Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information 14. Taxation continued On 12 June 2018, an amendment to the current corporate taxation model applicable to financial institutions, including banks and insurance businesses, became effective. The change implies a zero corporate tax rate on retained earnings and a 15% corporate tax rate on distributed earnings starting from 1 January 2023, instead of 1 January 2019 as previously enacted in 2016. The change had an immediate impact on deferred tax asset and deferred tax liability balances attributable to previously recognised temporary differences arising from prior periods. As at 30 June 2018, deferred tax assets and liabilities balances have been remeasured, in line with the new date for the change to be implemented. The Group has calculated the portion of deferred taxes that it expects to utilise before 1 January 2023 for financial businesses and has recognised the respective portion of deferred tax assets and liabilities. During the transitional period the Group will only continue to recognise the portion of deferred tax assets and liabilities arising on items charged or credited to the income statement during the same period, which it expects to utilise before 1 January 2023. The effective income tax rate differs from the statutory income tax rates. As at 31 December 2018, 31 December 2017 and 31 December 2016 a reconciliation of the income tax expense based on statutory rates with the actual expense is as follows: 2018 2017 2016 Profit before income tax expense from continuing operations 437,545 391,253 269,851 Net gain before income tax benefit from discontinued operations (Note 5) 109,084 104,923 120,069 Profit before income tax expense 546,629 496,176 389,920 Average tax rate 15% 15% 15% Theoretical income tax expense at average tax rate (81,994) (74,426) (58,488) Non-taxable income 58,741 38,223 19,711 Correction of prior year declarations – 5,940 2,494 Non-deductible expenses (4,752) (1,220) (1,645) Tax at the domestic rates applicable to profits in each country (829) (1,244) (143) Effects from changes in tax legislation (30,275) – 76,964 Other 1,258 – (237) Income tax (expense) benefit (57,851) (32,727) 38,656 Applicable taxes in Georgia and Belarus include corporate income tax (profit tax), individuals’ withholding taxes, property tax and value added tax, among others. However, regulations are often unclear or nonexistent and few precedents have been established. This creates tax risks in Georgia and Belarus, substantially more significant than typically found in countries with more developed tax systems. Management believes that the Group is in substantial compliance with the tax laws affecting its operations. However, the risk remains that relevant authorities could take differing positions with regard to interpretative issues. As at 31 December 2018, 31 December 2017 and 31 December 2016 income tax assets and liabilities consist of the following: 2018 2017 2016 Current income tax assets 19,328 1,155 22,329 Deferred income tax assets 123 1,138 1,714 Income tax assets 19,451 2,293 24,043 Current income tax liabilities 701 9,617 5,548 Deferred income tax liabilities 28,154 11,342 22,170 Income tax liabilities 28,855 20,959 27,718 Annual Report 2018Bank of Georgia Group PLC 237