HSBC 2011 Annual Report Download - page 333

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Tax reconciliation
The tax charged to the income statement differs to the tax charge that would apply if all profits had been taxed at the
UK corporation tax rate as follows:
2011 2010 2009
US$m % US$m % US$m %
Profit before tax................................................................ 21,872 19,037 7,079
Tax at 26.5% (2010: 28%; 2009: 28%) ........................... 5,796 26.5 5,330 28.0 1,982 28.0
Impact of differently taxed overseas profits .................... (492) (2.2) (744) (3.9) (1,345) (19.0)
Adjustments in respect of prior period liabilities ............ 495 2.3 – – (39) (0.6)
Deferred tax temporary differences not recognised/
(previously not recognised) ......................................... (923) (4.2) (6) – 360 5.1
Effect of profits in associates and joint ventures ............ (865) (4.0) (758) (4.0) (499) (7.1)
Tax impact of intra-group transfer of subsidiary ............ – – 1,216 6.4 – –
Non taxable income and gains ......................................... (613) (2.8) (700) (3.7) (603) (8.6)
Permanent disallowables ................................................. 467 2.1 355 1.9 223 3.2
Change in tax rates .......................................................... (3) – 31 0.2 (10) (0.1)
Local taxes and overseas withholding taxes ........................ 267 1.2 224 1.2 353 4.9
Other items (including low income housing tax credits) (201) (0.9) (102) (0.6) (37) (0.4)
Total tax charged to the income statement ...................... 3,928 18.0 4,846 25.5 385 5.4
The effective tax rate for the year was 18.0% compared with 25.5% for 2010. Although the reported profit before tax
was higher in 2011, the tax charge for the year was US$0.9bn lower than in 2010. The tax charge in 2011 included
the benefit of deferred tax of US$0.9bn now eligible to be recognised in respect of foreign tax credits, while the tax
charge in 2010 included US$1.2bn attributable to a gain arising from an internal reorganisation of our North
American operations.
The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 26.5% (2010: 28%; 2009: 28%).
The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2011 will reduce
from 28% to 26% to be followed by further 1% reductions per annum to 23% for the year beginning 1 April 2014.
While the reductions in the corporate tax rate to 25% have already been enacted, the further announced reductions are
expected to be enacted through the 2012 and 2013 Finance Acts. The reduction in the main rate of corporation tax in
2011 results in a weighted average rate of 26.5% (2010: 28%). It is not expected that the proposed future rate
reductions will have a significant effect on the net UK deferred tax liability at 31 December 2011 of US$239m.
The Group’s legal entities are subject to routine review and audit by tax authorities in the territories in which the
Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided
depending on the ultimate resolution of such matters. A substantial proportion of the material open issues relate to the
UK of which the principal matter concerns the application of the UK Controlled Foreign Company (‘CFC’) rules.
Since it moved its holding company to the UK, HSBC has held the shares in its Asian and certain European
subsidiaries under Dutch resident and incorporated holding companies. HSBC considers that the holding companies’
income (principally dividends received from the subsidiaries) should not be subject to UK tax. Her Majesty’s
Revenue and Customs (‘HMRC’) interpret UK CFC and established EU law in a manner which would result in tax
being due for the period 2002-2009. In the event of an adverse outcome from our ongoing discussions with HMRC
on the CFC and other open UK issues the tax payable and financial impact could be as high as US$4.9bn, plus related
interest expense. HSBC continues to discuss these matters with HMRC.
Deferred taxation
The table overleaf shows the gross deferred tax assets and liabilities recognised in the balance sheet and the related
amounts recognised in the income statement, other comprehensive income and directly in equity.
The amounts presented in the balance sheet are different from the amounts disclosed in the table overleaf as they are
presented after offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle
on a net basis.