20.

Income tax

The major components of income tax expense for the years ended December 31, 2018, 2017 and 2016 are:


Recognised in profit or loss	2018			2017			2016
Current income tax
Current income tax charge		(2,315	)		(3,397	)		(555	)
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position		(2,962	)		(3,154	)		766

Deferred tax
Relating to origination and reversal of temporary differences		2,596			3,401			(5,104	)

Income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income		(2,681	)		(3,150	)		(4,893	)

In January 2013, the Group created the consolidated group of taxpayers in accordance with the Tax code of the Russian Federation, under the Federal law of the Russian Federation of November 16, 2011 No. 321-FZ. The existence of the consolidated group of taxpayers is subject to compliance with several conditions stated in the Tax code of the Russian Federation. The Group believes that these conditions were met as of December 31, 2018 and 2017. In 2016-2018, the consolidated group of taxpayers consisted of 20 subsidiaries of the Group, together with Mechel PAO, which is the responsible taxpayer under the agreement. Under the Federal law of the Russian Federation of August 3, 2018 No. 302-FZ, the Russian legislation introduced a limitation for registration by the tax authorities of agreements on the establishment of consolidated group of taxpayers, changes to contracts related to the accession of new members of such groups, withdrawal of participants, the extension of the agreement on the established consolidated group of taxpayers and termination of the consolidated group of taxpayers by January 1, 2023.

For subsidiaries which are not included in the consolidated group of taxpayers, income taxes are calculated on an individual subsidiary basis. Deferred income tax assets and liabilities are recognised in the accompanying consolidated financial statements in the amount determined by the Group in accordance with IAS 12.

During 2016-2018, income tax was calculated at 20% of taxable profit in Russia, at 10.5%-11% in Switzerland, at 15% in Lithuania, at 20% in Kazakhstan and at 18% in Ukraine. The Group’s subsidiaries incorporated in British Virgin Islands are exempt from profit tax. Amendments in the tax legislation of the United Kingdom resulted in the decrease in tax rate from 20% since April 1, 2015 to 19% since April 1, 2017.

Starting 2018, Elgaugol used a privilege and applied a 0% income tax rate due to fulfillment of conditions of the Regional investment project (RIP) resulting in an income tax benefit for 2018.

The reconciliation between the income tax expense computed by applying the Russian enacted statutory tax rates to the income from continuing operations before tax and non-controlling interest, to the income tax expense reported in the consolidated financial statements is as follows:


	2018			2017			2016
Profit before tax from continuing operations		16,217			15,720			14,151

Income tax expense at statutory income tax rate of 20%		(3,243	)		(3,144	)		(2,830	)

Adjustments:
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position		(2,962	)		(3,154	)		766
Unrecognised current year tax losses and write-off of previously recognised asset on tax losses		4,008			4,783			513
Non-deductible expenses for tax purposes		(3,625	)		(1,755	)		(1,317	)
Non-deductible interest expense		(363	)		(254	)		(1,055	)
Effect of restructuring and expense related to fines and penalties on breach of covenants in credit agreements		3,460			112			(1,152	)
Effect of different tax rates		(12	)		262			182
Change in tax rate		56			—			—
At the effective income tax rate of 16.5% (20.0% in 2017, 34.6% in 2016) income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income		(2,681	)		(3,150	)		(4,893	)

The deferred tax balances were calculated by applying the currently enacted statutory income tax rate in each jurisdiction applicable to the period in which the temporary differences between the carrying amounts and tax base (both in respective local currencies) of assets and liabilities are expected to reverse.

On January 9, 2014, the Group failed to sustain its position in the court with respect to the income tax claims in the amount of RUB 3,977 million, including penalties and fines. The schedule of payments was agreed with the tax authorities for the period till May 2017. During 2016, the Group did not meet this schedule of payments and a new payment schedule agreed with the tax authorities was signed in December 2016. As of December 31, 2017, the outstanding amount payable was RUB 540 million (not overdue). As of December 31, 2018, there was no outstanding amount payable.

The amounts reported in the accompanying consolidated financial statements consisted of the following:


	January 1, 2016			Tax (expense) benefit during the period recognised in profit or loss			Foreign currency translation effect			December 31, 2016
Deferred tax assets
Property, plant and equipment		1,055			(378	)		—			677
Rehabilitation provision		510			184			—			694
Inventory		73			134			(14	)		193
Trade and other receivables		1,112			(253	)		(28	)		831
Loans and borrowings		224			(106	)		—			118
Finance lease liabilities		1,508			(389	)		2			1,121
Trade and other payables and other liabilities		763			(70	)		7			700
Net operating loss carry-forwards		10,611			(5,807	)		(89	)		4,715
Other		324			(264	)		(1	)		59

Deferred tax liabilities
Property, plant and equipment		(16,199	)		497			37			(15,665	)
Mineral licenses		(7,701	)		485			—			(7,216	)
Inventory		(604	)		(83	)		3			(684	)
Trade and other receivables		(224	)		100			—			(124	)
Loans and borrowings		(454	)		350			1			(103	)
Trade and other payables and other liabilities		(596	)		496			4			(96	)

Deferred tax assets (liabilities), net		(9,598	)		(5,104	)		(78	)		(14,780	)


	January 1, 2017			Tax benefit (expense) during the period recognised in profit or loss			Foreign currency translation effect			December 31, 2017
Deferred tax assets
Property, plant and equipment		677			81			1			759
Rehabilitation provision		694			108			—			802
Inventory		193			(9	)		(5	)		179
Trade and other receivables		831			(92	)		(4	)		735
Loans and borrowings		118			195			—			313
Finance lease liabilities		1,121			(138	)		—			983
Trade and other payables and other liabilities		700			(31	)		(13	)		656
Net operating loss carry-forwards		4,715			3,248			9			7,972
Other		59			26			1			86

Deferred tax liabilities
Property, plant and equipment		(15,665	)		(193	)		(11	)		(15,869	)
Mineral licenses		(7,216	)		564			—			(6,652	)
Inventory		(684	)		(117	)		—			(801	)
Trade and other receivables		(124	)		(207	)		1			(330	)
Loans and borrowings		(103	)		(9	)		—			(112	)
Trade and other payables and other liabilities		(96	)		(25	)		2			(119	)

Deferred tax assets (liabilities), net		(14,780	)		3,401			(19	)		(11,398	)


	January 1, 2018			Adjustment on initial application of IFRS 9		As of January 1, 2018 adjusted for the effect of IFRS 9			Tax (expense) benefit during the period recognised in profit or loss			Foreign currency translation effect			December 31, 2018
Deferred tax assets
Property, plant and equipment		759			—		759			(373	)		—			386
Rehabilitation provision		802			—		802			(29	)		—			773
Inventory		179			—		179			1,537			—			1,716
Trade and other receivables		735			—		735			52			3			790
Loans and borrowings		313			822		1,135			(815	)		—			320
Finance lease liabilities		983			—		983			(141	)		1			843
Trade and other payables and other liabilities		656			—		656			213			—			869
Net operating loss carry-forwards		7,972			—		7,972			5,646			5			13,623
Other		86			—		86			(15	)		3			74

Deferred tax liabilities
Property, plant and equipment		(15,869	)		—		(15,869	)		429			(28	)		(15,468	)
Mineral licenses		(6,652	)		—		(6,652	)		276			—			(6,376	)
Inventory		(801	)		—		(801	)		(28	)		(5	)		(834	)
Trade and other receivables		(330	)		—		(330	)		(160	)		(9	)		(499	)
Loans and borrowings		(112	)		50		(62	)		(3,835	)		(1	)		(3,898	)
Trade and other payables and other liabilities		(119	)		—		(119	)		(161	)		(57	)		(337	)

Deferred tax assets (liabilities), net		(11,398	)		872		(10,526	)		2,596			(88	)		(8,018	)

Recognised in the consolidated statement of financial position:


	December 31, 2018			December 31, 2017
Deferred tax assets		5,488			96
Deferred tax liabilities		(13,506	)		(11,494	)

Deferred tax liabilities, net		(8,018	)		(11,398	)

The Group offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.

For financial reporting purposes, the Group has not recognised deferred tax assets in the amount of RUB 33,216 million (2017: RUB 35,161 million) on losses in the amount of RUB 177,639 million (2017: RUB 194,659 million) that are available to carry forward against future taxable income of the subsidiaries in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as it is not probable that future taxable profit will be available for utilization of such assets. Deferred tax assets on net operating loss carry forwards which are considered to be realisable in the future, are mostly related to the Russian subsidiaries.

A deferred tax liability of approximately RUB 302 million and RUB 210 million as of December 31, 2018 and 2017, respectively, has not been recognised for temporary differences related to the Group’s investment in foreign subsidiaries primarily as a result of unremitted earnings of consolidated subsidiaries, as it is the Group’s intention, generally, to reinvest such earnings permanently.

Similarly, as of December 31, 2018 and 2017, no deferred tax liability has been recognised for temporary difference related to unremitted earnings of consolidated domestic subsidiaries as management believes the Group is able to control the timing of the reversal of these temporary differences and does not intend to reverse them in the foreseeable future.

Probable income tax risks of RUB 6,314 million and RUB 3,139 million as of December 31, 2018 and 2017, respectively, have been recorded in the Group’s consolidated financial statements. Due to changes in the Russian tax legislation effective January 1, 2017, calculation of the consolidated tax base of the consolidated group of taxpayers and the way to offset current losses and losses received in the previous tax periods (before January 2017) were changed. Due to the absence of official explanations of the regulatory authorities concerning changes, there is an uncertainty in the interpretation. The Group does not believe that any other material income tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading as of December 31, 2018.

Possible income tax risks of RUB 2,745 million and RUB 794 million as of December 31, 2018 and 2017, respectively, have not been recognised in the Group’s consolidated financial statements.