Tax

Tax, and in particular 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 countries where we operate. We regard it as a critical element of our commitment to grow in a sustainable, responsible and socially inclusive way.

Our Code of Business Principles sets out the standards of behaviour to which we expect all employees to adhere. 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.

We must also square our responsibilities as a co-operative, compliant taxpayer in each and every country in which we operate, 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 and while we recognise that they sometimes negatively impact a country’s tax revenue, without taking them the overall tax raising potential of our business would decrease.

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 support the OECD international tax reform work on Base Erosion and Profit Shifting (BEPS). As we operate in a global competitive environment, we would 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 the “crown jewels” of our business, and managing them effectively requires a global strategy. Centralising parts of our business enables us to offer consumers innovative products quickly. By bringing together activities in one location, we create efficiencies and economies of scale, which create value for both consumers and 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 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 in which 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 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 requires our employees to have 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.

Governance framework

Adherence to the governance framework helps to protect Unilever against the impact that taxation risk may have on the Unilever Group’s future value creation.

Our tax principles

1. Compliance

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.

2. Transparency

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.

4. Structure

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.

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.

9. Accountability and 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.

Our tax principles in action

To further embed the Principles, in 2014 we rolled out an online training course for all of our employees who have the potential to make decisions concerning tax, and instituted new procedures for assessing whether material transactions or changes in the way we do business comply with the Principles.

The scorecard, completed by the relevant tax managers and reviewed by senior Tax employees, requires material transactions to be scored against the various Principles and the transactions will not be approved unless they achieve a certain score. In 2015, a total of 13 scorecards were completed. See one example of our Tax Principles scorecards in the Downloads section of this page.

Tax function responsibilities and organisation

Unilever’s Tax team is part of the Finance function which reports to the Group Chief Financial Officer. Our Executive Vice President Global Tax leads a team of approximately 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 the Tax team work with Unilever’s 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 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 in which we operate 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 direct tax exposures and provisions. The tool is used to collect details of all exposures and provisions on a quarterly basis with an approval process for any new provisions or changes to existing provisions, and also includes an Annual Compliance Checklist. In 2015, we also introduced a tax compliance tracking tool to centrally monitor the filing of all corporate income tax returns and related tax payments.

Tax Risk Framework

The Tax Risk Framework (PDF | 111KB) sets out the key tax risks and the mitigating actions that Unilever takes to manage and monitor those risks. There are 5 key risk areas covered by the tax risk framework – policy, governance & organisation, people, compliance & documentation, reporting & risk management.

Tax in the 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 2015, we made global tax payments of €8 billion (our Total Tax Contribution). This comprised €3.8 billion of taxes paid by Unilever, and €4.2 billion of taxes collected from employees and customers on behalf of governments. The chart below shows a breakdown of the taxes paid.

Total taxes paid by type

  1. Corporate tax paid (54%)
  2. Sales taxes (7%)
  3. Customs duties (7%)
  4. Employment taxes (19%)
  5. Other taxes (13%)

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. Approximately 60% 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 2015 was 28%. This is our worldwide corporate tax charge in the Unilever Annual Report and Accounts of €1,961 million, shown as a percentage of the worldwide Group profit before tax.

Note 6A (p106 of the 2015 Annual Report and Accounts) to the Group consolidated financial statements provides a tax reconciliation on a Group basis which provides an explanation as to why for 2015 the effective tax rate of 28% differs from the expected tax rate of 24% (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.

The main reasons why the effective tax rate in the 2015 financial statements of 28% is higher than the expected tax rate of 24% include:

  • An aggregate increase in the tax rate of 9% 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 (2%)
    • withholding taxes on other cross border payments such as royalties and service fees, which cannot be offset against any other taxes due (2%)
    • a net increase in the amount provided for uncertain tax provisions (2%)
    • adjustments related to deferred tax that cannot be recognised in the balance sheet due to uncertainty (1%)
  • An aggregate decrease in the tax rate of 5% from preferential tax regimes that have been legislated by the countries and provinces concerned in order to promote economic development and investment

The chart below shows the corporate tax paid (€2,021 million) by Unilever by region and by the top three largest countries within these regions.

Corporate tax paid by region

  1. Total Americas (29%)
  2. Total Asia/Africa (50%)
  3. Total Europe (21%)
  1. Brazil (8.7%)
  2. Argentina (6.7%)
  3. USA (3.6%)
  4. Other Americas (10%)
  5. India (18.9%)
  6. Indonesia (8.5%)
  7. Philippines (4.3%)
  8. Other Asia/Africa (18.5%)
  9. Germany (9.0%)
  10. France (2.8%)
  11. Italy (2.6%)
  12. Other Europe (6.4%)
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