DEFERRED INCOME TAX

12 Months Ended

Dec. 31, 2018

Income tax expense for each of the years presented is as follows:



	Year ended December 31,
	2018		2017		2016

Current tax	(588,773	)	(450,384	)	(394,045	)
Effect of changes in tax law (1)	(28,596	)	—		—

Deferred tax (Note 20)
Deferred tax	232,485		106,047		(16,821	)
Effect of changes in tax law (1)	—		7,455		2,028
Withholding tax on dividend distributions (2)	—		—		(2,690	)
Recovery of income tax (3)	15,449		—		—

Income tax expense	(369,435	)	(336,882	)	(411,528	)

(1) For 2018, it includes mainly the option exercised by the Company of the asset revaluation for tax purpose in Argentina, for which an amount of $28.6 millions was included. The option was formally presented on March 28, 2019. For 2017, it includes the effects of the Argentine tax reform, which became effective starting January 1, 2018, including a reduction in the corporate income tax rate from 35% to 30% during the first two years (i.e., fiscal years starting on or after January 1, 2018 until December 31, 2019, inclusive) and to 25% going forward. Also, a one-time tax on an asset revaluation for tax purposes was approved.

It also includes the effects of the U.S. tax reform, which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. This required a revaluation of the deferred tax assets and liabilities and certain current tax payables to the newly enacted tax rates at the date of enactment. Consequently, the Company has recorded a net adjustment to deferred income tax benefit of $5.2 million for the year ended December 31, 2017.

For 2016 , it includes mainly the effects of the Colombian tax rate reform which introduced an increase from 39% to 40% in 2016, 42% in 2017, 43% in 2018 and of the Mexican mining tax.

(2) It includes the 10% withholding tax on dividend distributions made by Argentine companies to foreign beneficiaries since 2013.

(3) It includes the recovery of tax credits in Ternium Brasil Ltda.

Income tax expense for the years ended December 31, 2018, 2017 and 2016 differed from the amount computed by applying the statutory income tax rate in force in each country in which the company operates to pre-tax income as a result of the following:



	Year ended December 31,
	2018		2017		2016

Income before income tax	2,031,567		1,359,809		1,118,457

Income tax expense at statutory tax rate	(604,493	)	(387,666	)	(324,592	)
Non taxable income	102,870		16,232		606
Non deductible expenses	(16,201	)	(24,070	)	(5,838	)
Effect of currency translation on tax base (1)	161,536		51,167		(81,042	)
Recovery of income tax	15,449		—		—
Withholding tax on dividend distributions	—		—		(2,690	)
Effect of changes in tax law	(28,596	)	7,455		2,028

Income tax expense	(369,435	)	(336,882	)	(411,528	)

(1) Ternium applies the liability method to recognize deferred income tax on temporary differences between the tax bases of assets and their carrying amounts in the financial statements. By application of this method, Ternium recognizes gains and losses on deferred income tax due to the effect of the change in the value on the tax basis in subsidiaries, which have a functional currency different to their local currency, mainly Mexico.

Tax rates used to perform the reconciliation between tax expense (income) and accounting profit are those in effect at each relevant date or period in each applicable jurisdiction.

DEFERRED INCOME TAX

Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rate of the applicable country.

Changes in deferred income tax are as follows:



	As of December 31,
	2018		2017

At the beginning of the year	(392,265	)	(523,209	)

Acquisition of business (Note 3)	—		13,686
Translation differences	(7,201	)	(1,052	)
Effect of changes in tax law (Note 11)	—		7,455
Effect of initial inflation adjustment	(182,773	)	—
Credits (Charges) directly to other comprehensive income	9,547		4,808
Deferred tax (charge) credit (Note 11)	232,485		106,047

At the end of the year	(340,207	)	(392,265	)

The changes in deferred tax assets and liabilities (prior to offsetting the balances within the same tax jurisdiction) during the year are as follows:



Deferred tax liabilities	PP&E		Inventories		Intangible assets		Other		Total at December 31, 2018

At the beginning of the year	(539,839	)	(57,006	)	(18,692	)	(2,056	)	(617,593	)

Translation differences	9,726		527		497		(688	)	10,062
Effect of initial inflation adjustment	(161,044	)	(20,967	)	(762	)	—		(182,773	)
Income statement credit (charge)	168,702		36,130		3,031		1,656		209,519

At the end of the year	(522,455	)	(41,316	)	(15,926	)	(1,088	)	(580,785	)



Deferred tax assets	Provisions		Trade receivables		Tax losses (1)		Other		Total at December 31, 2018

At the beginning of the year	61,101		8,200		43,355		112,672		225,328

Translation differences	(6,036	)	(1,089	)	—		(10,137	)	(17,263	)
Credits (Charges) directly to other comprehensive income	—		—		—		9,547		9,547
Effect of changes in tax law	—		—		—		—		—
Income statement credit (charge)	17,882		4,154		(9,973	)	10,903		22,966

At the end of the year	72,947		11,265		33,382		122,984		240,578

(1) As of December 31, 2018, the recognized deferred tax assets on tax losses amount to $33,383 and there are net unrecognized deferred tax assets of $0.7 billion and unrecognized tax losses amounting to $1.2 billion. These two last effects are connected to the acquisition of Ternium Brasil (see Note 3).



Deferred tax liabilities	PP&E		Inventories		Intangible assets		Other		Total at December 31, 2017

At the beginning of the year	(625,963	)	(48,637	)	(28,050	)	(3,050	)	(705,700	)

Translation differences	6,907		(215	)	67		(29	)	6,730
Charges directly to other comprehensive income	—		—		—		(108	)	(108	)
Effect of changes in tax law	17,293		185		352		11		17,841
Income statement credit (charge)	61,924		(8,339	)	8,939		1,120		63,644

At the end of the year	(539,839	)	(57,006	)	(18,692	)	(2,056	)	(617,593	)



Deferred tax assets	Provisions		Trade receivables		Tax losses (2)		Other		Total at December 31, 2017

At the beginning of the year	53,188		7,488		56,297		65,518		182,491

Translation differences	(501	)	(273	)	—		(7,008	)	(7,782	)
Acquisition of business (Note 3)	—		—		—		13,686		13,686
Charges directly to other comprehensive income	—		—		—		4,916		4,916
Effect of changes in tax law	(2,692	)	(238	)	—		(7,456	)	(10,386	)
Income statement credit (charge)	11,106		1,223		(12,942	)	43,016		42,403

At the end of the year	61,101		8,200		43,355		112,672		225,328

(2) As of December 31, 2017, the recognized deferred tax assets on tax losses amount to $43,355 and there are no net unrecognized deferred tax assets of $0.9 billion and unrecognized tax losses amounting to $1.5 billion. These two last effects are connected to the acquisition of Ternium Brasil (see note 3).

Deferred tax assets and liabilities are offset when the entity a) has a legally enforceable right to set off the recognized amounts; and b) intends to settle the tax on a net basis or to realize the asset and settle the liability simultaneously.

The amounts shown in the statement of financial position (prior to offsetting the balances within the same tax jurisdiction) include the following:



	As of December 31,
	2018		2017

Deferred tax assets to be recovered after more than 12 months	153,681		155,350
Deferred tax assets to be recovered within 12 months	86,897		69,978
Deferred tax liabilities to be settled after more than 12 months	(538,854	)	(558,890	)
Deferred tax liabilities to be settled within 12 months	(41,931	)	(58,703	)

	(340,207	)	(392,265	)