11. Income taxes

Income taxes recognised in the income statement consist of the following:

(€ million) 2012 2011 (*)
Current taxes:    
IRAP (Italy) 60 72
Other taxes 626 519
Total Current taxes 686 591
Deferred taxes for the period:    
IRAP (Italy) 20 (8)
Other taxes (89) (17)
Total Deferred taxes (69) (25)
Taxes relating to prior periods 8 (32)
Total Income taxes  625 534
(*) Amounts reported for 2011 include the consolidation of Chrysler from 1 June 2011.

The increase in Total income taxes in 2012 compared to 2011, is mainly due to the combined effect of the consolidation of Chrysler for the full year and the improvement in its results, partially offset by the decrease in income taxes arising from the lower taxable profits of certain other non-Italian companies. In 2011 Income taxes also included non-recurring income relating to benefits arising from the recovery of prior year income taxes.

The effective tax rate of the Fiat Group for 2012 (excluding current and deferred IRAP) was 26.7% (21.5% in 2011).

The reconciliation between the tax charges recorded in the consolidated financial statements and the theoretical tax charge, calculated on the basis of the theoretical tax rate in effect in Italy, is the following:

(€ million) 2012 2011
Theoretical income taxes 560 601
Tax effect of permanent differences (79) 1
Tax effect of non-taxable income recognised on the acquisition of control of Chrysler - (555)
Taxes relating to prior years 8 (32)
Effect of difference between foreign tax rates and the theoretical Italian tax rate 165 69
Effect of deferred tax assets not recognised in prior years (529) (181)
Effect of deferred tax assets not recognised and write-down of previous  years deferred tax assets 332 452
Other differences 88 115
Current and deferred income tax recognised in the financial statements, excluding IRAP 545 470
IRAP (current and deferred) 80 64
Current and deferred income tax recognised in the financial statements 625 534

Since the IRAP (an Italian employment-related tax) taxable basis differs from income before taxes, it is excluded in the reconciliation above. Theoretical income taxes are determined by applying only the tax rate in effect in Italy (IRES equal to 27.5% in 2012 and in 2011) to Profit/(loss) before taxes.

As shown in the reconciliation, in 2012 theoretical income taxes were affected by negative permanent differences of €79 million (positive for €1 million in 2011), which consist of the tax effect of non-deductible costs of €209 million (€205 million in 2011) less the tax effect of non-taxable income of €288 million (€204 million in 2011), that includes for €190 million the effect deriving from the transfer of the taxable income generated in the U.S. by Chrysler Group LLC to its minority shareholders due to the “tax transparency” of the company. In 2011 the tax effect of non-taxable income recognised on the acquisition of control of Chrysler arose from the fair value measurement of the 30% interest in Chrysler prior to the acquisition of control and the right to receive an additional 5%, which had not been recognised as it relates to temporary differences on the investment and other financial assets that are controlled by the Group whose reversal was not deemed to be probable in the foreseeable future.

In addition, the difference between theoretical income taxes and the tax charge recognised in the financial statements includes a benefit of €529 million (€181 million in 2011) deriving from deductible temporary differences and tax losses for which no deferred tax assets had been recognised in previous years, partially offset by the negative effects of €332 million (€452 million in 2011) deriving from unrecognised deferred tax assets on temporary differences and tax losses originated during the year and the write-down of deferred tax assets recognised in previous periods.

Other differences in the above reconciliation include unrecoverable withholding tax of €95 million (€73 million in 2011).

The deferred tax asset balance consists of the deferred tax assets less the deferred tax liabilities, where these may be offset, of the individual consolidated companies.

The amounts stated in the statement of financial position are as follows:

(€ million) At 31 December 2012 At 31 December 2011
Deferred tax assets 1,736 1,690
Deferred tax liabilities (802) (760)
Total 934 930

The change of €4 million in net deferred tax assets is due to the following:

  • net benefit of €69 million deriving from the recognition of deferred tax assets on temporary differences and tax losses originated in the year net of write-down of deferred tax assets relating to prior years;
  • recognition directly to equity of net deferred tax liabilities of €23 million;
  • exchange rate differences and other changes for a negative amount of €42 million. 

Deferred tax assets, net of Deferred tax liabilities may be analysed by source as follows:

(€ million) At 31 December 2011 Reclassifi-cations
Recognised
in income statement
Charged to equity Changes
in the scope of consolidation
Translation differences
and other changes
At 31 December 2012
Deferred tax assets arising from:              
Cash flow hedge reserve - 7 - 2 - - 9
Taxed provisions 3,097 (271) 162 - 2 (79) 2,911
Inventories 229 22 15 - - (2) 264
Taxed allowances for doubtful accounts 85 - 9 - - (4) 90
Provision for employee benefits 1,374 (302) (50) - - (2) 1,020
Intangible assets 419 - (38) - - - 381
Write-downs of financial assets 212 4 12 - - - 228
Measurement of derivative financial instruments 33 (30) - - - - 3
Other 538 912 (10) - 37 (33) 1,444
Total Deferred tax assets 5,987 342 100 2 39 (120) 6,350
               
Deferred tax liabilities arising from:              
Cash flow hedge reserve - 16 - (25) - - (9)
Accelerated depreciation (1,733) 316 35 - (1) 29 (1,354)
Capitalisation of development costs (800) (296) (140) - - 25 (1,211)
Trade-marks and other intangibles - (713) (89) - - 18 (784)
Deferred tax on gains on disposal (14) - 8 - - - (6)
Capital investment grants (3) - - - - 3 -
Provision for employee benefits (19) - (2) - - - (21)
Other  (1,340) 786 50 - (1) (7) (512)
Total Deferred tax liabilities (3,909) 109 (138) (25) (2) 68 (3,897)
               
Theoretical tax benefit arising from tax loss carryforwards 3,215 (162) 392 - (20) (26) 3,399
Adjustments for assets whose recoverability is not probable (4,363) (299) (285) - (19) 48 (4,918)
Total Deferred tax assets, net of Deferred tax liabilities 930 (10) 69 (23) (2) (30) 934

The decision to recognise Deferred tax assets is taken for each company in the Group by assessing critically whether the conditions exist for the future recoverability of such assets on the basis of most recent forecasts from budgets and plans. Regarding the Italian entities, despite a tax loss for 2012 in the tax consolidation, the Group continued to recognise deferred tax assets on the basis of the future taxable income expected to arise in the Italian tax consolidation in the period considered and taking into account changes in Italian tax law in 2011 by which the tax losses can be carried forward indefinitely. Deferred tax assets arising from Italian companies amount to €1,063 million at 31 December 2012 (€1,033 million at 31 December 2011). The total theoretical future tax benefits arising from deductible temporary differences (€6,350 million at 31 December 2012 and €5,987 million at 31 December 2011) and tax loss carry-forwards (€3,399 million at 31 December 2012 and €3,215 million at 31 December 2011) have been reduced by €4,918 million at 31 December 2012 (€4,363 million at 31 December 2011).

In particular, at 31 December 2012 Deferred tax assets, net of Deferred tax liabilities, include tax benefits arising from unused tax losses of €929 million (€783 million at 31 December 2011). At 31 December 2012, further tax benefits arising from unused tax losses amounting to €2,470 million have not been recognised. At 31 December 2011 the corresponding item was €2,432 million.

Deferred taxes have not been provided on the undistributed earnings of subsidiaries, except in cases where it is probable they will be distributed in the foreseeable future.

The totals of deductible and taxable temporary differences and accumulated tax losses at 31 December 2012, together with the amounts for which deferred tax assets have not been recognised, analysed by year of expiry, are as follows:

 Year of expiry
(€ million) At 31 December 2012 2013 2014 2015 2016 Beyond 2016 Unlimited/
indeterminable
Temporary differences and tax losses relating to State taxation (IRES in the case of Italy):              
Deductible temporary differences 19,013 4,869 2,241 2,098 2,144 7,661 -
Taxable temporary differences (11,011) (1,642) (1,348) (1,215) (1,222) (4,155) (1,429)
Tax losses 11,906 42 37 28 257 1,745 9,797
Temporary differences and tax losses for which deferred tax assets have not been recognised (16,228) (2,038) (813) (707) (604) (3,290) (8,776)
Temporary differences and tax losses relating to State taxation 3,680 1,231 117 204 575 1,961 (408)
               
Temporary differences and tax losses relating to local taxation (IRAP in the case of Italy):              
Deductible temporary differences 17,714 3,357 2,257 2,158 2,116 7,826 -
Taxable temporary differences (12,166) (1,551) (1,364) (1,307) (1,327) (5,100) (1,517)
Tax losses 1,702 24 21 14 13 835 795
Temporary differences and tax losses for which deferred tax assets have not been recognised (7,185) (869) (807) (795) (775) (3,168) (771)
Temporary differences and tax losses relating to local taxation 65 961 107 70 27 393 (1,493)

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