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 we operate in. 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 through our tax contributions (PDF | 389KB).
Our Code of Business Principles
Our Code of Business Principles (PDF | 6MB) sets out the standards of behaviour we expect all employees to adhere to. This is no different when it comes to taxation. While Unilever has 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. Tax evasion is illegal.
We must also square our responsibilities as a co-operative, compliant taxpayer in each and every country we operate in with the need to support competitive business growth - serving 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 – resulting in a change to where value is created. 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. While we recognise that they sometimes negatively impact a country’s tax revenue, without taking such decisions the overall tax raising potential of our business would decrease.
Building trust through transparency
Re-building public trust in the corporate tax system is vital - when broader taxpayer trust in the system is damaged people become less willing to comply and all taxpayers suffer as a result. Addressing public concerns that some multinationals are not paying their fair share of tax, requires not only technical international tax reforms but also better efforts to improve public understanding and awareness. Providing user-friendly information about a company’s tax position to a broad range of stakeholders plays an important role in this.
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 | 157KB) 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 policy makers 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
Our brands are important assets used in our business and managing them effectively requires a global 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.
Corporate income tax is payable on the profits made by the companies in the Unilever Group 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 we operate in. 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 requires careful judgement consistently applied across around 400 corporate income tax returns that the Unilever Group files annually.
The tax authorities in the countries in which we operate may not agree with some of the judgements we make. For the Unilever Group this happens most often in the area of transfer pricing where 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 arising.
Here our biggest challenge is to ensure that we pay tax only once on the profits, particularly since the current international system for resolving tax disputes often falls short of what is needed. We try to obtain certainty, firstly by ensuring that our transfer pricing policies are consistently applied across the Group and, secondly by entering into Advance Pricing Agreements with the relevant country tax authorities based on full disclosure of all relevant information. We want to pay all the tax that is due, we just don’t want to pay tax twice on the same profits.
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. Unilever has adopted a set of global tax principles covering areas such as transfer pricing, use of tax havens and relationships with tax authorities. We believe these principles illustrate good corporate practice in the area of tax management and tax transparency, balancing the interests of our various stakeholders including consumers, investors and the governments and communities in the countries in which we operate.
The tax principles are a clear articulation of our tax governance framework and Unilever’s perspective on tax risk. Our tax principles are set out below.
Our tax principles
We act at all times in accordance with all applicable laws and are guided by relevant international standards (for example OECD Guidelines). We aim to comply with the spirit as well as the letter of the law.
We are transparent about our approach to tax. We regularly put forward understandable, timely and transparent communication about our tax policy and total tax payments.
3. Transfer pricing
We aim to pay an appropriate amount of tax according to where value is created within the normal course of commercial activity. Any transfer pricing is always calculated using the ‘arm’s-length’ principle.
We do not use contrived or abnormal tax structures that are intended for tax avoidance, have no commercial substance and do not meet the spirit of local or international law.
5. Tax havens
Secrecy jurisdictions or so-called ‘tax havens’ are not used for tax avoidance. See Tax havens below for further information.
6. Tax rulings
We only seek rulings from tax authorities to confirm the applicable treatment based on full disclosure of the relevant facts.
7. Relationships with governments
We respect the right of governments to determine their own tax structures, rates of tax and collection mechanisms.
8. Relationships with tax authorities
We seek to develop strong, mutually respectful relationships with national tax authorities based on transparency and trust. Where countries have weak or poorly constructed fiscal regulation and/or institutions we support work to help develop the capability of tax authorities and systems. See Our relationships with tax authorities below for more information.
9. Accountability & governance
We ensure that as a business we have the mechanisms in place to adhere to the above principles and provide both relevant training and opportunities for employees to raise any issues of concern confidentially, consistent with the Unilever Code of Business Principles. We report annually to the Board on adherence to the Unilever Tax Principles. See Accountability & governance below for more information.
Our tax principles in action
We set out below further details on some of our principles.
We use the OECD definition of tax havens and as at 31 December 2017 we had four companies in the Unilever Group located in countries identified as tax havens: two in Panama, one in Jersey and one in the Isle of Man.
The Panama companies are both operating companies: one is a marketing and sales company and the other provides regional services including logistics. The Jersey and Isle of Man companies are both holding companies which are UK tax resident and therefore subject to tax in the UK.
During 2018, Unilever completed an acquisition and as part of that acquisition, acquired eight companies based in the British Virgin Islands. Unilever is working to unwind this structure. The assets held by these entities will be transferred to other Unilever companies in line with our global tax principles and, following these transfers, the British Virgin Islands legal entities will be liquidated.
Our relationships with tax authorities
We promote open, transparent working relationships with tax authorities and early engagement in advance of undertaking transactions and filing tax returns.
In the Netherlands Unilever engages with the Dutch tax authorities through regular meetings, calls and correspondence which includes discussing the tax impacts of potential future events, such as a business restructure, in advance. Unilever’s participation in the Dutch horizontal monitoring program (formalised through a so-called “Handhavingsconvenant”), constructive cooperation and real time working results in transparency as well as faster and greater clarity on Unilever's positions.
In the UK Unilever has an open and transparent relationship with HMRC (Her Majesty’s Revenue and Customs). Unilever and HMRC engage cooperatively with regular face-to-face meetings and telephone calls with any issues being discussed on a real time basis, including pre-filing meetings in advance of filing our tax returns.
In Australia, we are a signatory to the Board of Taxation's Voluntary Tax Transparency Code. The Code aims to enhance the community’s understanding of the corporate sector’s compliance with Australia’s tax laws. It outlines a set of principles and minimum standards to guide the disclosure of tax information by businesses. Further information on the Code and its full Catalogue of Signatories is available from the Australian Board of Taxation.
This open approach helps us with our goal of achieving certainty over tax positions - but such an approach is not always possible. For example, in some developing countries we face significant challenges in reaching agreements and in some cases find regional and national tax authorities taking different views on the same issue.
As well as engaging with tax authorities directly we also talk to them as part of trade bodies such as the Confederation of British Industry (CBI) in the UK and VNO (The Confederation of Netherlands Industry and Employers) in the Netherlands. We take part in working groups such as those set up to engage on new legislation arising from BEPS. We help tax authorities develop expertise and understanding of our industry and in partnership with the OECD Tax & Development team have run business sector knowledge sessions for tax authorities in Africa and Latin America.
Preventing tax evasion and criminal facilitation
Tax evasion and criminal facilitation of tax evasion is illegal. The United Kingdom introduced new legislation in 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 and 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 United Kingdom and across Unilever and continue to adopt reasonable prevention procedures, which are proportional to the risks inherent in our business.
Accountability & governance
We report to our Board’s Audit Committee on tax strategy and provide updates on tax regulation and key tax challenges we are facing. The Audit Committee receives an annual update on the Group’s effective tax rate, tax provisions, key tax issues for the coming year, and compliance with our Tax Principles.
We have a Tax Principles scorecard to assess whether material transactions or changes in the way we do business comply with our Tax Principles. The scorecard is completed by our Tax managers and reviewed by senior members of our Tax team. Material transactions must be scored against the various Tax Principles and the transactions will not be approved unless they achieve a certain score. In 2018 a total of 25 scorecards were completed.
Tax function responsibilities & organisation
Unilever’s Tax team is part of our Finance function, which reports to the Group Chief Financial Officer. Our Executive Vice President Global Tax leads a senior team of around 80 people with specific geographic and technical responsibilities, including specialists in Transfer Pricing, Indirect Taxes and Employment Taxes. Advice is sought from external advisors on material transactions and whenever the necessary expertise is not available in-house.
The Tax function is organised on a global basis which ensures we have consistent tax policies, strategies and processes, and can invest in the team’s continuing professional development. Most of our Tax team work with our operations in a country with only a few central roles, allowing the Tax team to stay closely connected to Unilever’s business and the tax developments in country.
Managing our tax risk
As a business, we are subject to taxation in the many countries in which we operate. The tax legislation in these countries differs and 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 we operate in and this creates added uncertainty.
The risks are managed through our Tax Risk Framework and monitored through a web-based tool for collecting details of all our corporate income tax exposures and provisions. We use the tool to collect details of all exposures and provisions on a quarterly basis. It has an approval process for any new provisions or changes to existing provisions, and also includes an Annual Compliance Checklist, in which countries confirm that they have met all their statutory tax obligations, that their controls are operating effectively and that all tax positions are in compliance with our Tax Principles.
We have a tax compliance tracking tool to 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
The Tax Risk Framework sets out the key tax risks and the mitigating actions that Unilever takes to manage and monitor those risks. There are five key risk areas covered by the tax risk framework – policy, governance & organisation, people, compliance & documentation, reporting & risk management.
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 2018, we made global tax payments of €7.7 billion (our Total Tax Contribution). This comprised €3.7 billion of taxes borne by Unilever, and €4 billion of taxes collected from employees and customers on behalf of governments. The “Other taxes” include sustainability taxes, stamp duties (and equivalent), excise duty, service taxes, property taxes, local business taxes, social and educational taxes.
- Corporate tax paid (62%)
- Sales taxes (6%)
- Customs duties (6%)
- Employment taxes (16%)
- Other taxes (10%)
The chart below further breaks down the corporate tax paid by Unilever (€, 2,294 million) by region and by the top three largest countries within these regions.
Outer ring: by region
- Total Asia / Africa (57%)
- Total Americas (30%)
- Total Europe (13%)
Inner ring: by country
- India (20%)
- Indonesia (8%)
- Phillippines (4%)
- Other Asia / Africa (25%)
- Brazil (8%)
- Mexico (7%)
- USA (4%)
- Other Americas (11%)
- Switzerland (5%)
- Germany (2%)
- Netherlands (1%)
- Other Europe (5%)
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. Timing differences 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: Unilever is subject to taxation in the many countries in which it operates. The tax legislation of these countries differs, is often complex and is subject to interpretation by management and the government authorities. These matters of judgment give rise to the need to create provisions that may result in a tax payment in future years.
- We make provisions against individual exposures and take into account the specific circumstances of each case, including the strength of technical arguments, recent case law decisions or rulings on similar issues and relevant external advice. The provision is estimated based on the individual most likely outcome approach. Approximately two thirds 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 (ETR) in 2018 was 21.1%. This is our worldwide corporate tax charge in the Unilever Annual Report and Accounts of €2,575 million, shown as a percentage of the worldwide Group profit before tax.
Note 6A (p107 of the 2018 Annual Report and Accounts) to the Group consolidated financial statements provides a tax reconciliation on a Group basis of the 2018 effective tax rate of 21% to the expected tax rate of 25% (the weighted average rate applicable in the countries where we made our profits).
It also shows our underlying effective tax rate of 26%; the difference between this and the reported rate of 21% is due to the tax impact of non-underlying items and in particular to the impact of the spreads disposal where a significant part of the disposal benefited from the participation exemption in the Netherlands and was therefore not taxable. 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.
The main reconciling items in the 2018 financial statements between the expected rate of 25% and the underlying effective tax rate (26%) include:
1. An aggregate increase in the tax rate of 5% 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%)
- an increase in uncertain tax provisions (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 (3%), see further detail below re tax incentives.
- other favourable items including settlements with tax authorities (1%)
The Group’s future tax charge and effective tax rate could be affected by several factors including changes in tax laws and their interpretation and still to be determined tax reform proposals in the EU and Switzerland and the continuing OECD international tax reform work, as well as the impact of acquisitions, disposals and any restructuring of our businesses.
Tax incentives are government measures that are intended to influence business decision-making or to 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 provides tax ınvestment regimes for large industrial projects. Currently Unilever has two projects benefitting from the incentive. The first is an ıce 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.
India provides tax incentive regimes to encourage research and development activity in the country. Currently Unilever participates in an incentive regime which relates to research and development carried out on eligible products. These include a wide range of home and beauty & personal care products such as detergent and body wash. The incentive comes in the form of enhanced corporate tax deductions for the associated costs, including capital costs on relevant plant and machinery.