A responsible taxpayer
Average read time: 20 minutes
Tax, particularly international tax, is a key issue for us, our stakeholders and other interested parties.
The tax we pay is an important part of our wider economic and social impact and plays a key role in the development of the countries where we operate. We regard it as a critical element of our commitment to grow in a sustainable, responsible and socially inclusive way. Find out more about how we’re Supporting sustainable development (PDF 427KB) through our tax contributions.
Our Code of Business Principles
Our Code sets the standards we live by
Our Code of Business Principles (PDF 8.99MB) sets out the standards of behaviour we expect all employees to adhere to. This is no different when it comes to taxation. Tax evasion is illegal. We have a clear responsibility to comply in full with the laws in the countries in which we operate. We also choose to do this by respecting not only the letter of the law, but also the underlying tax policy intent.
We need to square our responsibilities as a co-operative, compliant taxpayer in each country where we operate, with the need to support competitive business growth. We must serve all our stakeholders, including investors, suppliers and employees. Sometimes this means that the total tax we pay in a particular country will decrease due to changes in our business model. For example, a decision to close a factory in a certain country would result in a change to the amount – and the jurisdiction – of the tax paid.
These are important business decisions taken to ensure our future competitiveness. We recognise that they sometimes negatively impact a country’s tax revenue. However, without taking these decisions the overall tax raising potential of our business would decrease.
Building trust through transparency
Rebuilding trust in the global corporate tax system is vital. When the public loses trust in that system, the relationship between corporates and society is damaged, which is good for neither.Graeme Pitkethly, Unilever CFO
Addressing public concerns that some multinationals are not paying their fair share of tax, requires technical international tax reforms and better efforts to improve public understanding and awareness. We think that providing user-friendly information about our corporate tax position to a broad range of stakeholders plays an important role in improving transparency and public trust.
Supporting global initiatives for responsible tax
We endorse the B Team Responsible Tax Principles which were developed with a group of leading companies, along with involvement from civil society, investors and representatives from international institutions. See the B Team Responsible Tax Principles and our compliance (PDF 108KB) for more information.
We support the OECD international tax reform work on Base Erosion and Profit Shifting (BEPS). As we operate in a global competitive environment, we urge tax policymakers to implement international tax reform in a coherent, co-ordinated way so that there is a level playing field and the risk of paying tax twice on the same income is minimised.
Our tax strategy
Centralising parts of our business means we can offer consumers innovative products quickly. By bringing together activities in one location, we create efficiencies and economies of scale, which create value for our consumers and our shareholders. As a result, there are many transactions between Unilever Group companies, and the transfer pricing for these transactions must reflect an arm’s-length or market price. Our pricing is driven by the activities undertaken and the value created in each part of our business, and is in accordance with the OECD transfer pricing guidelines.
Paying the right amount of tax, at the right time, and in the right countries
Corporate income tax is payable on the profits made by the companies in the Unilever Group. Profits are calculated after deducting business expenses and legislated tax reliefs – such as depreciation on equipment and R&D incentives – as provided by the tax laws in the countries where we operate.
We aim to pay the right amount of tax at the right time, on the profits we make, and in the countries where we create the value that generates those profits.
This means that we must:
- Respect the tax laws applicable in each country, including not only the letter of the law but the tax policy intent underlying the tax law
- Understand how and where the different companies in the Unilever Group contribute to creating value, and ensure that our transfer prices – the prices paid on transactions between companies in the Unilever Group – properly reflect where value is created
- Prepare and file all tax returns in the form specified and at the time required
- Prepare and retain the documentation required by the tax laws or which will be needed to answer any questions raised by tax auditors
- Employ appropriately qualified and trained tax professionals with the right levels of tax expertise and understanding of Unilever’s business
As the tax laws are not always clear, getting this right often requires careful judgement. This must be consistently applied across around 400 corporate income tax returns that the Unilever Group files annually.
400 Corporate income tax returns completed by Unilever every year
The tax authorities in the countries where we operate may not agree with some of the judgements we make. This happens most often in the area of transfer pricing. There can be different views from different jurisdictions’ tax authorities of where value is created, and therefore which country has the right to tax the profits.
Our biggest challenge is to ensure that we pay tax only once on the profits and that we can recover centrally incurred business expenses from Group companies. Unfortunately, the current international system for resolving tax disputes often falls short of what is needed.
Our tax principles
Our tax principles are a clear articulation of our tax governance framework and, in those cases where judgements are required, they illustrate our perspective on tax risk. These principles have been approved by the Board’s Audit Committee.
Tax function responsibilities & organisation
Tax evasion and criminal facilitation of tax evasion is illegal. The UK introduced new legislation on 30 September 2017 called the Criminal Finance Act. Part III of the Act describes a Corporate Criminal Offence for the Failure to Prevent the Facilitation of Tax Evasion.
This applies automatically to a Corporation where an associated person (employee or third party) acting for or on behalf of the Corporation criminally facilitates tax evasion. Acting in this way is in clear contravention of Unilever’s Tax Principles. Doing so risks criminal prosecution of the individuals involved, as well as placing unnecessary risks on Unilever. We maintain a zero-tolerance approach to dealing with such behaviour.
We follow HMRC’s guidelines to continuously improve prevention procedures both in the UK and across Unilever. We continue to adopt reasonable prevention procedures, which are proportional to the risks inherent in our business.
Managing our tax risk
Exercising judgement on tax sensitive items consistently across the Unilever Group means our employees need a common understanding of Unilever’s perspective on tax risk. We’ve adopted a set of global tax principles covering areas such as transfer pricing, use of tax havens and relationships with tax authorities.
As a business, we’re subject to taxation in the many countries in which we operate. The tax legislation in these countries differs, is often complex and subject to interpretation by management and the government authorities. Recent developments in the international tax arena have increased the likelihood of changes to tax systems in the countries where we operate, and this creates added uncertainty.
How we manage our tax risk
Risks are managed through our Tax Risk Framework. They are monitored through a web-based tool for collecting details on a quarterly basis of all our corporate income tax exposures and provisions. The tool has an approval process for any new provisions or changes to existing provisions. It also includes an Annual Compliance Checklist, in which the tax lead in the countries concerned confirms that all their statutory tax obligations have been met, their controls are operating effectively, and all tax positions are in compliance with our Tax Principles.
We centrally monitor the filing of all corporate income tax returns and related tax payments. A key way to manage tax exposure is to be as ‘current’ as possible in agreeing the final tax liability for the tax year with the tax authority. So we monitor and seek to minimise the number of open tax years where final agreement has not yet been reached.
Our Tax Risk Framework
Our Tax Risk Framework sets out the key tax risks and the mitigating actions that we take to manage and monitor those risks. There are five key risk areas covered by the Tax Risk Framework – policy, governance & organisation, people, compliance & documentation, and reporting & risk management.
Examples of a risk and mitigating action for each of the five key risk areas:
Governance & Organisation
Compliance & Documentation
Reporting & Risk Management
Transactions and behaviours not in line with Tax Principles
Lack of right organisational structure to implement strategy
Insufficient tax training
Failure to comply with statutory obligations
Tax positions not accurately reflected in reporting
Annual compliance confirmation and completion of scorecard for certain transactions
Organisational structure regularly reviewed by Tax Leadership Team
Regular global, regional and local training sessions, plus individual development plans
Annual compliance checklists plus online compliance tracking tool
Online tool to collect and approve direct tax exposures and provisions
Tax in our Annual Report and Accounts
The Unilever Group consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Unilever’s business generates considerable tax income for the governments in the countries in which we operate. In addition to corporation taxes, we pay and collect numerous other taxes. These include employee taxes, sales taxes, customs duties and local transaction taxes. During 2020, we made global tax payments of €7.1 billion (2019: €8 billion) (our Total Tax Contribution). This comprised €3.3 billion of taxes borne by Unilever, and €3.8 billion of taxes collected from employees and customers on behalf of governments. ‘Other taxes’ include sustainability taxes, stamp duties (and equivalent), excise duty, service taxes, property taxes, local business taxes, social and educational taxes.
Total tax paid by type in 2020
Tax paid in 2020 (€ million)
Total tax borne
Corporate tax paid by region in 2020
Tax paid in 2020 (€ million)
Note: the countries listed in bullets under the regions are the three largest tax payers by region.
There are a number of reasons why the corporate tax cash payments in a particular year will be different from the corporate tax charge in the financial statements, including:
- Timing differences: Tax payments relating to a particular year’s profits will typically be due partly in the current year and partly in the following year.
- Deferred tax: The Group tax charge includes deferred tax which is an accounting adjustment arising from timing differences. These occur when an item has to be included in the financial statements in one year but is required to be taxed/deducted for tax in another year.
- Uncertain tax positions: We are subject to taxation in the many countries in which we operate. The tax legislation of these countries differs, is often complex and is subject to interpretation by management and the government authorities. These matters of judgement may mean we need to make provision for possible tax payments in future years. We make provisions against individual exposures and take into account the specific circumstances of each case. These include the strength of technical arguments, recent case law decisions or rulings on similar issues, and relevant external advice. The provision is estimated based on one of two methods: the expected value method or the single most likely amount method, depending on which is expected to better predict the resolution of the uncertainty. Approximately half of our uncertain tax provisions relate to judgements on transfer pricing where there is the potential for disputes due to tax authorities potentially having a different point of view on where value is created.
Our effective tax rate in 2020
Our Effective Tax Rate (ETR) in 2020 was 24.6% (2019: 27.9%). This is our worldwide corporate tax charge in the Unilever Annual Report and Accounts of €1,923 million (2019: €2,263 million), shown as a percentage of the worldwide Group profit before tax.
Note 6A (page 131 of the 2020 Annual Report and Accounts) to the Group consolidated financial statements provides a tax reconciliation on a Group basis of the 2020 effective tax rate of 25% to the expected tax rate of 23% (the weighted average rate applicable in the countries where we made our profits). In addition, where there is a requirement to prepare local company financial statements, this will also generally include an effective tax rate reconciliation for the local company.
Our Group tax reconciliation also shows our underlying effective tax rate of 23%. The difference between this and the reported rate of 25% is due to the tax impact of non-underlying items. In particular, it is due to the impact of taxes payable on the reorganisation of our European business and taxes related to the UK tax audit of intangible income and centralised services.
The main reconciling items in the 2020 financial statements between the expected rate of 23% and the underlying effective tax rate (23%) include:
1. An aggregate increase in the tax rate of 4% due to
- withholding taxes on dividends paid by subsidiary companies, which cannot be offset against any other taxes due (2%)
- business expenses that are not allowed as a deduction for tax purposes (1%)
- withholding taxes on other cross-border payments, such as royalties and service fees, which cannot be offset against any other taxes due (1%)
2. An aggregate decrease in the tax rate of 4% due to
- benefits from preferential tax regimes that have been legislated by the countries and provinces concerned in order to promote economic development and investment (2%), see further detail below regarding tax incentives
- income tax reserve adjustments (1%)
- other favourable items including tax settlements and one-off benefits (1%).
The Group’s future tax charge and effective tax rate could be affected by several factors. These include changes in tax laws and their interpretation, still to be determined tax reform proposals in the EU, the continuing OECD international tax reform work, as well as the impact of acquisitions, disposals and any restructuring of our businesses.
Withholding taxes on dividends – UK and the Netherlands
With effect from 29 November 2020, Unilever NV merged into Unilever PLC.
Dividend withholding taxes suffered by Unilever PLC
Unilever PLC receives dividends (both directly and indirectly) from subsidiary companies. In many countries, particularly developing and emerging ones, these dividend payments are subject to withholding tax. For the purposes of our tax paid by region analysis, the withholding taxes are reported in the country of the paying company, but this withholding tax is actually a cost to the recipient of the dividend.
This tax cannot be offset against other taxes due as the dividend income is not generally taxed in the UK or in intermediate holding companies in the Netherlands. For 2020, the total dividend withholding tax suffered by the parent and intermediate holding companies was €142 million (2019: €84 million).
Dividend withholding taxes collected by Unilever NV and Unilever PLC
During 2020, Unilever NV also collected €432 million in dividend WHT from dividends paid to external shareholders. This is a tax cost to the external shareholder. There is no dividend withholding tax on dividends paid by PLC to its shareholders.
Tax incentives are government measures that are intended to influence business decision-making or encourage businesses to invest in a particular way, by reducing the amount of tax they have to pay. A number of the territories in which we operate offer incentives of various kinds. We seek to use these incentives where they are aligned with our business and operational objectives, and where they require economic substance in order for the tax incentive to be granted.
Tax incentives in practice - Turkey
Turkey provides tax investment regimes for large industrial projects. Currently, Unilever has two projects benefiting from the incentive. The first is an ice cream factory and the second is a factory which makes cleaning and beauty & personal care products, both located in the province of Konya in Central Anatolia. The incentives are granted to help develop this and other regions in Turkey. The benefit is in the form of a lower tax rate on the profits generated from the sale of goods manufactured in those factories.