |
306 | (88) | – | – | 218 |
| Taxable income on the release of IBNR allowance, previously tax deductible, on implementation of IFRS 9 | 78 | (13) | – | – | 65 |
| Prepayments | 165 | 35 | – | – | 200 |
| Tax on foreign exchange gains in Sweden | – | 143 | – | – | 143 |
| Other taxable temporary differences | 5 | 8 | – | – | 13 |
| Gross deferred income tax provision | 1 041 | 87 | – | 38 | 1 166 |
| DEFERRED TAX ASSET | |||||
| Interest accrued on liabilities | 99 | (13) | – | – | 86 |
| Valuation of derivatives | 142 | (123) | – | (10) | 9 |
| Valuation of securities | 12 | (17) | – | 6 | 1 |
| Provision for employee benefits | 84 | – | – | 2 | 86 |
| Allowances for expected credit losses | 1 126 | (128) | – | – | 998 |
| Fair value measurement of loans | 17 | 101 | – | – | 118 |
| Adjustment of straight-line valuation method and effective interest rate | 800 | 100 | – | – | 900 |
| Other deductible temporary differences | 12 | 38 | – | – | 50 |
| Provision for costs to be incurred | 36 | 3 | – | – | 39 |
| Tax loss brought forward | 14 | – | – | – | 14 |
| Difference between carrying amount and tax value of property, plant and equipment and intangible assets, including leased assets |
782 | 14 | 73 | – | 869 |
| Deferred tax asset, gross | 3 124 | (25) | 73 | (2) | 3 170 |
| Total effect of temporary differences | 2 083 | (112) | 73 | (40) | 2 004 |
| Deferred income tax provision (presented in the statement of financial position) | 52 | 149 | – | 38 | 239 |
| Deferred income tax asset (presented in the statement of financial position) | 2 135 | 37 | 73 | (2) | 2 243 |
| DEFERRED TAX PROVISION | 31.12.2017 | IMPACT ON OPENING BALANCE OF ADJUSTMENT ON ADOPTION OF IFRS 9 (retained earnings) |
IMPACT ON OPENING BALANCE OF ADJUSTMENT ON ADOPTION OF IFRS 9 (other comprehensive income) |
INCOME STATEMENT |
OTHER COMPREHENSIVE INCOME |
31.12.2018 |
|---|---|---|---|---|---|---|
| Interest accrued on receivables (loans) | 224 | 471 | – | (451) | – | 244 |
| Interest on securities | 62 | – | – | 18 | – | 80 |
| Valuation of securities | 8 | 29 | (19) | 18 | 64 | 100 |
| Valuation of derivative financial instruments | 8 | – | – | 2 | 13 | 23 |
| Difference between carrying amount and tax value of property, plant and equipment and intangible assets | 333 | – | – | (27) | – | 306 |
| Taxable income on release of IBNR allowance which was tax deductible in the past due to the adoption of IFRS 9 | – | – | – | 78 | – | 78 |
| Prepayments | 120 | – | – | 45 | – | 165 |
| Foreign exchange gains | 18 | – | – | (18) | – | – |
| Other taxable temporary differences | 4 | – | – | 1 | – | 5 |
| Deferred income tax provision, gross | 883 | 500 | (19) | (400) | 77 | 1 041 |
| DEFERRED TAX ASSET | ||||||
| Interest accrued on liabilities | 116 | – | – | (17) | – | 99 |
| Valuation of derivatives | 156 | – | – | 5 | (19) | 142 |
| Valuation of securities | – | – | – | 12 | – | 12 |
| Provision for employee benefits | 94 | – | – | (10) | – | 84 |
| Allowances for credit losses | 735 | 639 | – | (248) | – | 1 126 |
| Fair value remeasurement of loans | – | – | – | 17 | – | 17 |
| Deferred commission to be settled under the straight-line method and effective interest rate |
705 | – | – | 95 | – | 800 |
| Other deductible temporary differences | 27 | – | – | (15) | – | 12 |
| Provision for costs to be incurred | 41 | – | – | (5) | – | 36 |
| Tax loss brought forward | 16 | – | – | (2) | – | 14 |
| Foreign exchange differences | 1 | – | – | (1) | – | – |
| Difference between carrying amount and tax value of property, plant and equipment and intangible assets, including leased assets | 723 | – | – | 59 | – | 782 |
| Negative temporary differences regarding the companies of the Group |
– | – | – | – | – | – |
| Deferred tax asset, gross | 2 614 | 639 | – | (110) | (19) | 3 124 |
| Total effect of temporary differences | 1 731 | 139 | 19 | 290 | (96) | 2 083 |
| Deferred income tax provision (presented in the statement of financial position) |
36 | – | – | – | – | 5 |
| Deferred income tax asset (presented in the statement of financial position) | 1 767 | – | – | – | – | 2 135 |
Tax systems of countries in which the Bank and entities in the PKO Bank Polski SA Group have their registered offices or branches are often subject to amendments to laws, among other things as a result of operations aimed at tightening the tax system, both at national and international level.
In addition, understanding the regulations of the tax law, due to their ambiguity, may in practice lead to inconsistent interpretations by the tax authorities, differing from the interpretation by the taxpayer, and respective disputes may only be resolved by national or European courts. Therefore, interpretations of the tax law by the tax authorities differing from the practices implemented by the Bank or entities of the PKO Bank Polski SA Group cannot be eliminated and may have a significant unfavourable impact on their operations and financial condition, despite the various actions aimed at mitigating this risk, which are regularly undertaken and allowed by law.
Due to the doubts relating to taxation of foreign exchange differences on loans granted to the Bank and issue commitments in the territory of Sweden, PKO Finance AB, whose reporting currency is the EUR, applied to the Swedish Council for Tax Rulings (Skatterättsnämnden) for an individual ruling. PKO Finance AB lends funds obtained from bonds issued to the Bank and at the same time recognizes receivables from the loans and liabilities relating to the issue.
Changes in foreign exchange rates have a symmetrical impact on the valuation of such receivables and liabilities, because foreign exchange differences on the valuation of loans granted are matched with the opposite foreign exchange differences on the valuation of liabilities in respect of the bonds issued.
According to the ruling obtained on 14 March 2019, a company for which EUR is the reporting currency should tax the EUR/SEK exchange differences on the loans granted as at the maturity date, and at the same time it is not possible to recognize a tax cost related to foreign exchange differences on the company’s liabilities in respect of the bond issue at the maturity date. If the Council’s ruling is upheld by the Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen), it would mean that a different approach is applied in Sweden to companies reporting in EUR compared with companies reporting in SEK (which can also include foreign exchange differences on liabilities in their tax settlements), and this would increase the economic risk and hamper effective hedging of the currency risk. In the opinion of the Group, such an approach would be contrary to Article 63 of the Treaty on the Functioning of the European Union (TFEU) related to the need to ensure free flow of capital in the EU or Article 49 and 54 of TFEU related to the freedom of business activities. On 3 April 2019, the company appealed to the Swedish Supreme Administrative Court against the Council’s ruling and on 1 July submitted extended arguments to dismiss the case. In its opinion of 23 August 2019, the Swedish Tax Office (Skatteverket) took a negative stance on the company’s appeal. The company sustained its position in the response to the opinion submitted to the Swedish Supreme Administrative Court on 25 September 2019. In addition, on 10 October 2019, the company submitted complementary documents to its appeal, in which it emphasized, among other things, the importance of the resolution for companies operating in the territory of Sweden and reporting in the euro.
In connection with IFRIC 23 “Uncertainty over Income Tax Treatments” entering into force, the Group made a judgment regarding the uncertain treatment of taxable income earned in the territory of Sweden in respect of foreign exchange differences on loans and liabilities relating to the bond issue. Consequently, as at 31 December 2019, the Group recognized current income tax liability of PLN 131 million and a deferred income tax provision of PLN 143 million. The Group reflected the effect of uncertainty by using the “most probable amount” method.