26. Income tax expense

Corporate income tax is recognized as current tax and deferred tax. The current income tax is recognized in the income statement. Deferred income tax, depending on the source of temporary differences, is recorded in the income statement or in other comprehensive income.

Current income tax is calculated on the basis of gross accounting profit adjusted by non-taxable income, taxable income that does not constitute accounting income, non-tax deductible expenses and tax-deductible costs which are not accounting costs, in accordance with the tax regulations. These items mainly include income and expenses relating to accrued interest receivable and payable, allowances for expected credit losses and provisions for off-balance financial liabilities granted.

Group Companies are Corporate Income Tax payers. The value of the Companies’ current tax liability is transferred to offices of the tax administration authorities with jurisdiction over the Companies’ location.

Corporate income tax liabilities of individual Group companies for 2020 will be paid in accordance with the schedules stipulated by the relevant tax regulations.

Pursuant to the principles governing the statute of limitations for tax liabilities, the correctness of income tax settlements may be audited within five years of the end of the year in which the deadline for the submission of the respective tax returns passed.

Deferred tax is recognized in the amount of the difference between the tax value of the assets and liabilities and their carrying amounts for the purpose of financial reporting. The Group records deferred tax provisions and assets, which are recognized in the statement of financial position. Changes in the balance of deferred tax provisions and assets are recognized in mandatory charges to profit, with the exception of the effects of the measurement of financial assets measured at fair value through other comprehensive income, hedging instruments which are recognized in other comprehensive income, where changes in the balance of deferred tax provisions and assets are recognized in other comprehensive income. In determining deferred income tax, the deferred tax assets and provisions as at the beginning and as at the end of the reporting period are taken into account.

The carrying amounts of deferred tax assets are verified at each balance sheet date and decreased adequately if it is no longer likely that taxable income sufficient to realize a deferred tax asset in part or in full will be earned.

Deferred tax assets and provisions are valued using the tax rates which are expected to be in force in the period in which the asset will crystallize or the provision will be utilized, based on the tax rates (and tax regulations) binding as at the balance sheet date or tax rates and tax regulations that as at the balance sheet date are believed to be binding in the future.

For deferred income tax calculation the Group uses the 19% tax rate for entities operating in the territory of Poland, the 18% tax rate for entities operating in Ukraine and the 21.4% tax rate for entities operating in Sweden.

Deferred tax assets are offset by the Group against deferred tax provisions only when it has an enforceable legal title to offset current income tax receivables against current income tax liabilities and deferred income tax is related to the same taxpayer and the same tax authority.

Based on the contract dated 5 November 2018 PKO Bank Polski S.A.,  jointly with its two subsidiaries: PKO Bank Hipoteczny S.A. and PKO Leasing S.A., created the Podatkowa Grupa Kapitałowa Powszechnej Kasy Oszczędności Banku Polskiego Spółki Akcyjnej Tax Group (“PGK PKO Banku Polskiego S.A.”). The respective contract was registered by the Head of the Second Masovian Tax Office in Warsaw.

A tax group is an institution of the tax law stipulated in the provisions of the Corporate Income Tax Act. Its creation means that the income of the Tax Group companies will be consolidated for corporate income tax purposes and that solutions will be available facilitating the application of other, in particular operational, regulations of the Corporate Income Tax Act, dedicated specifically to Tax Groups.

PKO Bank Polski S.A. is the parent of PGK PKO Banku Polskiego S.A.. PGK PKO Banku Polskiego S.A. was established for three tax years. The first tax year began on 1 January 2019.

The Management Board declares that, in the area of taxation, it acts in a responsible manner, understood as fulfilling its social responsibility for the timely payment of taxes at amounts commensurate with the scope and effects of the activities conducted. When fulfilling its tax obligations, the Bank takes into account the current provisions of the national tax law, the European standards and international agreements (the Bank complies with the tax laws in all countries where it conducts its business activities).

The tax law is applied taking into account interpretations of the tax offices and guidelines of the tax authorities. In order to responsibly fulfil its tax obligations, the Bank has a number of internal procedures in place, and dedicated organizational units (including the Tax Department) responsible for meeting tax obligations.

The Tax Department operates within the Finance and Accounting Area, and its main purposes (in accordance with the Bank’s internal regulations) are to ensure that the Bank’s tax obligations as a taxpayer are fulfilled in a timely and fair manner and to ensure the balanced tax position of the Bank and its Group. In accordance with Article 22a(6)(4)(b) of the Polish Banking Law, within the Management Board, oversight of the Finance and Accounting Area was assigned to the Vice-President of the Management Board, Rafał Kozłowski in the Banks Organizational By-laws. In accordance with the Bank’s Articles of Association, Members of the Management Board exercise oversight over the operating areas assigned to them and decide on affairs falling within the scope of ordinary management of the operating areas that are supervised by them. Moreover, the Bank has a management system which comprises a set of principles and mechanisms related to the decision-making processes taking place in the Bank, as well as to an assessment of the activities conducted by the Bank.  As part of this management system, there is a risk management system, in particular, functioning within the Bank. The Management Board of the Bank designs, implements and ensures the functioning of the management system. The operating principles of the management system, including the risk management system and internal controls system, are set out in the Bank’s internal regulations.

The Management Board declares that the Bank’s approach to taxes is transparent. The Bank maintains continuous relations with the national tax authorities based on transparency and mutual trust, within the framework of the applicable tax law. Any contacts with the Tax authorities are undertaken by the Bank in a professional, courteous and timely manner. Irrespective of the above, the Bank makes every effort to regularly present clear and transparent (public and internal) communication on its approach to specific aspects of tax settlements, within the deadlines and the scope required by the commonly applicable law.

In connection with the business activities conducted and in accordance with the applicable provisions of the tax law, the Management Board declares that the Bank is obliged to pay not only corporate income tax, but other taxes as well, such as, among others, the tax on goods and services (VAT), real estate tax, tax on certain financial institutions. As a taxpayer, the Bank is also collecting and remitting personal income tax on amounts paid to employees, customers and suppliers. With regard to income received by foreign customers and suppliers, the Bank is collecting and remitting withholding tax to national tax authorities.

The Management Board declares that the Bank is consistently avoiding any activities which would require using aggressive tax planning structures or avoiding taxes (including the use of tax havens) and is avoiding any solutions which are clearly in contravention with the legislator’s intentions or the spirit of the law (the principle of tax honesty).

The undertakings listed above also apply to tax settlements made in each country in which the Bank conducts its business activities.

Corporate income tax paid on the income earned by the PKO Bank Polski S.A. Group in 2020 by country of operations:

Tax systems of countries in which the Bank and entities in the PKO Bank Polski S.A. Group have their registered offices or branches are often subject to amendments to laws, among other things as a result of operations aimed at tightening the tax system, both at national and international level.

In addition, understanding the regulations of the tax law, due to their ambiguity, may in practice lead to inconsistent interpretations by the tax authorities, differing from the interpretation by the taxpayer, and respective disputes may only be resolved by national or European courts. Therefore, interpretations of the tax law by the tax authorities differing from the practices implemented by the Bank or entities of the PKO Bank Polski S.A. Group cannot be eliminated and may have a significant unfavourable impact on their operations and financial condition, despite the various actions aimed at mitigating this risk, which are regularly undertaken and allowed by law.

Due to the doubts relating to taxation of foreign exchange differences on loans granted to the Bank and issue commitments in the territory of Sweden, PKO Finance AB, whose reporting currency is the EUR, applied to the Swedish Council for Tax Rulings (Skatterättsnämnden) for an individual ruling. PKO Finance AB lends funds to the Bank obtained from bonds issued and at the same time recognizes receivables from the loans and liabilities relating to the issue.

Changes in foreign exchange rates have a symmetrical impact on the valuation of such receivables and liabilities, because foreign exchange differences on the valuation of loans granted are matched with the opposite foreign exchange differences on the valuation of liabilities in respect of the bonds issued.

According to the ruling obtained on 14 March 2019, a company for which EUR is the reporting currency should tax the EUR/SEK exchange differences on the loans granted as at the maturity date, and at the same time it is not possible to recognize at the maturity date a tax cost related to foreign exchange differences on the Company’s liabilities in respect of the bond issue. If the Council’s ruling is upheld by the Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen), it would mean that a different approach is applied in Sweden to companies reporting in EUR compared with companies reporting in SEK (which can also include foreign exchange differences on liabilities in their tax settlements), and this would increase the economic risk and hamper effective hedging of the currency risk. In the opinion of the Group, such an approach would be contrary to Art. 63 of the Treaty on the Functioning of the European Union (TFEU) related to the need to ensure free flow of capital in the EU or Art. 49 and 54 of TFEU related to the freedom of business activities. On 3 April 2019, the company appealed to the Swedish Supreme Administrative Court against the Council’s ruling and on 1 July submitted extended arguments to dismiss the case. In its opinion of 23 August 2019, the Swedish Tax Office (Skatteverket) took a negative stance on the company’s appeal. The Company sustained its position in the response to the opinion submitted to the Swedish Supreme Administrative Court on 25 September 2019. In addition, on 10 October 2019, the Company submitted complementary documents to its appeal, in which it emphasized, among other things, the importance of the resolution for companies operating in the territory of Sweden and reporting in euro.

On 5 May 2020, the Swedish Supreme Administrative Court dismissed, for formal reasons, an appeal by PKO Finance AB, resulting in the interpretation of 14 March 2019 becoming expired. On 13 May 2020, PKO Finance AB received two decisions of the Swedish tax office which confirmed the correctness of the Company’s tax settlements for 2015 and 2016. In these decisions, PKO Finance AB adopted a symmetrical settlement of foreign exchange differences on loans granted and due, and on liabilities in respect of eurobond issues. The decisions are favourable for the Group, but inconsistent with the line of interpretations previously issued by the tax office.

In accordance with IFRIC 23 “Uncertainty over Income Tax Treatments” entering into force, the Group made a judgment regarding the uncertain treatment of taxable income earned in the territory of Sweden in respect of foreign exchange differences on loans and liabilities relating to the bond issue. The Group reflected the effect of uncertainty by using the “most probable amount” method.

As at 31 December 2020, the deferred income tax provision amounted to PLN 279 million (PLN 274 million as at 31 December 2019). The Group is analysing the impact of the decisions of the Swedish tax office on the taxation of foreign exchange differences of PKO Finance AB, which may lead to changing the related judgment in the next reporting periods.