Income taxes
28. Income taxes
adidas AG and its German subsidiaries are subject to corporate and trade taxes. In general, a corporate tax rate of 25% plus a surcharge of 5.5% thereon is applied to earnings.
The municipal trade tax is approximately 15% of taxable income, which is deductible in the determination of income for corporation tax purposes.
For non-German companies, deferred taxes are calculated based on tax rates that have been enacted or substantively enacted by the closing date.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are offset if they relate to the same fiscal authority. The following deferred tax assets and liabilities, determined after appropriate offsetting, are presented on the balance sheet:
Deferred Tax Assets/Liabilities € in millions
Dec. 31 2006
Dec. 31 2005
Deferred tax assets
Deferred tax liabilities
Deferred tax assets, net
The movements of deferred taxes are as follows:
Movement of Deferred Taxes € in millions
Deferred tax assets, net as at January 1 1 153
89 Deferred tax (expense)/income (14) 2 76
Change in consolidated companies (347) (13)
Change in deferred taxes attributable to effective portion of qualifying hedging instruments recorded in equity [see Note 24]
Currency translation differences
Change in deferred taxes attributable to actuarial gains and losses recorded in equity [see Note 19]
Deferred tax assets, net as at December 31
1 Includes deferred tax income of €2 million relating to discontinued operations for the year ending December 31, 2005
2 Relates to the acquisition of Reebok International Ltd. (USA) and its subsidiaries for the year ending December 31, 2006 [see Note 5] and to the divestiture of the Solomon business segment for the year ending December 31, 2006
[see Note 5] and to the divestiture of the Solomon business segment for the year ending December 31, 2005.
Chapter 9 / Income Taxes (IAS 12)
Deferred tax assets and liabilities of the Group on a gross basis before valuation allowances and before appropriate offsetting are attributable to the item detailed in the table below:
Deferred Taxes € in millions
Dec. 31 2006
Dec. 31 2005
Noncurrent assets
Current assets
Accrued liabilities and provisions
Accumulated tax loss carryforwards
467 255 Valuation allowances
Deferred tax assets
Noncurrent assets
Current assets
Untaxed reserves
Accrued liabilities and provisions
Deferred tax liabilities
Deferred tax assets, net
As a result of the acquisition of Reebok International Ltd. (USA) and its subsidiaries that was accounted for under the purchase method (see note 5) deferred tax liabilities were recorded representing the difference between the book value and the tax basis of acquired assets.
The actual existing and unused accumulated tax loss carry forwards of the group amounted to € 156 million and €47 million for the years ending December 31, 2006 and 2005, respectively. The increase of €109 million results for the most part from the acquisition of Reebok and mainly relates to the effects of the acquisition on Reebok’s US tax position.
Deferred tax assets are recognized only to the extent that the realization of the related benefit is probable. Based on the past performance and the prospects of the respective business for the foreseeable future, valuation allowances are established where this criterion is not met.
Valuation allowances, which refer to deferred tax assets of companies whose realization of the related tax benefits is not probable increased by € 46 million from December 31, 2005 to Decem- ber 31, 2006. This increase mainly relates to unused foreign tax credits of Reebok International Ltd. (USA), which expire in a relatively short period and cannot be carried forward indefinitely. These amounts were mainly part of the opening balance of Reebok International Ltd. (USA) as at Jan- uary 31, 2006. Remaining valuation allowances relate to deferred tax assets of companies operating in certain emerging markets, since the realization of the related benefit is not considered probable.
The group does not recognize deferred tax liabilities for unremitted earnings of non-German subsidiaries to the extent that they are expected to be permanently invested in international operations. These earnings, the amount of which cannot be practicably computed, could become subject to additional tax if they were remitted as dividends or if the group were to sell its shareholdings in the subsidiaries.