UPM annual report 2015

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IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

UPM pays corporate income taxes where added value is created

Prosperity grows in Uruguay’s forests

Corporate income taxes and property taxes paid by country The tax figures shown in the country analysis include corporate tax payments and property taxes. The country analysis shows the corporate income taxes paid by UPM business areas oper- ating in that particular country. The corporate income taxes paid are reported on a cash basis and thus include some taxes concerning previ- ous years as well, but exclude deferred taxes because they may not be paid. Consequently, in those countries where UPM’s companies are using tax losses resulting from previous years to offset the tax liability of the year in question, such as Germany, there are no or only limited corporate income taxes paid. Real estate/property taxes that are reported in the country analysis include various types of taxes imposed on real estate, land and prop- erty. For UPM, these taxes are also particularly significant in the production countries due to the operations requiring major investment in production facilities, land areas and other real estate and property. The scope, basis and tax rates of the real estate/property taxes vary significantly between countries. For example, land, buildings or total net assets may be sub- ject to these taxes, the tax rates may depend on conditions such as purpose of use or location of the immovable property, and the amount of tax may be calculated based on variables such as taxable values, historic values or balance sheet values of the property. Aligning the corporate legal structure with the business structure in Finland Currently in Finland most business areas have their main operations in UPM-Kymmene Oyj, the parent company of the UPMGroup, with the exception of UPMRaflatac and UPMPly- wood. These businesses have their Finnish operations in UPMRaflatac Oy and UPM- Kymmene Wood Oy. In addition to production and sales opera- tions, these subsidiaries perform certain R&D activities and may also own subsidiaries out- side of Finland. In 2016, similar subsidiary structures are considered for other business areas and/or units in Finland to align UPM’s corporate legal structure with its current business structure. As a taxpayer, UPMhas already consoli- dated the taxable income and corporate income taxes of the Finnish group companies to the parent company. Consequently, the corporate income tax has been reported and paid by the parent company UPM-Kymmene Oyj. While not affecting UPM’s total tax payments in Finland, the planned changes in corporate legal structure, which aim to align this with the

Particularly in the countries where UPM’s business areas have significant value-adding operations, the company is a major taxpayer of both direct taxes (for example corporate income tax, real estate/property tax) and indirect taxes (for example value added tax). UPMhas worked systematically to improve its profitability in all businesses. UPM’s importance to tax revenue is especially emphasised at the locations of production sites. In addition to Finland, UPMhas major investments in production in Uruguay, Ger- many, China, the UK and the USA, for exam- ple. In Finland, UPMhas significant operations through all of its six business areas as well as research and development operations. Due to these factors, UPM is also one of the biggest tax payers in Finland. In some countries, governments support companies making significant investments, for example by granting temporary operating permits for special economic zones. In Uru- guay, the government has granted UPM’s pulp mill with a permit to operate in a special economic zone. Therefore, UPM’s tax pay- ments in Uruguay mainly concern real estate/ property taxes. In China, with regard to fine paper production, UPM qualifies as a High- tech enterprise with a reduced corporate income tax rate of 15% instead of the standard rate of 25%. Corporate income taxes and property taxes paid by UPM are reported by country (see table on the left). In addition to these taxes paid by UPM, the local impact is augmented by the taxes paid to the local municipalities by UPM’s employees as well as those indirectly employed by UPM to perform various services at the production sites. About UPM’s tax policy The main principles of UPM’s tax policy are: • Compliance with relevant statutory legis- lations and rules. • Management of tax risks, both financial and non-financial. • Transparency of tax issues and overall • Continuous enhancement of shareholder value by aiming for efficient, optimum and cost effective tax processes, business trans- actions and structures. UPMAudit Committee has reviewed the company’s tax policy and the principles of tax risk management during 2015. UPM’s tax policy is available on the corpo- rate website under www.upm.com/govern- ance. requirement of commercial rationale concerning tax related transactions.

In accordance with UPM’s tax policy, UPM pays corporate income taxes where added value is created and profit generated. Taxes are paid in accordance with the local tax legislation and regulations of the country in question. Due to UPM’s corporate and operational structure, UPM reports and pays its corporate income taxes mainly in the production countries and in the countries where innovations are being developed.

The forest industry’s investment projects have been a key enabler of economic growth in Uruguay. UPM’s success story is an excellent example of how one industry spreads prosperity across many sectors of society. The economic impact of UPM on the Uruguayan economy can be measured through its entire production process starting from the breeding of eucalyptus varieties up to logistics and foreign trade. According to a recent independent study, UPM’s input in the value chain, together with that of its service providers accounted for over 1% of Uruguay’s GDP in 2014. The direct impact of UPM Fray Bentos pulp mill represents more than 3% of the country’s manufacturing industry. The majority of the inputs derive from the production process while the remaining added value can be attributed to employment, salaries, exports and productivity. The UPM Fray Bentos and UPM Forestal Oriental directly generate approximately 560 jobs. At the same time, UPM’s suppliers employ around 3,700 people directly through their operations. Consequently, these jobs generate salaries as well as consumption, which results new jobs. The employment in various sectors linked to UPM’s activity in Uruguay amounts to more than 1,700 jobs. Direct, indirect and induced UPM salaries exceeded USD 170 million, which represents approximately 30% of the total added value generated by the company in Uruguay in 2014. The total number of jobs generated by UPM amounts to around 6,000, which accounts for 0.3% of the total employment generated in the country. Pulp is one of the four main export products and UPM is Uruguay’s largest exporting company. In 2014, UPM Fray Bentos exports represented approximately 7.2% of total goods exports. The added value generated directly by the activities of UPM Forestal Oriental represents 42% of the added value generated by the forest sector in 2014. The majority of UPM Forestal Oriental’s activities are located in rural areas and support local livelihoods.

business structure, will divide UPM’s corporate income tax payments between its Finnish group companies. In 2015, UPM’s corporate income taxes in Finland are estimated to be approxi- mately EUR 83 million in total, of which, subsidiaries – mainly UPMRaflatac Oy and UPM-Kymmene Wood Oy – report and pay approximately EUR 22 million, and the

remaining approx. EUR 61 million is reported and paid by UPM-Kymmene Oyj. Starting from 2015, the corporate income tax of UPM-Kymmene Oyj is also affected by the accelerated depreciations of production investments concerning Lappeenranta Biorefinery, which started up in January 2015, and the expansion on Kymi pulp mill, which was completed in October 2015.

Corporate income taxes paid and property taxes by country EURm 2015 Finland 131 Uruguay 10 China 9 Russia 8 United States 8 France 3 United Kingdom 2 Other countries 3 Germany -2 Total 172

direct economic value generated and distributed by upm IN 2015 (EUR million) Direct economic value created

Economic value distributed Operating costs

–7,577

Sales

10,138 Employee wages and benefits

–1,257

Income from sale of assets

69 Payments to providers of loans

–39

Income from financial investments

7 Dividend distribution

–373

Other income

–7 Corporate income taxes paid and property taxes

–172

10,207

–9,418

Economic value retained 789

UPM’s economic impact is significant in the surrounding communities. The company’s operations contribute to local, regional and national economies by generating economic benefits for different stakeholder groups. The related direct monetary flows indicate the extent of added value globally.