11. Taxes

INCOME TAXES

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

€ in millions 2010 2009
Germany 338 342
International 1,448 1,101
Total 1,786 1,443

€ in millions 2010 2009
Germany 338 342
International 1,448 1,101
Total 1,786 1,443

Income tax expenses (benefits) for 2010 and 2009 consisted of the following:

€ in millions Current taxes Deferred taxes Income taxes
2009      
Germany 83 - 83
International 358 11 369
Total 441 11 452
       
2010      
Germany 97 -10 87
International 472 22 494
Total 569 12 581

€ in millions Current taxes Deferred taxes Income taxes
2009      
Germany 83 - 83
International 358 11 369
Total 441 11 452
       
2010      
Germany 97 -10 87
International 472 22 494
Total 569 12 581

In 2010 and 2009, Fresenius SE (since January 28, 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 below. 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 29.0% for the fiscal years 2010 and 2009.

€ in millions 2010 2009
Computed "expected" income tax expense 518 418
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 12 11
Tax rate differential 63 54
Tax-free income -23 -32
Taxes for prior years 9 19
Changes in valuation allowances on deferred tax assets 24 5
Noncontrolling partnership interests -20 -19
Other -2 -4
Income tax 581 452
Effective tax rate 32.5% 31.3%

€ in millions 2010 2009
Computed "expected" income tax expense 518 418
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 12 11
Tax rate differential 63 54
Tax-free income -23 -32
Taxes for prior years 9 19
Changes in valuation allowances on deferred tax assets 24 5
Noncontrolling partnership interests -20 -19
Other -2 -4
Income tax 581 452
Effective tax rate 32.5% 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 2010 2009
Deferred tax assets    
Accounts receivable 29 33
Inventories 65 54
Other current assets 47 38
Other non-current assets 84 54
Accrued expenses 235 208
Other short-term liabilities 88 61
Other liabilities 37 39
Benefit obligations 55 37
Losses carried forward from prior years 145 124
Deferred tax assets, before valuation allowance 785 648
less valuation allowance 116 92
Deferred tax assets 669 556
     
Deferred tax liabilities    
Accounts receivable 12 10
Inventories 15 13
Other current assets 113 54
Other non-current assets 511 486
Accrued expenses 8 43
Other short-term liabilities 53 7
Other liabilities 27 14
Deferred tax liabilities 739 627
Net deferred taxes -70 -71

€ in millions 2010 2009
Deferred tax assets    
Accounts receivable 29 33
Inventories 65 54
Other current assets 47 38
Other non-current assets 84 54
Accrued expenses 235 208
Other short-term liabilities 88 61
Other liabilities 37 39
Benefit obligations 55 37
Losses carried forward from prior years 145 124
Deferred tax assets, before valuation allowance 785 648
less valuation allowance 116 92
Deferred tax assets 669 556
     
Deferred tax liabilities    
Accounts receivable 12 10
Inventories 15 13
Other current assets 113 54
Other non-current assets 511 486
Accrued expenses 8 43
Other short-term liabilities 53 7
Other liabilities 27 14
Deferred tax liabilities 739 627
Net deferred taxes -70 -71

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

  2010 2009
€ in millions thereof
short-term
thereof
short-term
Deferred tax assets 492 380 395 280
Deferred tax liabilities 562 74 466 51
Net deferred taxes -70 306 -71 229

  2010 2009
€ in millions thereof
short-term
thereof
short-term
Deferred tax assets 492 380 395 280
Deferred tax liabilities 562 74 466 51
Net deferred taxes -70 306 -71 229

As of December 31, 2010, Fresenius Medical Care has not recognized a deferred tax liability on approximately €2.6 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
2011 6
2012 14
2013 13
2014 20
2015 22
2016 29
2017 11
2018 10
2019 6
2020 and thereafter 31
Total 162

for the fiscal years € in millions
2011 6
2012 14
2013 13
2014 20
2015 22
2016 29
2017 11
2018 10
2019 6
2020 and thereafter 31
Total 162

The total remaining operating losses of €263 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, 2010.

UNRECOGNIZED TAX BENEFITS

Fresenius SE & Co. KGaA and its subsidiaries are subject to tax audits on a regular basis.

In Germany, the tax audit for the years 1998 until 2001 has been finalized. All results of the completed tax audits are already sufficiently recognized in the consolidated financial statements as of December 31, 2008. The fiscal years 2002 to 2005 are currently under audit. As of December 31, 2010, all proposed adjustments have been recognized in the consolidated financial statements. All further fiscal years are open to tax audits. For the tax year 1997, Fresenius Medical Care recognized an impairment of one of its subsidiaries which the German tax authorities disallowed in 2003 at the conclusion of its audit for the years 1996 and 1997. Fresenius Medical Care has filed a complaint with the appropriate German court to challenge the tax authority’s decision. In January 2011, Fresenius Medical Care reached an agreement with the tax authorities, estimated to be slightly more favorable than the tax benefit recognized previously. The additional benefit will be recognized in 2011.

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 the right to pursue claims in the United States Courts for refunds of all other disallowed deductions. 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 June 24, 2010, the court denied FMCH’s motion for summary judgment and the litigation is proceeding towards trial. The unrecognized tax benefit relating to these deductions is included in the total unrecognized tax benefit noted below. The IRS tax audits of FMCH in the United States for the years 2002 through 2006 have been completed. The IRS has disallowed all deductions taken during these audit periods related to intercompany mandatorily redeemable preference shares. In addition, the IRS proposed other adjustments which have been recognized in the consolidated financial statements. Fresenius Medical Care has protested the disallowed deductions and will avail itself of all remedies. An adverse determination with respect to the disallowed deductions related to the intercompany mandatorily redeemable preference shares could have a material adverse effect on Fresenius Medical Care’s results of operations and liquidity. Fiscal years 2007 and 2008 are currently under audit, 2009 and 2010 are open to audit. There are a number of state audits in progress and various years are open to audit in other states. All expected results 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 tax effects of such audits are not material to the consolidated financial statements.

The following table shows the changes to unrecognized tax benefits during the year 2010:

€ in millions 2010
Balance at January 1, 2010 355
Increase in unrecognized tax benefits prior periods 10
Decrease in unrecognized tax benefits prior periods -15
Increase in unrecognized tax benefits current periods 18
Changes related to settlements with tax authorities -26
Foreign currency translation 12
Balance at December 31, 2010 354

€ in millions 2010
Balance at January 1, 2010 355
Increase in unrecognized tax benefits prior periods 10
Decrease in unrecognized tax benefits prior periods -15
Increase in unrecognized tax benefits current periods 18
Changes related to settlements with tax authorities -26
Foreign currency translation 12
Balance at December 31, 2010 354

Included in the balance at December 31, 2010 are €354 million of unrecognized tax benefits, which would affect the effective tax rate if recognized. As a result of the settlement agreement for 1997 noted above, the Fresenius Group estimates that the unrecognized tax benefits at December 31, 2010 could be reduced by approximately US$196 million in 2011 with a small portion of the reduction being realized as an additional tax benefit in 2011. 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 2010, the Fresenius Group recognized €8 million in interest and penalties. The Fresenius Group had a total accrual of €43 million of tax related interest and penalties at December 31, 2010.

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12. Earnings per share

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