11.Taxes

The breakdown of tax expenses by type is shown in the table below:

The deferred tax assets and liabilities were allocated to the items in the statement of financial position as shown in the table below:

In connection with the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V. successfully completed on April 1, 2021, deferred tax liabilities totaling €146 million and deferred tax assets totaling €21 million were recognized as an addition to the purchase price allocation taken directly to equity. These deferred taxes were mainly included in intangible assets.

Of the total tax loss carryforwards of €482 million (previous year: €277 million), an amount of €353 million (previous year: €277 million) is expected to be usable within a foreseeable period. The increase in loss carryforwards was mainly due to the initial consolidation of a company with existing loss carryforwards, the increase in loss carryforwards in the reporting year, and tax reassessments for prior years. Deferred tax assets of €52 million (previous year: €41 million) were recognized for the amount of loss carryforwards expected to be usable.

The use of €129 million (previous year: €0 million) of existing tax loss carryforwards was subject to legal or economic restrictions.

In the reporting year, tax credits of €2 million were recognized.

In fiscal 2021, subsidiaries that reported losses for the reporting year or the previous year recognized net deferred tax assets totaling €506 million (previous year: €719 million) from temporary differences and tax loss carryforwards. Of this amount, €27 million (previous year: €39 million) was attributable to net deferred tax assets from tax loss carryforwards. The net deferred tax assets are mainly attributable to the domestic tax group of Covestro AG. The losses are due in particular to non-recurring declines in sales and earnings in connection with the coronavirus pandemic in fiscal 2020. All of the deferred tax assets were considered to be unimpaired because the companies concerned were expected to generate taxable income and tax strategies ensure that the deferred tax assets will be utilized. Both the temporary differences and the loss carryforwards can be carried forward and used indefinitely. The planning anticipates stable, positive business performance in future business cycles.

Deferred tax liabilities of €13 million (previous year: €8 million) were recognized in the reporting year for planned dividend payments by subsidiaries. No deferred tax liabilities were recognized for temporary differences of €128 million (previous year: €88 million) relating to shares in subsidiaries, as the parent company can control the timing of the reversal of the temporary differences, and it is unlikely that these temporary differences will reverse in the foreseeable future.

The reported tax expense of €566 million (previous year: €151 million) for fiscal 2021 was €59 million higher (previous year: €25 million) than the expected tax expense of €507 million (previous year: €126 million) that would have resulted from applying an expected weighted average tax rate to the pre-tax income of the Covestro Group. This average tax rate was derived from the expected tax rates of the individual Group companies and amounted to 23.2% in fiscal 2021 (previous year: 20.8%). The effective tax rate was 25.9% (previous year: 25.0%).

The Covestro Group operates in various countries. The tax rates range from 14.1% to 34.3% (previous year: 13.9% to 34.0%) due to national regulations.

The reconciliation of expected to actual income tax expense and of the expected to the effective tax rate for the Covestro Group is shown in the following table: