39. Income taxes

Income taxes for the year are composed as follows:

(in thousands of Euros)

2007

2006

Current income taxes

122,075

125,460

Deferred income taxes

11,428

2,388

133,503

127,848

Deferred income taxes in 2007 include a limited net negative effect of Euros 183 thousand due to the change in the tax rates in Italy and Germany starting from 2008.

The reconciliation between theoretical and effective taxes is as follows:

reconciliation between theoretical and effective taxes (in thousands of Euros)

2007

2006

Income before taxes

424,023

1,049,061

Income (loss) from discontinued operations

33,070

(1,970,039)

Reversal of income (loss) from discontinued operations (*)

1,940,200

Reversal of share of earnings of associates and joint ventures

(118,608)

(103,958)

Total taxable income

338,485

915,264

Theoretical income taxes

(90,494)

(300,144)

Main reasons for differences between theoretical and effective income taxes:

- Non-taxable income

169,692

288,359

- Non-deductible costs

(74,226)

(98,634)

- Utilization of tax loss carryforwards

32,788

27,483

- Unrecognized deferred taxes

(137,676)

(18,763)

- Other

(33,586)

(26,149)

Effective income taxes

(133,503)

(127,848)

* Share of loss of Olimpia S.p.A. for the year ended December 31, 2006, reclassified for comparative purposes in these financial statement to “Income (loss) from discontinued operations”

The effective tax charge of the Group for 2007 is 26.7 percent higher than the theoretical tax charge of the Group, since deferred tax assets were not recognized on the tax loss carryforwards held mainly by Pirelli & C. S.p.A. and largely attributable to disposals of investments to third parties. The figure also includes taxes unrelated to income such as IRAP taxes on labor costs and Pirelli & C. S.p.A.’s recognition of the tax effects generated by the option for national tax consolidation.

The theoretical tax charge of the Group is calculated by taking into account the nominal tax rates in the countries in which the major companies of the Group operate, as indicated in the following table:

theoretical tax charge of the Group

2007

2006

EUROPE

Italy

37.25%

37.25%

Spain

32.5%

35%

Germany

38.36%

38.34%

United Kingdom

30%

30%

Turkey

20%

20%

North America

USA

40%

40%

South America

Argentina

35%

35%

Brazil

34%

34%

Venezuela

34%

34%

Source : KPMG Corporate Tax Rate Survey 2007