UPM Annual Report 2016

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UPM Annual Report 2016 UPM Annual Report 2016 54 55
In brief Strategy Businesses Governance Accounts Stakeholders
CONTENTS
UPM’s corporate and operational structure means that UPM reports
and pays its corporate income taxes mainly in the production countries
and in the countries where innovations are being developed.
In the countries where UPM’s business areas have significant value-
adding operations in particular, UPM is also a major taxpayer of both
income taxes and taxes applied to various production inputs and
outputs. In addition to these taxes, the local impact is augmented by
the taxes paid to the local municipalities by UPM’s employees as well
as by those indirectly employed by UPM to perform various services
at the production sites.
About UPM’s tax policy
UPM’s tax policy is supported by internal instructions, benchmark
analysis of best practices as well as by related internal controls.
Tax matters at UPM are managed by UPM’s own tax function, which
is complemented by third-party tax services in order to comply with
local tax reporting and filings among others.
The Audit Committee is responsible for the supervision of tax risk
UPM aims to develop tax reporting that meets the expectations
of various stakeholders and fulfils the various statutory reporting
requirements. During 2016, UPMhas prepared for the country-by-
country reporting on taxes to tax authorities in accordance with the
OECD Guidelines.
During 2016, UPM changed its corporate structure in Finland to
better match its current business structure. Three new subsidiaries
were established in Finland: UPMEnergy Oy, UPM Specialty Papers Oy
and UPMPaper ENA Oy. The personnel and assets of UPMEnergy,
UPM Specialty Papers and UPMPaper ENA in Finland were transferred
to the new companies on 1 July 2016. UPMRaflatac and UPMPlywood
were already operating as subsidiaries in Finland while UPMBiorefining
remained part of the UPM-Kymmene Corporation.
In 2016, UPM’s corporate income taxes in Finland are estimated
to be approximately EUR 138 million in total (EUR 83 million), of which
subsidiaries report and pay approximately EUR 56 million (EUR 22
million), and the remaining approximately EUR 82 million (EUR 61
million) is reported and paid by UPM-Kymmene Corporation.
Taxation at various levels
of the value chain
Taxation of end products varies by business area
In addition to the taxes on income, UPM’s various production inputs
and outputs are also subject to taxation. These are typically local taxes in
the production countries (for example energy taxes, real estate/land and
property taxes) or in the location of customers or a final consumption
(for example value added taxes, customs and duties or various excise
taxes). These taxes may either be paid by UPM or collected by UPM
from the customers and remitted to the local authorities.
Due to significant production and consumption of mainly renewable
energy, energy taxation is especially relevant for UPM in various
countries. The energy taxation refers to excise taxes of liquid fuels as
well as electricity and certain other fuels. Energy taxation is subject
to detailed regulation not only at country level but also at EU level.
The majority of UPM’s own electricity production is hydropower or
combined heat and power production at mill sites, where the majority
of the fuels used in energy production are from renewable sources.
The electricity produced by UPM is subject to the electricity taxation
regardless of which sources are used.
The renewable diesel, UPMBioVerno which is produced from crude
tall oil, a residue of the pulp production, is also subject to energy
taxation. The taxes are charged by fuel distributors to their customers
at service stations. The environmental goals of taxation of transport fuels
directly impact the business. One of the main goals of the energy taxation
In accordance with UPM’s tax policy, UPM pays corporate income taxes in the countries
where added value is created and profit is generated. Taxes are paid in accordance
with the local tax legislation and regulations of the country in question.
management as part of UPM’s risk management processes. UPM’s
internal control and risk management functions review the tax risks
regularly and update the control framework together with the tax
function.
UPM aims to co-operate transparently and proactively with tax
authorities and other important interest groups regarding taxation.
UPM’s tax policy is available on the corporate website under
Corporate income taxes and
property taxes paid by country
According to UPM’s tax policy, the location of UPM group entities in
different countries is driven by business reasons, such as the location
of customers, suppliers, rawmaterials, know-how and other similar
considerations.
Corporate income taxes and property taxes paid by UPM are
reported by country (see table). The tax figures shown in the country
analysis include corporate tax payments and property taxes.
UPM’s value creation also
generates tax revenues
UPM CREATES SIGNIFICANT ADDED VALUE
IN THE FINNISH ECONOMY
According to a study made by the Research Institute of
the Finnish Economy (Etla), UPM is the company producing
the most added value in Finland when taking into account
the added value produced by companies themselves and
the indirect added value resulting from purchases.
UPM’s share of the GDP was 2.0% in 2015. The added
value produced by UPM in Finland totalled EUR 1.5 billion
and the added value generated by the multiplier effects
resulting from purchases as much as EUR 2.6 billion. UPM’s
supply chain in Finland includes 10,000 companies and
service providers, and, for example, the company’s annual
wood sourcing spend is approximately EUR 850 million.
“Forest industry companies mainly purchase their wood
raw material from Finland, which means that the added
value from wood trade, felling and transport is created in
Finland,” says Jyrki Ali-Yrkkö, Deputy CEO at Etlatieto Oy.
Added value is the difference between the product’s final
selling price and the purchase price paid for raw materials,
energy, services and other intermediate products to
manufacture the product.
“The share of domestic added value is the largest in forest
and paper industry as well as in the food industry because
they use more domestic raw materials and intermediate
products than other industries.”
is to globally limit and mitigate climate change and therefore the
regulation has developed in favour of advanced biofuels.
Consequently, the energy taxes of transport fuels from renewable
sources like UPMBioVerno are lower than those of fossil fuels due
to their lower carbon dioxide emissions. Therefore the fuel tax of
renewable diesel UPMBioVerno is 30–50% lower than that of fossil
diesel in the main market in Finland.
Taxation of raw materials and other inputs
UPM is also a significant electricity consumer, especially for pulp
and paper production. All of the electricity consumed by UPM,
including the electricity that has been self-produced from renewable
sources, is subject to electricity taxes. Most of the fuels used in the
production processes are also subject to energy taxes, though there
are different tax rates or even exemptions depending on the type of
use.
Additionally, taxation of transport fuels is also a significant form
of energy taxation for UPM in businesses other than UPMBiofuels.
UPMpays significant amounts of energy taxes on fuels as part of
logistics costs, especially on road transportation.
Compensation of paid energy taxes
for global cost-competitiveness
Within the EU, the energy taxation legislation allows member
states to compensate paid taxes or apply lower tax rates for industrial
production or activities which are considered energy intensive.
Many of the main UPMproduction countries, e.g. Finland and
Germany, apply such tax reliefs because the level of energy taxation
has increased significantly in recent years.
For example, in Finland, electricity is taxed at a lower tax rate
when used in industrial production. Energy-intensive industries
get a retroactive refund of paid energy taxes based on a separate
application, if the amount of energy taxes paid exceeds a certain
threshold dependent on the company’s added value.
A similar retroactive energy tax refund can be applied for
in Austria while in the UK and France, relief is granted upfront
in a form of lower tax rates for energy-intensive industrial users
that fulfil the requirements. In Germany, there are certain energy
tax reliefs that companies may apply for in advance and some that
are applied for retroactively if the company fulfils various criteria
to be eligible for the reliefs. Like the entire field of energy taxation,
energy tax reliefs are subject to detailed regulation not only at
country level but also at EU level.
Regarding energy production, UPM benefits from some subsidy
schemes and feed-in tariffs related to renewable energy production,
such as EEG (Erneuerbare Energien Gesetz) in Germany and
operating aid for wood fuel power plants in Finland.
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.
DIRECT ECONOMIC VALUE GENERATED AND DISTRIBUTED
BY UPM IN 2016 (EUR MILLION)
Direct economic value created Economic value distributed
Operating costs –7,115
Sales 9,812 Employee wages and benefits –1,246
Income from sale of assets 99 Payments to providers of loans –32
Income from financial investments 10 Dividend distribution –400
Other income 81 Corporate income taxes paid
and property taxes
–181
Donations –1
Total 10,002 –8,975
Economic value retained 1,027
CORPORATE INCOME TAXES AND
PROPERTY TAXES PAID BY COUNTRY
EURm 2016 2015
Finland 133 131
China 11 9
Uruguay 10 10
United States 7 8
United Kingdom 6 2
Russia 5 8
France 3 3
Other countries 8 3
Germany –2 –2
Total 181 172