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INTEGRATED REPORT 2016

Income tax expense

  2016 2015
Current income tax expense 197,124 47,058
Adjustments recognised in the period for current income tax of prior periods (449) 3,986
Deferred income tax expense/(benefit) 132,875 (27,213)
Income tax expense 329,550 23,831

Income before taxation and non-controlling interests for consolidated financial statements purposes is reconciled to income tax as follows:

  2016 2015
Profit before income tax (1,756,696) (207,599)
Theoretical tax charge 272,288 32,178
Corrections of profit tax for prior years (449) 3,986
Tax effect of expenses which are not deductible, net 13,721 1,301
Effect of different tax rates in countries 176 (9,088)
Effect of changes in tax rate 39,452 -
Write-off of deferred tax asset 6,006 -
Other (1,644) (4,546)
Income tax expense 329,550 23,831

In the years ended 31 December 2016 and 2015, most companies of the Group were registered in the Russian Federation, Perm region and were taxed at a rate of 15.5% on taxable profits as at 31 December 2015 and at a rate from 15.5% to 17.0% as at 31 December 2016. However, deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the laws that have been enacted or substantively enacted by the end of the reporting period. In 2015, a new law was adopted by Legislative Assembly of Perm region which determined the income tax rate of 17.0% in 2016 up to 20.0% in 2018 and further. However, for those taxpayers which make significant capital investments and/or donate to charity on the territory of Perm region, the tax rate can be decreased by a certain percentage (which is calculated using the formula stated in the law). The decreased tax rate cannot be lower than 15.5% in 2016 and 16.5% starting from 2017.

The management of the Group performed an analysis using the forecasts of capital expenditure and profits based on which they expect to utilize the tax benefit for some of the entities of the Group registered in Perm region, including the Company.

As at 31 December 2016 the Group had unused tax losses carried forward in the amount of US$ 103,022 (31 December 2015: US$ 137,322). Due to changes in the tax legislation taking effect since January 2017 tax losses may be now carried forward for an indefinite period. The carryforward period used to be limited to 10 years. In 2017-2020 the taxable profit can be reduced by maximum 50% losses of previous tax periods in any fiscal year. The deferred tax asset in the amount of US$ 19,651 (31 December 2015: US$ 23,215) was recognised in relation to these losses as the management believes that taxable profits would be received in the amount sufficient to utilize such losses.

In 2016 and 2015, foreign subsidiaries were taxed applying respective national income tax rates.

The tax effect of the movements in the temporary differences for the year ended 31 December 2016 was the following:

31 December 2015 Recognised in profit or loss Effect of translation to presentation currency 31 December 2016
Tax effects of taxable and deductible temporary differences:    
Property, plant and equipment (104,222) (25,647) (23,704) (153,573)
Intangible assets (374,959) (20,604) (77,742) (473,305)
Inventories 30,487 (27,691) 3,233 6,029
Borrowings (3,869) (1,485) (936) (6,290)
Trade and other receivables (3,581) (10,094) (1,784) (15,459)
Derivative financial instruments 90,762 (57,305) 12,269 45,726
Trade and other payables 590 725 195 1,510
Tax loss carry-forward 23,215 (7,459) 3,895 19,651
Provisions 18,756 10,639 4,899 34,294
Other assets and liabilities 2,410 6,046 1,132 9,588
Total net deferred tax liability (320,411) (132,875) (78,543) (531,829)

The tax effect of the movements in the temporary differences for the year ended 31 December 2015 was the following:

31 December 2014 Recognised in profit or loss Effect of translation to presentation currency 31 December 2015
Tax effects of taxable and deductible temporary differences:    
Property, plant and equipment (107,107) (25,772) 28,657 (104,222)
Intangible assets (493,680) 7,300 111,421 (374,959)
Inventories 4,416 32,350 (6,279) 30,487
Borrowings (3,179) (1,690) 1,000 (3,869)
Trade and other receivables 4,367 (8,284) 336 (3,581)
Derivative financial instruments 86,009 29,135 (24,382) 90,762
Trade and other payables 24,394 (21,786) (2,018) 590
Tax loss carry-forward 28,234 1,706 (6,725) 23,215
Provisions 6,970 15,995 (4,209) 18,756
Other assets and liabilities 4,996 (1,741) (845) 2,410
Total net deferred tax liability (444,580) 27,213 96,956 (320,411)

Deferred tax balances presented in the consolidated statement of financial position were as follows:

31 December 2016 31 December 2015
Deferred tax asset 47,408 56,721
Deferred tax liability (579,237) (377,132)
Deferred tax liability, net (531,829) (320,411)

The Group has not recognised a deferred income tax liability in respect of taxable temporary differences associated with investments in subsidiaries in the amount of US$ 200,565 (31 December 2015: US$ 199,444). The Group controls the timing of the reversal of these temporary differences and does not expect their reversal in the foreseeable future.

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