14. Income taxes

The breakdown of income taxes by region and origin is as follows:

	2007	2008
	€ million	€ million
Income taxes paid or accrued
Germany	(185)	(161)
other countries	(730)	(651)
	(915)	(812)
Deferred taxes
from temporary differences	1,469	323
from interest carryforwards	-	11
from tax loss carryforwards	(517)	(168)
from tax credits	35	10
	987	176
Total	72	(636)

In 2007 the Bayer Group recognized deferred tax income of €921 million due to changes in tax rates, including one-time deferred tax income of €912 million arising in connection with the corporate tax reform in Germany. The latter amount resulted mainly from the remeasurement of the deferred tax liabilities accrued in connection with the Schering acquisition, particularly in order to reflect the lower nominal rates of corporate income tax applicable in Germany from 2008.

The deferred tax assets and liabilities are allocable to the various balance sheet items as follows:

	Dec. 31, 2007		Dec. 31, 2008
	Deferred tax assets	Deferred tax liabilities	Deferred tax assets	Deferred tax liabilities
	€ million	€ million	€ million	€ million
Intangible assets	464	3,946	470	3,766
Property, plant and equipment	59	696	67	632
Financial assets	45	293	78	228
Inventories	392	247	324	85
Receivables	52	459	64	511
Other assets	5	26	150	74
Provisions for pensions and other post-employment benefits	797	523	1,170	462
Other provisions	674	404	301	318
Liabilities	487	66	524	44
Interest carryforwards	-	-	11	-
Tax loss carryforwards	589	-	429	-
Tax credits	75	-	96	-
	3,639	6,660	3,684	6,120
of which noncurrent	2,092	5,707	2,644	5,354
Set-off	(2,794)	(2,794)	(2,528)	(2,528)
Total	845	3,866	1,156	3,592

The recognition in stockholders’ equity of actuarial gains and losses relating to defined benefit pension plans and similar commitments resulted in a €460 million increase (2007: €611 million decrease) in stockholders’ equity due to the related deferred taxes. Similarly, changes in fair values of available-for-sale financial assets and derivatives designated as hedges resulted in the recognition in stockholders’ equity of deferred tax assets of €45 million (2007: deferred tax liabilities of €66 million).

Utilization of tax loss carryforwards from previous years diminished the amount of income taxes paid or accrued in 2008 by €287 million (2007: €353 million).

Tax credits and tax loss carryfowards expire as follows:

	Tax credits		Tax loss carryforwards
	Dec. 31, 2007	Dec. 31, 2008	Dec. 31, 2007	Dec. 31, 2008
	€ million	€ million	€ million	€ million
One year	-	-	4	58
Two years	-	-	42	10
Three years	-	-	33	58
Four years	-	-	32	51
Five years	-	1	83	113
Thereafter	75	95	2,096	1,566
Total	75	96	2,290	1,856

Deferred tax assets of €11 million were recognized for interest expense of €36 million that is not currently tax-deductible in Germany, in the expectation that the interest carryforward can be utilized in the future.

Of the total tax loss carryforwards of €1,856 million in 2008 (2007: €2,290 million), an amount of €1,455 million (2007: €1,896 million) can probably be utilized within a reasonable period. Deferred tax assets of €429 million (2007: €589 million) were recognized for these tax loss carryforwards, including €15 million (2007: €14 million) that could not be recognized in income.

The utilization of €401 million (2007: €394 million) of loss carryforwards is subject to legal or economic restrictions. Consequently, no deferred tax assets were recognized for these amounts. However, if the utilizability of the loss carryforwards had been probable, theoretical deferred tax assets of €113 million (2007: €113 million) would have had to be recognized.

Tax credits of €96 million (2007: €75 million) were recognized as deferred tax assets, including €3 million (2007: €0 million) that could not be recognized in income.

Deferred taxes were not recognized for temporary differences of €6,651 million (2007: €3,830 million) relating to earnings of subsidiaries, either because these profits are not subject to taxation or because they are to be reinvested for an indefinite period. If deferred taxes were recognized for these temporary differences, the liability would be based on the respective withholding tax rates only, taking into account the local and German tax rates on corporate dividends where applicable. Deferred tax liabilities are recognized for €19 million (2007: €73 million) in planned dividend payments by subsidiaries.

The reported tax expense of €636 million for 2008 (2007: tax income of €72 million) differs by €62 million (2007: €867 million) from the expected tax expense of €698 million (2007: €795 million) that would result from applying an anticipated weighted average tax rate to the pre-tax income of the Group. This average rate is derived from the theoretical tax rates of individual Group companies and was 29.6% in 2008 (2007: 35.6%). The effective tax rate was 27.0% (2007: minus 3.2%).

The reconciliation of theoretical to reported income tax expense (income) for the Group is as follows:

	2007		2008
	€ million	%	€ million	%
Theoretical income tax expense (income)	795	100	698	100

Reduction in taxes due to tax-free income
Tax-free income from affiliated companies and divestiture proceeds	(2)	-	(10)	(1)
Other	(47)	(6)	(51)	(7)

First-time recognition of previously unrecognized deferred tax assets on loss carryforwards	(1)	-	(50)	(7)
Use of tax loss carryforwards without prior recognition of deferred tax assets	-	-	(11)	(2)

Increase in taxes due to non tax-deductible expenses
Write-downs of investments	2	-	29	4
Expenses related to litigations	10	1	18	2
Other	85	11	107	15

Tax income and expenses relating to other periods	4	1	(42)	(6)
Tax effects of changes in tax rates	(921)	(116)	7	1
Other tax effects	3	-	(59)	(8)
Actual income tax expense (income)	(72)	(9)	636	91

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