Note 14: Taxes

NOK in millions 2005 2004
Profit before taxes and minority interests
Norway 6 704 9 404
Outside Norway 1) 5 887 470
Total profit before taxes and minority interests 12 591 9 874
     
Current taxes 2)
Norway 445 4
Outside Norway 1 587 1 128
Total current taxes 2 032 1 132
     
Deferred taxes
Norway 977 1 421
Outside Norway 444 (92)
Total deferred taxes 1 421 1 329
     
Total income tax expense 3 453 2 461
1) Includes associated companies and subsidiaries outside Norway. Gains and losses from disposal of companies are related to the countries in which the disposed companies were located. The gains and losses were, however, to a large extent liable to tax in Norway. In 2004 new tax regulations were introduced in Norway related to gains and losses on realization of shareholdings, as explained below.
2) Up to, and including 2005 current taxes were primarily related to mobile companies outside Norway, due to tax losses carried forward in Norway. Current taxes did not include significant adjustments recognized in the periods for current tax of prior periods. However, in 2005, current taxes in Norway included the payment of NOK 334 million following the non-recognition of a tax loss derived from the liquidation of a wholly owned subsidiary. This is further discussed below.

Effective tax rate
The table below reconciles the reported income tax expense to the expected income tax expense according to the corporate income tax rate of 28% in Norway. It also shows major components of tax expense (income).

NOK in millions 2005 2004
Expected income taxes according to corporate income tax rate in Norway (28%) 3 525 2 765
Tax rates outside Norway different from 28% (81) (34)
Associated companies (350) (267)
Net loss in subsidiaries outside Norway for which deferred tax assets have not been established 618 181
Previously not recognized deferred tax assets in business combinations (162) (30)
Non-taxable income (128) (102)
Non-deductible expenses 265 195
Write-downs of goodwill that are not tax deductible 12 842
Other deferred tax assets not recognized previously (18) (461)
Non-taxable gain on sale of shares (30) (152)
Changes in tax law – previously recognized tax assets not realized - 257
Deferred taxes on retained earnings in subsidiaries and associated companies 292 (375)
Other tax assets not recognized current year 16 39
Previously recognized tax assets – not realized or written-down (valuation allowance) current year 6 27
Conversion of inter-company debt (249) -
Liquidation of Dansk Mobil Holding AS 438 (438)
Sale of Telenor Business Solutions AS (701) -
Other - 14
Income tax expense (income) 3 453 2 461
Effective tax rate in % 27.4 24.9

In December 2004, the Norwegian Parliament enacted new tax rules. The major change for corporations was the introduction of the “Exemption Method”. According to this new legislation, capital gains deriving from the sale of shares and dividends received from subsidiaries will be tax exempt. However, any loss deriving from the sale or other disposal of shares will no longer be tax deductible. The new rules in respect of dividends received became effective as of 1 January 2004, while the capital gains rules regarding non deducibility of capital losses came into effect as of 26 March 2004.

Comments on selected line items in the preceding table
Tax rates outside Norway different from 28%
The net effects of different tax rates for subsidiaries outside Norway were small for 2005 and 2004. However, this was influenced by tax rates that are both higher and lower than the Norwegian 28% tax rate. The most significant effects were that Pannon GSM Rt. (Hungary) and Kyivstar GSM JSC (Ukraine) had tax rates lower than 28% and GrameenPhone Ltd. (Bangladesh) and Telenor Pakistan had higher tax rates. For 2005, it also included an effect of changes in tax rates in Denmark and for ProMonte.

Associated companies
Results from associated companies are reflected after tax and therefore do not impact the Group level taxes. Tax on undistributed earnings, if any, is included in a separate line item (deferred taxes on retained earnings in subsidiaries and associated companies). Gains or losses on sale or liquidation of Telenor’s ownership shares have been taxable in previous years. As a consequence of the new tax rules in Norway in 2004, gains or losses on sale or liquidation of shares will no longer have a tax effect in Norway, but may be subject to tax or give rise to tax loss abroad.

Net loss in subsidiaries outside Norway for which deferred tax assets have not been established
Deferred tax asset are not recognized for deductible temporary differences, primarily carry forward of unused tax losses in subsidiaries outside Norway. This because we cannot demonstrate probable taxable profits that will be available against such deductible temporary differences. In 2004 and 2005 this issue was primarily related to activities in Sweden and Pakistan, except for Mobile Sweden, a branch operation that is taxable both to Norway and Sweden.

Previously not recognized tax assets in business combinations
In 2004 and 2005 Telenor realized taxable income and recorded deferred tax assets previously not recognized in business combinations for Canal Digital Group and Utfors AB (only 2004). The tax assets did not previously satisfy the criteria for separate recognition, but parts were recognized in 2004 and 2005. The corresponding tax income was recognized in the income statement. As a result, the carrying amount of goodwill was reduced to the amount that would have been recognized if the deferred tax asset had been recorded at the acquisition date. In 2005, previously not recognized tax assets on Canal Digital Sweden and Denmark were recorded in excess of the related write-downs of goodwill.

Non-taxable income and non-deductible expenses
The large amounts related primarily to mobile companies outside Norway, especially GrameenPhone in Bangladesh and Kyivstar in the Ukraine.

Write-downs of goodwill that are not tax deductible
Write-downs of goodwill deriving from purchase of shares are generally not tax deductible. In 2004 this primarily related to write-down of goodwill on Sonofon. For 2005 and 2004, goodwill of NOK 75 million and NOK 50 million, respectively was expensed due to recognition of tax assets previously not recognized in business combinations, see above.

Other deferred tax assets not recognized previously
This line primarily relates to losses on subsidiaries and associated companies on which deferred tax assets had not been previously recognized, as well as adjustments to the taxable basis of shares. These deferred tax assets were recognized when the sale or liquidation of shares or loans allowed for the realization of tax losses on these shareholdings or loans, or when Telenor can demonstrate probable taxable profits that will be available against such deductible temporary differences.

In 2004, Telenor realized a taxable capital gain on the sale of shares in Cosmote SA. According to the transition rules to the “Exemption Method”, this gain was offset by tax losses deriving from sale or liquidation of shares in the period 26 March 2004 to 31 December 2004. This also included a tax loss following from to the liquidation of Dansk Mobil Holding AS, which is shown on a separate line in the table and discussed below.

Non-taxable gain on sale of shares
In 2004, the Norwegian Parliament enacted the Exemption Method, see above.

Changes in tax laws in Norway – previously recognized tax assets not realized
Following the introduction of the Exemption Method, Telenor reversed some previously recognized deferred tax assets in 2004. These were primarily related to the future liquidation of dormant subsidiaries of EDB Business Partner ASA, which had not been formally decided by the appropriate corporate body prior to 26 March 2004.

Deferred taxes on retained earnings in subsidiaries and associated companies
Telenor has recognized deferred tax liability (primarily withholding tax) for undistributed earnings in subsidiaries and associated companies because it is expected that dividends will be distributed in the foreseeable future or, for associated companies, Telenor is not able to control the timing of the distribution of dividends.

Deferred taxes are calculated to the extent dividends will be subject to taxation, either in Norway or as withholding taxes at source. Due to introduction of the Exemption Method and the abolishment of withholding taxes in Hungary for dividends that will be distributed to companies resident within the EEA area subsequent to 1 January 2006, Telenor reversed NOK 639 million of deferred taxes on undistributed earnings. The major changes were related to future distributions from Pannon GSM.

Conversion of inter-company debt
In 2005, following a conversion of inter-company debt, Telenor ASA recognized a tax loss and correspondingly reduced income tax expense.

Liquidation of Dansk Mobil Holding AS
During the regular tax assessment of Dansk Mobil Holding II AS in the fourth quarter of 2005, the tax authorities challenged the company’s tax return for the fiscal year 2004 by disallowing a tax loss derived from the liquidation of its wholly owned subsidiary, Dansk Mobil Holding AS. The tax authorities disagreed with Telenor’s position, that the loss is tax deductible under the transition rules to the Exemption Method that were enacted in 2004. Telenor has appealed the decision. However, the related tax was expensed in 2005, of which NOK 334 million was current taxes.

Sale of Telenor Business Solutions AS
In 2003, Telenor Eiendom Holding AS realized a tax loss of approximately NOK 2.8 billion in connection with the sale of shares in Telenor Business Solutions AS to Telenor Business Solutions Holding AS. This sale was carried out as part of the overall restructuring of the Telenor Group. Due to the challenge of Telenor’s tax return regarding the tax loss in connection with the sale of shares in Sonofon in 2001, as discussed below, Telenor did not reflect the tax benefit derived from loss on the sale in the financial statements for 2003. In March 2006, the tax authorities accepted a tax deduction of approximately NOK 2.5 billion. Consequently, Telenor recorded a tax benefit and deferred tax asset in 2005.

Other uncertain tax positions not recognized
In 2002, the tax assessment authorities in Norway disallowed the tax loss from the disposal of the shares in Sonofon Holding A/S claimed by Telenor Communication AS (now Telenor Eiendom Holding AS) for the fiscal year 2001. As a result of this change, the current tax expense for 2001 was increased by NOK 2.4 billion, which was recorded in 2002. Telenor originally recognized this tax loss due to the disposal of shares in Sonofon Holding A/S to Dansk Mobil Holding AS, a sister company of Telenor Eiendom Holding AS. The disposal was carried out as an integral part of the overall restructuring of the Group. In January 2003, Telenor initiated proceedings against the Norwegian Tax Authorities, before Oslo District Court (“Oslo Tingrett”) see note 26. In June 2004, Oslo District Court ruled in favour of Telenor. The Tax Authorities appealed this decision. On 21 December 2005 a Norwegian Court of Appeal (Borgarting Lagmannsrett) ruled in favour of Telenor in respect of this proceeding. The tax appealed the decision, to the Norwegian Supreme Court, and Telenor has consequently not taken the tax reduction to income.

In connection with Telenor B-Invest AS’s calculation of the gain on sale of shares in Cosmote SA in 2003 and 2004, a RISK adjustment of the tax base values of the shares with NOK 184 million and NOK 386 million respectively was claimed by Telenor based on the EEA Agreement. Such RISK adjustments would reduce the taxable gain on sale of shares in Cosmote SA. On 23 November 2004 the EEA-court ruled in favor of a Finnish tax payer (the “Manninin case”) in a case that Telenor believes is similar to its RISK adjustment case. However, the Norwegian Ministry of Finance has stated that they are of the opinion that the EEA-court ruling should only have effect from the time of the ruling. This statement has been challenged by a number of tax payers, including Telenor. It is unclear what the final outcome will be. The Norwegian tax authorities did not accept such RISK adjustment for 2003. Telenor appealed the decision to the “Appeal assessment board” (Overligningsnemnda). At the end of 2005, the Appeal assessment board accepted the RISK adjustment for 2003. The Norwegian tax authorities may until the end of April 2006 bring this decision before the County Assessment Board, that may reach a different conclusion. Telenor has therefore not recorded the potential tax benefit. If Telenor should win the case regarding the liquidation of Dansk Mobil Holding AS, RISK adjustment on the Cosmote SA shares for 2004 will not have any effect under the transition rules to the Exemption Method, as discussed above.

For Canal Digital Denmark, the tax authorities in Denmark has challenged the tax assessment for 2004 and did not recognize a transaction where the previous tax losses were realized and a corresponding increased depreciable tax base in assets were established. The tax authorities disagreed with the valuation of the assets in this transaction. Consequently, the tax authorities have disallowed the step up in depreciable tax basis and also claim that the previous tax losses have expired and cannot be brought forward.

Tax losses carried forward
Tax losses carried forward in selected countries expire as follows:

NOK in millions Norway Sweden Other Nordic Pakistan Other Total
2006 - - 208 - 102 310
2007 - - 16 - 45 61
2008 - - 26 - 17 43
2009 - - 28 - 21 49
2010 - - 47 30 7 84
2011 and later - - 94 577 135 806
Not time-limited 3 393 3 326 227 1 337 - 8 283
Total tax losses carried forward 3 393 3 326 646 1 944 327 9 636
Of which not recognized as deferred tax assets (Valuation allowance) 231 3 104 636 926 324 5 221
Tax losses on which deferred tax asset has been recognized 3 162 222 10 1 018 3 4 415

The tax effect of tax losses in the Telenor tax Group in Norway (Telenor ASA and subsidiaries owned 90% or more) are recognized as tax assets because it is probable that these tax losses will be utilized in the future. Significant tax losses have been realized in Norway due to a step up in the tax base of shares in 2000 and subsequent sales or liquidation of companies. Due to the introduction of the Exemption Method, this will not impact future realization of shares. At the same time the Telenor tax Group in Norway have produced significant taxable profits from its other operations. This evidences that it is probable that sufficient taxable profits will be available to utilize all the tax losses carried forward. Other tax losses recognized as deferred tax assets are where the relevant company has other taxable temporary differences that give rise to deferred tax liabilities.

Deferred tax asset are not recognized for carry forward of unused tax losses when Telenor cannot demonstrate that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Deferred taxes as of 31 December
NOK in millions Assets 2005 Liabilities 2005 Of which
assets no
recognized
(valuation
allowance) 2005		 Assets 2004 Liabilities 2004 Of which
assets not
recognized
(valuation
allowance) 2004
Tangible and intangible assets 4 405 (4 718) (698) 2 464 (2 866) (216)
Associated companies - - - - - -
Undistributed earnings in foreign
subsidiaries and associated companies - (606) - - (373) -
Other non-current items 1 637 (1 245) (1) 898 (695) (49)
Total non-current assets and liabilities 6 042 (6 569) (699) 3 362 (3 934) (265)
             
Total current assets and liabilities 1 406 (1 078) (47) 330 (55) (12)
             
Tax losses carried forward 2 871 - (1 543) 3 047 - (1 408)
Deferred taxes 10 319 (7 647) (2 289) 6 739 (3 989) (1 685)
Net deferred tax assets 383 - - 1 065 - -
Of which deferred tax assets 3052 - - 3 357 - -
Of which deferred tax liabilities (2 669) - - (2 292) - -

Some deferred tax assets on the foreign subsidiaries of Canal Digital AS were not recognized as of 31 December 2005 and 2004 (valuation allowance). In 2005 and 2004, these companies showed net income and realized parts of the tax losses. However, as of 31 December 2004 no deferred tax assets were recognized related to these companies (a full valuation allowance), due to accumulated losses for previous years, including 2004. As of 31 December 2005, Telenor recorded parts of the deferred tax assets for Canal Digital Sweden due to the development in the company evidencing that it is probable that sufficient taxable profits will be available to utilize parts of the tax losses carried forward. For Canal Digital Denmark, the tax authorities in Denmark has challenged the tax assessment for 2004, as discussed above. Telenor is of the opinion that the values used in the transaction reflected the fair values at the time of the transaction. However, as a consequence of the disallowance, Telenor has not recognized deferred tax assets related to Canal Digital Denmark for 2005, and for 2004 deferred tax assets and tax assets not rcognized are shown in the preceeding table. As of 31 December 2005, approximately NOK 0.7 billion of net recognized deferred tax assets (valuation allowances) came from business combinations where any subsequently recognized tax benefits will be reallocated to reduce goodwill. These were primarily related to the business combinations in Fixed Sweden and Denmark in 2005.

Change in net deferred tax assets (liabilities)
NOK in millions 2005 2004
As of 1 January 1 065 3 626
Recorded to equity 1) 57 (284)
Recorded to profit or loss (1 421) (1 329)
Exchange differences (92) 63
Acquisition of subsidiaries 707 (999)
Disposal of subsidiaries 67 (12)
     
As of 31 December 383 1 065
1) The effect of the implementation of IAS 32 and 39 at 1 January 2005 was NOK (16) million.

At the balance sheet date, Telenor has recognized deferred tax liabilities on undistributed earnings of subsidiaries and associated companies for which a tax charge will occur at the time dividends are distributed. The calculation is based on enacted tax rates and tax rules at the balance sheet dates.

Changes in deferred tax assets not recognized (valuation allowances)
NOK in millions 2005 2004
Balance at the beginning of the year 1 685 6 900
Changes in opening balance (160) (752)
Net losses from associated companies and subsidiaries outside Norway 618 151
Associated companies – changes in tax rules in Norway - (4 605)
Other not recognized tax assets this year 16 71
Acquisitions and disposals 177 (55)
Currency adjustments (47) (25)
Balance at the end of the year 2 289 1 685

The significant change in deferred tax assets not recognized (valuation allowances) during 2004 was related to associated companies, due to the Exemption Method being introduced in Norway, as explained above. This change implied that the deferred tax assets are no longer present because losses on realization of shares are no longer tax deductible in Norway.

Preliminary 2005 RISK adjustment (adjustment of shares’ tax base) for Telenor ASA is calculated to be negative with NOK 1.95 per share, including proposed dividends to be paid in 2006 based on the 2005 financial statements. However, implementation of new tax rules for the shareholders taxation, together with the use of the IFRS accounting principles, has made it somewhat uncertain whether the RISK adjustment should take into consideration the proposed dividends.

To the top   |   Print page