11. INCOME TAX

REN is taxed based on the special regime for the taxation of group companies (“RETGS”), which includes all companies located in Portugal that REN detains directly or indirectly ate least 75% of the share capital, which should give at more than 50% of the voting rights, and comply with the conditions of the article 69º of the Corporate Income Tax law.

In accordance with current legislation, tax returns are subject to review and correction by the tax authorities for a period of four years (five years for social security), except when there are tax losses, tax benefits granted or tax inspections, claims or appeals in progress, in which case the period can be extended or suspended, depending on the circumstances. Consequently, the Company’s tax returns for the years from 2011 to 2014 are still subject to review.

The Company’s Board of Directors understands that possible corrections to the tax returns resulting from tax reviews /inspections carried out by the tax authorities will not have a significant effect on the financial statements as of 31 December 2014 and 2013.

In 2014 the Group is taxed in Corporate Income Tax rate of 23%, increased by a municipal surcharge up the maximum of 1.5% over the taxable profit, and a State surcharge of an additional (i) 3% of taxable profit between 1,500 thousand Euros and 7,500 thousand Euros (ii) of 5% over the taxable profit in excess of 7,500 thousand Euros and up to 35,000 thousand Euros and (iii) 7% for taxable profits in excess of 35,000 thousand Euros, which results in a maximum aggregate tax rate of 31.5%.

The deferred taxes, as of 31 December 2014, were updated considering the new rates established under the Law n. 82-C/2014 of 31 December, which establishes a Corporate Income Tax rate of 21% and a municipal surcharge up to a maximum of 1.5% of taxable profit, and a State surcharge of an additional (i) 3% of taxable profit between 1,500 thousand Euros and 7,500 thousand Euros (ii) of 5% over the taxable profit in excess of 7,500 thousand Euros and up to 35,000 thousand Euros; and (iii) 7% for taxable profits in excess of 35,000 thousand Euros. The referred tax rates are applicable for taxable profits generated on periods after the period started on 1 January 2015.

Consequently, the tax rate used in the valuation of temporary taxable and deductible differences as of 31 December 2014, were calculated using the average tax rate expected in accordance with future perspective of taxable profits of the Company recoverable in the next periods.

Income tax of the years ended 31 December 2014 and 2013 was as follows:

'14

'13

Current income tax

46,859

67,941

Adjustaments of income tax from previous years

(3,858)

(499)

Deferred tax

7,952

10,721

Income tax

50,953

56,721

Reconciliation between tax calculated at the nominal tax rate and tax recorded in the consolidated statement of profit and loss is as follows:

'14

'13

Consolidated profit before income tax

188,795

178,024

Permanent differences

  Positive net worth variation

(8)

(32)

  Non deductible costs

1,392

223

  Non taxable income

(2,165)

(800)

Timing differences

  

  Tariff deviations

(44,600)

31,752

  Provisions

665

(6,211)

  Provisions

5,153

6,675

  Pension, medical assistence and life insurance plans

(2,266)

(1,566)

  Derivative financial instruments 

-

(156)

Taxable income

146,965

207,803

Income tax

33,863

51,901

State surcharge tax

9,716

11,770

Municipal surcharge

2,692

3,834

Autonomous taxation

588

437

Current income tax

46,859

67,941

Deferred income tax

7,952

(10,721)

Deferred income tax

7,952

(10,721)

Adjustments of income tax from previous years

(3,858)

(499)

Income Tax

50,953

56,721

Effective tax rate

26.99%

31.86%

Income tax

The caption “Income tax” payable and receivable at 31 December 2014 and 2013 is made up as follows:

Icome Tax 

'14

'13

Income tax:

  

Corporate income tax - estimated tax

(46,859)

-

Corporate income tax - payments on account

53,301

-

Income withholding tax by third parties

3,837

-

Income tax related to previous years

(60)

-

Income tax receivable

10,219

-

Corporate income tax - estimated tax

-

(67,941)

Corporate income tax - payments on account

-

19,987

Income withholding tax by third parties

-

3,020

Income tax payable

-

(44,935)

Deferred taxes

The effect of the changes in the deferred tax captions in the years presented was as follows:

'14

'13

Impact on the statement of profit and loss

  

Deferred tax assets

38

1,076

Deferred tax liabilities

(7,990)

9,645

(7,952)

10,721

Impact on equity

  

Deferred tax assets

(1,856)

5,509

Deferred tax liabilities

(10,323)

(805)

(12,179)

4,705

Net impact of deferred taxes

(20,131)

15,425

The changes in deferred tax by nature were as follows:

Change in deferred tax assets – December 2014

CHANGE IN DEFERRED TAX ASSETS – DECEMBER 2014

Provisions  /Impairments

Pensions

Tariff deviations

Derivative financial instruments

Others

Total

At 1 January  2014

1,749

39,128

21,548

5,373

2

67,800

Increase/decrease through reserves

-

(1,658)

-

(198)

-

(1,856)

Reversal through profit and loss

(48)

(755)

-

-

(2)

(806)

Increase through profit and loss

117

-

727

-

-

844

Change in the period

69

(2,413)

727

(198)

(2)

(1,818)

At 31 December 2014

1,818

36,715

22,275

5,175

-

65,982

Change in deferred tax assets – December 2013

CHANGE IN DEFERRED TAX ASSETS – DECEMBER 2013

Provisions  /Impairments

Pensions

Tariff deviations

Derivative financial instruments

Others

Total

At 1 January  2013

3,483

30,684

18,185

 

8,858

5

61,215

Increase/decrease through reserves

-

8,955

-

(3,445)

-

5,509

Reversal through profit and loss

(1,775)

(1,519)

(726)

(39)

(2)

(4,062)

Increase through profit and loss

41

1,009

4,088

-

-

5,138

Change in the period

(1,735)

8,444

3,362

(3,484)

(2)

6,585

At 31 December 2013

1,749

39,128

21,548

5,373

2

67,800

Deferred tax assets at 31 December 2014 correspond mostly to liabilities for benefit plans granted to employees and tariff deviations liabilities to be settled in subsequent years.

Evolution of deferred tax liabilities – December 2014

EVOLUTION OF DEFERRED TAX LIABILITIES – DECEMBER 2014

Tariff deviations

Revaluations

Available-for-sale (fair value)

Total

At 1 January 2014

44,666

28,486

805

73,956

Increase/decrease through equity

-

(237)

10,560

10,323

Increase through profit and loss

9,581

-

-

9,581

Reversal trough profit and loss

-

(1,591)

-

(1,591)

Change in the period

9,581

(1,828)

10,560

18,313

At 31 December 2014

54,246

26,659

11,365

92,270

Evolution of deferred tax liabilities– December 2013

EVOLUTION OF DEFERRED TAX LIABILITIES – DECEMBER 2013

Tariff deviations

Revaluations

Available-for-sale (fair value)

Total

At 1 January 2013

52,373

30,424

-

82,797

Increase/decrease through equity

-

-

805

805

Reversal trough profit and loss

(7,078)

(1,937)

-

(9,645)

Change in the period

(7,078)

(1,937)

805

(8,840)

At 31 December 2013

44,666

28,486

805

73,956

Deferred tax liabilities relating to revaluations result from revaluations made in preceding years under legislation. The effect of these deferred taxes reflects the non tax deductibility of 40% of future depreciation of the revaluation component (included in the assets considered cost at the time of the transition to IFRS).

The legal documents that establish these revaluations were the following:

Legislation (Revaluation)

Electricity segment

Natural gas segment

Decree-Law nº 430/78

Decree-Law nº 140/2006

Decree-Law nº 399-G/81

Decree-Law nº 219/82

Decree-Law nº 171/85

Decree-Law nº 118-B/86

Decree-Law nº 111/88

Decree-Law nº 7/91

Decree-Law nº 49/91

Decree-Law nº 264/92