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12. Taxes

Income taxes

Income before income taxes was attributable to the following geographic regions:

€ in millions 2012 2011
Germany 414 404
International 1,977 1,528
Total 2,391 1,932

€ in millions 2012 2011
Germany 414 404
International 1,977 1,528
Total 2,391 1,932

Income tax expenses (benefits) for 2012 and 2011 consisted of the following:

€ in millions Current taxes Deferred taxes Income taxes
2012      
Germany 82 -17 65
International 599 -5 594
Total 681 -22 659
       
2011      
Germany 96 9 105
International 427 72 499
Total 523 81 604

€ in millions Current taxes Deferred taxes Income taxes
2012      
Germany 82 -17 65
International 599 -5 594
Total 681 -22 659
       
2011      
Germany 96 9 105
International 427 72 499
Total 523 81 604

In 2012 and 2011, Fresenius SE & Co. KGaA was subject to German federal corporation income tax at a base rate of 15% plus a solidarity surcharge of 5.5% on federal corporation taxes payable.

A reconciliation between the expected and actual income tax expense is shown in the following table. The expected corporate income tax expense is computed by applying the German corporation tax rate (including the solidarity surcharge) and the effective trade tax rate on income before income taxes. The respective combined tax rate was 29.5% for the fiscal year 2012 (2011: 29.0%).

€ in millions 2012 2011
Computed “expected” income tax expense 705 560
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 18 12
Tax rate differential 37 56
Tax-free income -64 -12
Taxes for prior years 21 4
Changes in valuation allowances on deferred tax assets -20 5
Noncontrolling interests -38 -22
Other - 1
Income tax 659 604
Effective tax rate 27.6% 31.3%

€ in millions 2012 2011
Computed “expected” income tax expense 705 560
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 18 12
Tax rate differential 37 56
Tax-free income -64 -12
Taxes for prior years 21 4
Changes in valuation allowances on deferred tax assets -20 5
Noncontrolling interests -38 -22
Other - 1
Income tax 659 604
Effective tax rate 27.6% 31.3%

Deferred taxes

The tax effects of the temporary differences that gave rise to deferred tax assets and liabilities at December 31 are presented below:

€ in millions 2012 2011
Deferred tax assets    
Accounts receivable 16 14
Inventories 96 79
Other current assets 74 93
Other non-current assets 145 127
Accrued expenses 251 183
Other short-term liabilities 64 86
Other liabilities 36 28
Benefit obligations 139 92
Losses carried forward from prior years 253 151
Deferred tax assets, before valuation allowance 1,074 853
less valuation allowance 101 121
Deferred tax assets 973 732
     
Deferred tax liabilities    
Accounts receivable 15 23
Inventories 22 22
Other current assets 16 11
Other non-current assets 736 560
Accrued expenses 120 23
Other short-term liabilities 50 123
Other liabilities 103 102
Deferred tax liabilities 1,062 864
Net deferred taxes -89 -132

€ in millions 2012 2011
Deferred tax assets    
Accounts receivable 16 14
Inventories 96 79
Other current assets 74 93
Other non-current assets 145 127
Accrued expenses 251 183
Other short-term liabilities 64 86
Other liabilities 36 28
Benefit obligations 139 92
Losses carried forward from prior years 253 151
Deferred tax assets, before valuation allowance 1,074 853
less valuation allowance 101 121
Deferred tax assets 973 732
     
Deferred tax liabilities    
Accounts receivable 15 23
Inventories 22 22
Other current assets 16 11
Other non-current assets 736 560
Accrued expenses 120 23
Other short-term liabilities 50 123
Other liabilities 103 102
Deferred tax liabilities 1,062 864
Net deferred taxes -89 -132

In the consolidated statement of financial position, the net amounts of deferred tax assets and liabilities are included as follows:

  2012 2011
€ in millions   thereof
short-term
  thereof
short-term
Deferred tax assets 659 401 493 368
Deferred tax liabilities 748 66 625 52
Net deferred taxes -89 335 -132 316

  2012 2011
€ in millions   thereof
short-term
  thereof
short-term
Deferred tax assets 659 401 493 368
Deferred tax liabilities 748 66 625 52
Net deferred taxes -89 335 -132 316

As of December 31, 2012, Fresenius Medical Care has not recognized a deferred tax liability on approximately €4.2 billion of undistributed earnings of its foreign subsidiaries, because those earnings are intended to be indefinitely reinvested.

Net operating losses

The expiration of net operating losses is as follows:

for the fiscal years € in millions
2013 17
2014 21
2015 23
2016 27
2017 48
2018 21
2019 20
2020 13
2021 10
2022 and thereafter 124
Total 324

for the fiscal years € in millions
2013 17
2014 21
2015 23
2016 27
2017 48
2018 21
2019 20
2020 13
2021 10
2022 and thereafter 124
Total 324

The total remaining operating losses of €347 million can mainly be carried forward for an unlimited period.

Based upon the level of historical taxable income and projections for future taxable income, the Management of the Fresenius Group believes it is more likely than not that the Fresenius Group will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2012.

Unrecognized tax benefits

Fresenius SE & Co. KGaA and its subsidiaries are subject to tax audits in Germany and the United States on a regular basis and ongoing tax audits in other jurisdictions.

In Germany, the tax years 2002 to 2009 are currently under audit by the tax authorities. The Fresenius Group recognized and recorded the current proposed adjustments of this audit period in the consolidated financial statements. All proposed adjustments are deemed immaterial. Fiscal years 2010, 2011 and 2012 are open to audit.

In the United States, Fresenius Medical Care filed claims for refunds contesting the Internal Revenue Service’s (IRS) disallowance of Fresenius Medical Care Holdings, Inc.’s (FMCH) civil settlement payment deductions taken by FMCH in prior year tax returns. As a result of a settlement agreement with the IRS, Fresenius Medical Care received a partial refund in September 2008 of US$37 million, inclusive of interest, and preserved its right to pursue claims in the United States Courts for refunds of all other disallowed deductions, which totaled approximately US$126 million. On December 22, 2008, Fresenius Medical Care filed a complaint for complete refund in the United States District Court for the District of Massachusetts, styled as Fresenius Medical Care Holdings, Inc. v. United States. On August 15, 2012, a jury entered a verdict for FMCH granting additional deductions of US$95 million. The District Court is now considering post trial motions by the IRS to set aside the verdict and the terms of the judgment to be entered against the United States to reflect the amount of the tax refund due to FMCH.

In the United States, the tax years 2009 and 2010 are currently under audit by the tax authorities. Fiscal years 2011 and 2012 are open to audit. FMCH is also subject to audit in various state jurisdictions. A number of these audits are in progress and various years are open to audit in various state jurisdictions. All expected results for both federal and state income tax audits have been recognized in the consolidated financial statements.

Subsidiaries of Fresenius SE & Co. KGaA in a number of countries outside of Germany and the United States are also subject to tax audits. The Fresenius Group estimates that the effects of such tax audits are not material to these consolidated financial statements.

The following table shows the changes to unrecognized tax benefits during the year 2012:

€ in millions 2012
Balance at January 1, 2012 224
Increase in unrecognized tax benefits prior periods 42
Decrease in unrecognized tax benefits prior periods -6
Increase in unrecognized tax benefits current periods 17
Changes related to settlements with tax authorities -13
Reductions as a result of a lapse of the statute of limitations -2
Foreign currency translation -10
Balance at December 31, 2012 252

€ in millions 2012
Balance at January 1, 2012 224
Increase in unrecognized tax benefits prior periods 42
Decrease in unrecognized tax benefits prior periods -6
Increase in unrecognized tax benefits current periods 17
Changes related to settlements with tax authorities -13
Reductions as a result of a lapse of the statute of limitations -2
Foreign currency translation -10
Balance at December 31, 2012 252

Included in the balance at December 31, 2012 are €234 million of unrecognized tax benefits, which would affect the effective tax rate if recognized. The Fresenius Group is currently not in a position to forecast the timing and magnitude of changes in other unrecognized tax benefits.

It is Fresenius Group’s policy to recognize interest and penalties related to its tax positions as income tax expense. During the fiscal year 2012, the Fresenius Group recognized €2 million in interest and penalties. The Fresenius Group had a total accrual of €29 million of tax related interest and penalties at December 31, 2012.

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13. Earnings per share

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