Income taxes

12 Months Ended

Dec. 31, 2019

11.	Income taxes

(a)

Reconciliation of income tax expense

The following is a reconciliation of income tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the years ended December 31, 2019, 2018 and 2017:


	2019			2018			2017
Profit (loss) before income taxes		1,090,655			442,339			(95,665	)
Brazilian statutory rate		34	%		34	%		34	%

Tax (expense) benefit at the statutory rate		(370,823	)		(150,395	)		32,526
Additions (exclusions):
Gain from entities not subject to the payment of income taxes		47,782			(3,283	)		(37,098	)
Interest on capital		10,102			—			—
Other permanent differences		6,039			(2,871	)		(3,805	)
Equity pickup on associates		(275	)		169			105
Unrecorded deferred taxes		(2,030	)		(652	)		(1,332	)
Use of tax losses previously unrecorded		5,163			2,689			218
Unrealized gain on previously held interest on acquisition		—			7,290			—
Tax incentives (i)		5,666			3,300			—
Research and development tax benefit		8,188			4,026			—
Other tax incentives		3,728			2,615			82

Total income tax and social contribution (expense) gain		(286,460	)		(137,112	)		(9,304	)

Effective tax rate		26	%		31	%		(10	)%
Current income tax and social contribution		(217,228	)		(154,882	)		(5,682	)
Deferred income tax and social contribution		(69,232	)		17,770			(3,622	)

Total income tax and social contribution (expense) gain		(286,460	)		(137,112	)		(9,304	)

(i)	Incentives to cultural and artistic activities (“Rouanet Law”), sports, child and adolescent rights fund and fund for the elderly.

(b)

Deferred income taxes

Net changes in deferred income taxes relate to the following:


	2019			2018
Beginning balance before adoption of new accounting standard		182,445			145,966
Adoption of new accounting standard		—			24,362

Beginning balance after adoption of new accounting standard		182,445			170,328
Losses available for offsetting against future taxable income		(46,177	)		(8,328	)
Tax credit carryforward		(2,720	)		18,762
Tax deductible goodwill on non-controlling interest		61,127			—
Temporary differences under FIDC		(27,806	)		(16,095	)
Share-based compensation		6,354			16,103
Deferred income taxes arising from business combinations		5,890			(8,672	)
Technological innovation benefit		(6,385	)		(3,079	)
Changes in FVOCI		7,758			7,198
Others		1,608			6,228

Final balance		182,094			182,445

Deferred tax assets on tax losses		124,530			174,380
Tax deductible goodwill on non-controlling interest		61,127			—
Assets at FVOCI		39,060			31,302
Tax credit carryforward		34,932			37,652
Share-based compensation		26,158			19,804
Temporary differences under FIDC		(68,099	)		(40,293	)
Deferred income taxes arising from business combinations		(30,961	)		(36,851	)
Technological innovation benefit		(9,464	)		(3,079	)
Others		4,811			(470	)

Deferred tax, net		182,094			182,445

Under Brazilian tax law, temporary differences and tax losses can be carried forward indefinitely, however the loss carryforward can only be used to offset up to 30% of taxable profit for the year.

(c)

Unrecognized deferred taxes

The Group has accumulated tax loss carryforwards and other temporary differences in some subsidiaries in the amount of R$ 2,714 (2018 – R$ 5,439) for which a deferred tax asset was not recognized, and are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognized with respect of these losses as they cannot be used to offset taxable profits between subsidiaries of the Group, and there is no other evidence of recoverability in the near future.