34 » Income Taxes

adidas AG and its German subsidiaries are subject to German corporate and trade taxes. For the years ending December 31, 2021 and 2020, the statutory corporate income tax rate of 15% plus a surcharge of 5.5% thereon is applied to earnings. The municipal trade tax is approximately 11.4% of taxable income.

For non-German subsidiaries, deferred taxes are calculated based on tax rates that have been enacted or substantively enacted by the closing date.

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are offset if:

• the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
  • the same taxable entity; or
  • different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

The following deferred tax assets and liabilities, determined after appropriate offsetting, are presented in the consolidated statement of financial position:

The movement of deferred taxes net is as follows:

Gross company deferred tax assets and liabilities after valuation allowances, but before appropriate offsetting, are attributable to the items detailed in the table below:

Deferred tax assets are recognized only to the extent that the realization of the related benefit is probable. For the assessment of probability, in addition to past performance and the respective prospects for the foreseeable future, appropriate tax structuring measures are also taken into consideration.

Deferred tax assets for which the realization of the related tax benefits is not probable decreased from € 386 million to € 222 million for the year ending December 31, 2021. These amounts mainly relate to tax losses carried forward and unused tax credits of the US tax group, which begin to expire in 2029. The remaining unrecognized deferred tax assets relate to subsidiaries operating in markets where the realization of the related tax benefit is not considered probable.

adidas does not recognize deferred tax liabilities for unremitted earnings of non-German subsidiaries to the extent that they are expected to be permanently invested in international operations. These earnings, the amount of which cannot be practicably computed, could become subject to additional tax if they were remitted as dividends or if the company were to sell its shareholdings in the subsidiaries.

TAX EXPENSES

Tax expenses are split as follows:

The deferred tax income includes tax income of € 5 million in total (2020: € 140 million) related to the origination and reversal of temporary differences.

The company’s applicable tax rate is 27.4% (2020: 27.4%), being the applicable income tax rate of adidas AG.

The company’s effective tax rate differs from the applicable tax rate of 27.4% as follows:

In 2021, the effective tax rate was 19.4%. The effective tax rate in 2020 was 20.2%.

The line item ‘Non-deductible expenses’ includes tax expense/benefits as well as expenses/benefits relating to tax-free income, movements in provisions for uncertain tax positions (including as a result of the application of a statute of limitations or law with similar impact applying to prior years) and tax expense relating to prior periods. In 2021, the tax benefit relating to prior periods was € 57 million (2020: tax income of € 63 million).

For 2021, the line item ‘Losses for which benefits were not recognizable and changes in valuation allowances’ mainly relates to the release of valuation allowances in respect of the US, Argentina and Brazil (€ 54 million) and an increase in the valuation allowance in Hong Kong (€ 14 million). For 2020, this line item mainly related to changes in valuation allowances for the US, Argentina and Lebanon.

For 2021, the total tax benefit arising from previously unrecognized tax losses, credits or temporary differences in prior years that is used to reduce current tax expense was € 15 million, mainly relating to Argentina and Canada (2020: € 5 million).

For 2021, the line item ‘Changes in tax rates’ mainly reflects the tax rate reductions in Argentina, France, and Switzerland. For 2020, this line item mainly reflected the reversal of the previously enacted tax rate reduction in the UK and the tax rate decrease in France.