| 13. | Income Taxes |
As explained previously in these consolidated financial statements, the Company is a Mexican corporation which has numerous consolidated subsidiaries operating in different countries. Presented below is a discussion of income tax matters that relates to the Company’s consolidated operations, its Mexican operations and significant foreign operations.
| i) | Consolidated income tax matters |
The composition of income tax expense for the years ended December 31, 2015, 2016 and 2017 is as follows:
| 2015 | 2016 | 2017 | ||||||||||
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In Mexico: |
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Current year income tax |
Ps. | 17,156,638 | Ps. | 14,316,005 | Ps. | 16,568,274 | ||||||
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Deferred income tax |
(4,095,128 | ) | (12,086,232 | ) | 2,582,287 | |||||||
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Foreign: |
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Current year income tax |
17,775,360 | 15,367,903 | 13,524,729 | |||||||||
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Deferred income tax |
(11,657,219 | ) | (6,198,820 | ) | (7,733,779 | ) | ||||||
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| Ps. | 19,179,651 | Ps. | 11,398,856 | Ps. | 24,941,511 | |||||||
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Deferred tax related to items recognized in OCI during the year:
| 2015 | 2016 | 2017 | ||||||||||
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Remeasurement of defined benefit plans |
Ps. | 7,786,292 | Ps. | (7,734,732 | ) | Ps. | 3,032,403 | |||||
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Effect of financial instruments acquired for hedging purposes |
(16,069 | ) | (21,046 | ) | (5,337 | ) | ||||||
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Available for sale securities |
169,529 | 2,858,452 | (266,753 | ) | ||||||||
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Other |
(4,019 | ) | 136,879 | — | ||||||||
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Deferred tax benefit (expense) recognized in OCI |
Ps. | 7,935,733 | Ps. | (4,760,447 | ) | Ps. | 2,760,313 | |||||
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A reconciliation of the statutory income tax rate in Mexico to the consolidated effective income tax rate recognized by the Company is as follows:
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
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Statutory income tax rate in Mexico |
30.0% | 30.0% | 30.0% | |||||||||
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Impact of non-deductible and non-taxable items: |
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Tax inflation effects |
6.2% | 15.9% | 17.8% | |||||||||
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Derivatives |
0.5% | 8.0% | 1.0% | |||||||||
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Employee benefits |
1.7% | 4.4% | 2.2% | |||||||||
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Other |
(0.1% | ) | 9.8% | 2.6% | ||||||||
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Effective tax rate on Mexican operations |
38.3% | 68.1% | 53.6% | |||||||||
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Use of tax credits in Brazil |
0.4% | (0.6% | ) | (0.4% | ) | |||||||
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Equity interest in net loss (income) of associated companies |
0.8% | (0.2% | ) | — | ||||||||
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Gain on derecognition of equity method investment |
(6.4% | ) | — | — | ||||||||
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Dividends received from associates |
(0.9% | ) | (7.9% | ) | (1.2% | ) | ||||||
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Foreign subsidiaries and other non-deductible items, net |
2.0% | (10.8% | ) | (8.3% | ) | |||||||
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Effective tax rate |
34.2% | 48.6% | 43.7% | |||||||||
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An analysis of temporary differences giving rise to the net deferred tax liability is as follows:
| Consolidated statement of financial position | Consolidated statement of comprehensive income | |||||||||||||||||||
| 2016 | 2017 | 2015 | 2016 | 2017 | ||||||||||||||||
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Provisions |
Ps. | 25,850,131 | Ps. | 26,268,666 | Ps. | (126,330 | ) | Ps. | 1,622,132 | Ps. | 1,579,604 | |||||||||
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Deferred revenues |
8,222,412 | 7,461,802 | 1,065,242 | (12,128 | ) | (965,010 | ) | |||||||||||||
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Tax losses carry forward |
38,208,079 | 38,332,408 | (1,222,172 | ) | 12,706,245 | (323,506 | ) | |||||||||||||
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Property, plant and equipment |
(9,716,615 | ) | (9,929,129 | ) | 7,110,085 | 2,445,783 | 1,974,753 | |||||||||||||
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Inventories |
1,522,739 | 2,003,049 | (1,527,453 | ) | (229,571 | ) | 519,046 | |||||||||||||
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Licenses and rights of use |
(2,530,747 | ) | (2,455,877 | ) | 2,548,353 | 54,182 | 348,201 | |||||||||||||
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Employee benefits |
28,243,207 | 33,253,071 | 2,614,932 | 3,616,952 | 1,225,310 | |||||||||||||||
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Other |
8,790,612 | 9,639,995 | 5,289,690 | (1,918,543 | ) | 793,094 | ||||||||||||||
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Net deferred tax assets |
Ps. | 98,589,818 | Ps. | 104,573,985 | ||||||||||||||||
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Deferred tax expense in net profit for the year |
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Ps. | 15,752,347 | Ps. | 18,285,052 | Ps. | 5,151,492 | |||||||||||||
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Reconciliation of deferred tax assets and liabilities, net:
| 2015 | 2016 | 2017 | ||||||||||
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Opening balance as of January 1, |
Ps. | 52,310,097 | Ps. | 69,817,147 | Ps. | 98,589,818 | ||||||
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Deferred tax benefit |
15,752,347 | 18,285,052 | 5,151,492 | |||||||||
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Effect of translation |
(6,259,252 | ) | 15,273,228 | (1,687,276 | ) | |||||||
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Deferred tax benefit (expense) recognized in OCI |
7,935,732 | (4,760,447 | ) | 2,760,313 | ||||||||
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Deferred taxes acquired in business combinations |
78,223 | (25,162 | ) | (240,362 | ) | |||||||
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Closing balance as of December 31, |
Ps. | 69,817,147 | Ps. | 98,589,818 | Ps. | 104,573,985 | ||||||
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Presented in the consolidated statements of financial position as follows: |
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Deferred income tax assets |
Ps. | 81,407,012 | Ps. | 112,651,699 | Ps. | 116,571,349 | ||||||
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Deferred income tax liabilities |
(11,589,865 | ) | (14,061,881 | ) | (11,997,364 | ) | ||||||
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| Ps. | 69,817,147 | Ps. | 98,589,818 | Ps. | 104,573,985 | |||||||
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The deferred tax assets are in tax jurisdictions in which the Company considers that based on financial projections of its cash flows, results of operations and synergies between subsidiaries, will generate sufficient taxable income in subsequent periods to utilize or realize such assets.
The Company does not recognize a deferred tax liability related to the undistributed earnings of its subsidiaries, because it currently does not expect these earnings to be taxable or to be repatriated in the near future. The Company’s policy has been to distribute the profits when it has paid the corresponding taxes in its home jurisdiction and the tax can be accredited in Mexico.
At December 31, 2016 and 2017, the balance of the contributed capital account (“CUCA”) is Ps. 478,087,224 and Ps. 510,832,194, respectively. On January 1, 2014, the Cuenta de Utilidad Fiscal Neta (“CUFIN”) is computed on an América Móvil’s stand-alone basis. The balance of the América Móvil’s stand-alone basis CUFIN amounted to Ps. 191,795,991 and Ps. 225,105,342 as of December 31, 2016 and 2017, respectively.
Corporate tax rate
The income tax rate applicable in Mexico from 2015 through 2017 was 30%.
| ii) | Significant foreign income tax matters |
a) Results of operations
The foreign subsidiaries determine their taxes on profits based on their individual taxable income, in accordance with the specific tax regimes of each country.
The combined income before taxes and the combined provision for taxes of such subsidiaries in 2015, 2016 and 2017 are as follows:
| 2015 | 2016 | 2017 | ||||||||||
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Combined income before taxes |
Ps. | 27,933,182 | Ps. | 45,697,258 | Ps. | 38,286,046 | ||||||
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Combined tax provision differences not deductible-not cumulative in the foreign subsidiaries |
Ps. | 6,118,142 | Ps. | 9,169,083 | Ps. | 5,790,950 | ||||||
The effective income tax rate for the Company’s foreign jurisdictions was 22% in 2015, 20% in 2016 and 15% in 2017 as shown in the table above. The statutory tax rates in these jurisdictions vary, although many approximate 22% to 40%. The primary difference between the statutory rates and the effective rates in 2015 was attributable to the gain on derecognition of the equity method investment in KPN. The primary difference between the statutory rates and the effective rates in 2016 and 2017 was attributable to dividends received from KPN and other non-deductible items and non-taxable income.
| iii) | Tax losses |
a) At December 31, 2017, the available tax loss carryforwards recorded in deferred tax assets are as follows on a country by country basis:
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Country |
Balance of available tax loss carryforwards at December 31, 2017 |
Tax loss carryforward benefit |
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Brazil |
Ps.78,617,318 | Ps.26,729,887 | ||||||
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Mexico |
1,850,216 | 555,065 | ||||||
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Colombia |
11,221,937 | 4,488,775 | ||||||
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Peru |
421,788 | 124,427 | ||||||
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Austria |
25,733,966 | 6,433,492 | ||||||
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Nicaragua |
2,536 | 762 | ||||||
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Total |
Ps. 117,847,761 | Ps. 38,332,408 | ||||||
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b) The tax loss carryforwards in the different countries in which the Company operates have the following terms and characteristics:
bi) The Company has accumulated Ps. 78,617,318 in net operating loss carryforwards (NOL’s) in Brazil as of December 31, 2017. In Brazil there is no expiration of the NOL’s. However, the NOL´s amount used against taxable income in each year may not exceed 30% of the taxable income for such year. Consequently, in the year in which taxable income is generated, the effective tax rate is 25% rather than the 34% corporate tax rate.
The Company believes that it is more likely than not that the accumulated balances of its net deferred tax assets are recoverable, based on the positive evidence of the Company to generate taxable temporary differences related to the same taxation authority which will result in taxable amounts against which the available tax losses can be utilized before they expire. Positive evidence includes the Company’s recent restructure in 2017 of its operations in Brazil, resulting in an organizational structure that is anticipated to be more efficient and profitable.
bii) The Company has accumulated Ps. 25,733,966 in NOL’s in Austria as of December 31, 2017. In Austria, the NOL´s have no expiration, but its annual usage is limited to 75% of the taxable income of the year. The realization of deferred tax assets is dependent upon the expected generation of future taxable income during the periods in which these temporary differences become deductible.
biii) The Company has accumulated Ps. 11,221,937 in NOL’s in Colombia that in accordance with the Colombian tax law can be carried forward with no time limitation. The Company expects to generate operating tax profits in the following years and realize the deferred tax asset. NOL’s were generated in 2017 by the transaction described in Note 1.II.a)