11. Taxes

INCOME TAXES

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

in million € 2009 2008
Germany 342 463
International 1,101 651
Total 1,443 1,114

in million € 2009 2008
Germany 342 463
International 1,101 651
Total 1,443 1,114

Income tax expenses (benefits) for 2009 and 2008 consisted of the following:

in million € Current
taxes
Deferred
taxes
Income
taxes
2008      
Germany 69 61 130
International 249 52 301
Total 318 113 431
       
2009      
Germany 83 83
International 358 11 369
Total 441 11 452

in million € Current
taxes
Deferred
taxes
Income
taxes
2008      
Germany 69 61 130
International 249 52 301
Total 318 113 431
       
2009      
Germany 83 83
International 358 11 369
Total 441 11 452

In 2009 and 2008, Fresenius SE 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 2009 and 2008.

in million € 2009 2008
Computed “expected” income tax expense 418 323
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 11 88
Foreign tax rate differential 54 27
Tax-free income - 32 - 29
Taxes for prior years 19 33
Changes in valuation allowances on deferred tax assets - 14 19
Book income of consolidated partnership attributable to non-controlling interest - 19 - 9
Other 15 - 21
Income tax 452 431
Effective tax rate 31.3 % 38.7 %

in million € 2009 2008
Computed “expected” income tax expense 418 323
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 11 88
Foreign tax rate differential 54 27
Tax-free income - 32 - 29
Taxes for prior years 19 33
Changes in valuation allowances on deferred tax assets - 14 19
Book income of consolidated partnership attributable to non-controlling interest - 19 - 9
Other 15 - 21
Income tax 452 431
Effective tax rate 31.3 % 38.7 %

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 million € 2009 2008
Deferred tax assets    
Accounts receivable 33 33
Inventories 54 52
Other current assets 38 19
Other non-current assets 54 46
Accrued expenses 208 218
Other short-term liabilities 61 76
Other liabilities 39 27
Benefit obligations 37 36
Losses carried forward from prior years 105 138
Deferred tax assets, before valuation allowance 629 645
less valuation allowance 73 87
Deferred tax assets 556 558
     
Deferred tax liabilities    
Accounts receivable 10 9
Inventories 13 7
Other current assets 54 66
Other non-current assets 486 439
Accrued expenses 43 68
Other short-term liabilities 7 7
Other liabilities 14 16
Deferred tax liabilities 627 612
Accumulated deferred taxes - 71 - 54

in million € 2009 2008
Deferred tax assets    
Accounts receivable 33 33
Inventories 54 52
Other current assets 38 19
Other non-current assets 54 46
Accrued expenses 208 218
Other short-term liabilities 61 76
Other liabilities 39 27
Benefit obligations 37 36
Losses carried forward from prior years 105 138
Deferred tax assets, before valuation allowance 629 645
less valuation allowance 73 87
Deferred tax assets 556 558
     
Deferred tax liabilities    
Accounts receivable 10 9
Inventories 13 7
Other current assets 54 66
Other non-current assets 486 439
Accrued expenses 43 68
Other short-term liabilities 7 7
Other liabilities 14 16
Deferred tax liabilities 627 612
Accumulated deferred taxes - 71 - 54

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

  2009 2008
in million €   thereof long-term   thereof long-term
Deferred tax assets 395 115 465 156
Deferred tax liabilities 466 415 519 449
Accumulated deferred taxes - 71 - 300 - 54 - 293

  2009 2008
in million €   thereof long-term   thereof long-term
Deferred tax assets 395 115 465 156
Deferred tax liabilities 466 415 519 449
Accumulated deferred taxes - 71 - 300 - 54 - 293

As of December 31, 2009, Fresenius Medical Care has not recognized a deferred tax liability on approximately € 1.9 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 million €
2010 34
2011 6
2012 7
2013 10
2014 17
2015 11
2016 10
2017 17
2018 8
2019 5
Thereafter 19
Total 144

for the fiscal years in million €
2010 34
2011 6
2012 7
2013 10
2014 17
2015 11
2016 10
2017 17
2018 8
2019 5
Thereafter 19
Total 144

The total remaining operating losses of € 208 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, 2009.

UNRECOGNIZED TAX BENEFITS

Fresenius SE 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 financial statements as of December 31, 2008. The fiscal years 2002 to 2005 are currently under audit. 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. As a result of a change in judgment based on new information which became available in the second quarter of 2009, Fresenius Medical Care has increased its recognition of the tax benefit related to this claim by € 10.4 million (US$ 14.6 million).

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 in prior year tax returns. As a result of a settlement agreement with the IRS to resolve Fresenius Medical Care’s appeal of the IRS’s disallowance of deductions for the civil settlement payments made to qui tam relators (see note 29, Commitments and Contingent Liabilities) in connection with the resolution of the 2000 US government investigation, Fresenius Medical Care received a refund in September 2008 of US$ 37 million, inclusive of interest. The settlement agreement preserves the right to continue to pursue claims in the US federal courts for refunds of all other disallowed deductions. The unrecognized tax benefit relating to these deductions is included in the total unrecognized tax benefit noted on the following page. 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 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, 2008 and 2009 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 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 2009:

in million € 2009
Balance at January 1, 2009 323
Increase in unrecognized tax benefits prior periods 48
Decrease in unrecognized tax benefits prior periods - 11
Increase in unrecognized tax benefits current periods 21
Changes related to settlements with tax authorities - 6
Foreign currency translation - 20
Balance at December 31, 2009 355

in million € 2009
Balance at January 1, 2009 323
Increase in unrecognized tax benefits prior periods 48
Decrease in unrecognized tax benefits prior periods - 11
Increase in unrecognized tax benefits current periods 21
Changes related to settlements with tax authorities - 6
Foreign currency translation - 20
Balance at December 31, 2009 355

Included in the balance at December 31, 2009 are € 355 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 the 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 2009, the Fresenius Group recognized € 12 million in interest and penalties. The Fresenius Group had a total accrual of € 33 million of tax related interest and penalties at December 31, 2009.

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12. Earnings per share

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