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11. Taxes

INCOME TAXES

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

€ in millions 2011 2010
Germany 404 338
International 1,528 1,448
Total 1,932 1,786

€ in millions 2011 2010
Germany 404 338
International 1,528 1,448
Total 1,932 1,786

Income tax expenses (benefits) for 2011 and 2010 consisted of the following:

€ in millions Current taxes Deferred taxes Income taxes
2010      
Germany 97 -10 87
International 472 22 494
Total 569 12 581
       
2011      
Germany 96 9 105
International 427 72 499
Total 523 81 604

€ in millions Current taxes Deferred taxes Income taxes
2010      
Germany 97 -10 87
International 472 22 494
Total 569 12 581
       
2011      
Germany 96 9 105
International 427 72 499
Total 523 81 604

In 2011 and 2010, 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 2011 and 2010.

€ in millions 2011 2010
Computed “expected” income tax expense 560 518
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 12 12
Tax rate differential 56 63
Tax-free income -12 -23
Taxes for prior years 4 9
Changes in valuation allowances on deferred tax assets 5 24
Noncontrolling partnership interests -22 -20
Other 1 -2
Income tax 604 581
Effective tax rate 31.3% 32.5%

€ in millions 2011 2010
Computed “expected” income tax expense 560 518
Increase (reduction) in income taxes resulting from:    
Items not recognized for tax purposes 12 12
Tax rate differential 56 63
Tax-free income -12 -23
Taxes for prior years 4 9
Changes in valuation allowances on deferred tax assets 5 24
Noncontrolling partnership interests -22 -20
Other 1 -2
Income tax 604 581
Effective tax rate 31.3% 32.5%

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 2011 2010
Deferred tax assets    
Accounts receivable 14 29
Inventories 79 65
Other current assets 93 47
Other non-current assets 127 84
Accrued expenses 183 235
Other short-term liabilities 86 88
Other liabilities 28 37
Benefit obligations 92 55
Losses carried forward from prior years 151 145
Deferred tax assets, before valuation allowance 853 785
less valuation allowance 121 116
Deferred tax assets 732 669
     
Deferred tax liabilities    
Accounts receivable 23 12
Inventories 22 15
Other current assets 11 18
Other non-current assets 560 511
Accrued expenses 23 8
Other short-term liabilities 123 148
Other liabilities 102 27
Deferred tax liabilities 864 739
Net deferred taxes -132 -70

€ in millions 2011 2010
Deferred tax assets    
Accounts receivable 14 29
Inventories 79 65
Other current assets 93 47
Other non-current assets 127 84
Accrued expenses 183 235
Other short-term liabilities 86 88
Other liabilities 28 37
Benefit obligations 92 55
Losses carried forward from prior years 151 145
Deferred tax assets, before valuation allowance 853 785
less valuation allowance 121 116
Deferred tax assets 732 669
     
Deferred tax liabilities    
Accounts receivable 23 12
Inventories 22 15
Other current assets 11 18
Other non-current assets 560 511
Accrued expenses 23 8
Other short-term liabilities 123 148
Other liabilities 102 27
Deferred tax liabilities 864 739
Net deferred taxes -132 -70

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

  2011 2010
€ in millions   thereof short-term   thereof short-term
Deferred tax assets 493 368 492 380
Deferred tax liabilities 625 52 562 74
Net deferred taxes -132 316 -70 306

  2011 2010
€ in millions   thereof short-term   thereof short-term
Deferred tax assets 493 368 492 380
Deferred tax liabilities 625 52 562 74
Net deferred taxes -132 316 -70 306

As of December 31, 2011, Fresenius Medical Care has not recognized a deferred tax liability on approximately €3.3 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
2012 19
2013 13
2014 21
2015 22
2016 38
2017 18
2018 15
2019 10
2020 7
2021 and thereafter 27
Total 190

for the fiscal years € in millions
2012 19
2013 13
2014 21
2015 22
2016 38
2017 18
2018 15
2019 10
2020 7
2021 and thereafter 27
Total 190

The total remaining operating losses of €219 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, 2011.

UNRECOGNIZED TAX BENEFITS

Fresenius SE & Co. KGaA and its subsidiaries are subject to tax audits in Germany and the United States on a regular basis and ongoing tax audits in other jurisdictions.

In Germany, the tax years 2002 to 2005 are currently under audit by the tax authorities. The Fresenius Group recognized and recorded the current proposed adjustments of this audit period in the consolidated financial statements. All proposed adjustments are deemed immaterial. In the fourth quarter of 2011, the tax audit for the years 2006 through 2009 was started. Fiscal years 2010 and 2011 are open to audit. 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 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. The additional benefit related to the agreement has been recognized in the consolidated financial statements 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 continue 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 a complete refund in the United States District Court for the District of Massachusetts, styled as FMCH v. United States. The court has denied motions for summary judgment by both parties 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 for the years 2002 through 2008 have been completed. On January 23, 2012, Fresenius Medical Care executed a closing agreement with the IRS with respect to the 2007 – 2008 tax audit. The agreement reflected a full allowance of interest deductions on intercompany mandatorily redeemable preferred shares for the 2007 – 2008 tax years. The agreement evidenced a revocation by the IRS in December of 2011 of an initial disallowance of the deductions on mandatorily redeemable shares for the 2007 – 2008 tax years that was reflected in an IRS examination report issued on November 21, 2011. Fresenius Medical Care also protested the IRS’s disallowance of interest deductions associated with mandatorily redeemable shares for the years 2002 – 2006. Although Fresenius Medical Care’s protests remain pending before IRS Appeals, the IRS has advised Fresenius Medical Care that it will withdraw its disallowance of, and will accordingly permit the deductions associated with, mandatorily redeemable shares for the years 2002 – 2006. During the IRS tax audit for 2007 – 2008, the IRS proposed other adjustments which have been recognized in the consolidated financial statements. In the U.S., fiscal years 2009, 2010 and 2011 are open to audit. FMCH is also subject to audit in various state jurisdictions. A number of these audits are in progress and various years are open to audit in various state jurisdictions. All expected results for both federal and state income tax audits 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 effects of such tax audits are not material to these consolidated financial statements.

The following table shows the changes to unrecognized tax benefits during the year 2011:

€ in millions 2011
Balance at January 1, 2011 354
Increase in unrecognized tax benefits prior periods 18
Decrease in unrecognized tax benefits prior periods -19
Increase in unrecognized tax benefits current periods 18
Changes related to settlements with tax authorities -156
Reductions as a result of a lapse of the statute of limitations -2
Foreign currency translation 11
Balance at December 31, 2011 224

€ in millions 2011
Balance at January 1, 2011 354
Increase in unrecognized tax benefits prior periods 18
Decrease in unrecognized tax benefits prior periods -19
Increase in unrecognized tax benefits current periods 18
Changes related to settlements with tax authorities -156
Reductions as a result of a lapse of the statute of limitations -2
Foreign currency translation 11
Balance at December 31, 2011 224

Included in the balance at December 31, 2011 are €224 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 reduced the unrecognized tax benefits at December 31, 2011 by US$206 million and a portion of the reduction was realized as an additional tax benefit in 2011. The Fresenius Group estimates that the uncertain tax benefit at December 31, 2011 will be reduced by approximately US$13 million due to expected settlements with tax authorities. 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 2011, the Fresenius Group recognized €2 million in interest and penalties. The Fresenius Group had a total accrual of €47 million of tax related interest and penalties at December 31, 2011.

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