Income Taxes
Components of income from continuing operations before income taxes and noncontrolling shareholders’ interests were as follows:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
United States | | $ | 211,225 |
| | $ | 319,156 |
| | $ | 314,263 |
|
Foreign | | 32,700 |
| | 47,937 |
| | 19,765 |
|
Total | | $ | 243,925 |
| | $ | 367,093 |
| | $ | 334,028 |
|
The provision (benefit) for income tax for continuing operations consisted of the following:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 69,463 |
| | $ | 100,714 |
| | $ | 67,405 |
|
State and local | | 6,304 |
| | 12,445 |
| | 12,837 |
|
Foreign | | 9,842 |
| | 14,990 |
| | 12,948 |
|
| | 85,609 |
| | 128,149 |
| | 93,190 |
|
Deferred: | | | | | | |
Federal | | 48,866 |
| | (6,730 | ) | | 23,466 |
|
State and local | | 4,915 |
| | (763 | ) | | 5,157 |
|
Foreign | | 7,790 |
| | (4,857 | ) | | (3,589 | ) |
| | 61,571 |
| | (12,350 | ) | | 25,034 |
|
| | $ | 147,180 |
| | $ | 115,799 |
| | $ | 118,224 |
|
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the "Tax Act", which made broad and complex changes to the tax code. In conjunction with that enactment, the SEC staff issued SAB 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act," which provides guidance on accounting for the impact of the Tax Act over a measurement period. In accordance with the guidance set forth under SAB 118, the Company recognizes that it has not yet completed its accounting for certain income tax effects of the Tax Act.
Where the Company has been able to make reasonable estimates of the effects for which its analyses are still being completed, it has recorded provisional amounts for those effects based on all information available as of December 31, 2017. These amounts will then be adjusted during the measurement period as the Company finalizes its analyses. Provisional amounts based on reasonable estimates were recorded for the following elements of the Tax Act as of December 31, 2017:
Remeasurement of deferred tax assets and liabilities: The Tax Act reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The rate change resulted in a reduction to our net deferred tax asset of $20,413 with a corresponding increase to deferred tax expense. The Company is still completing its analysis of the impact of this change and certain other specific changes related to 100 percent expensing of qualified fixed assets and new limitations on the deductibility of executive compensation.
Transition Tax on Unrepatriated Foreign Earnings: Upon enactment, the Tax Act also provides for a mandatory, one-time deemed repatriation of previously untaxed accumulated earnings and profits of the Company's foreign subsidiaries. The Company has recorded a provisional tax liability, commonly referred to as the "Transition Tax," of $35,378. The Transition Tax payable, net of foreign tax credit carryforwards of $1,707, will be paid over eight years in installments of $2,694 each year from 2018 through 2022 and the remaining liability of $20,201 in 2023 - 2025.
Where the Company has not been able to make reasonable estimates of the effects for which its analyses are still being completed, it has not recorded provisional amounts. Beginning in the first reporting period during the SAB 118 measurement period in which the Company obtains necessary information and is able to analyze and prepare reasonable estimates, it will record amounts as needed. Provisional amounts were not recorded for the following elements of the Tax Act as of December 31, 2017:
Indefinite Reinvestment Assertion: Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on unremitted foreign earnings because it overcame the presumption of the repatriation of those earnings. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately $495 million of unremitted foreign earnings. While the Company has accrued Transition Tax payable on the deemed repatriation of earnings that were previously indefinitely reinvested, it was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for its remaining outside basis differences or assess how the Tax Act will impact the Company's existing assertion of indefinite reinvestment. As such, no change has been made with respect to that assertion for the year ended December 31, 2017.
Global intangible low-taxed income: The Tax Act subjects a U.S. parent shareholder to current tax on its “global intangible low-taxed income” (GILTI). For the GILTI provisions of the Tax Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
A reconciliation of income tax expense (benefit) for continuing operations to the tax based on the U.S. statutory rate is as follows:
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| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Income tax provision at 35% | | $ | 85,375 |
| | $ | 128,483 |
| | $ | 116,910 |
|
Expiration of capital loss carryforward | | — |
| | — |
| | 18,376 |
|
Valuation allowance - China | | (6,671 | ) | | (2,441 | ) | | (18,200 | ) |
Valuation allowance - U.K. | | 18,915 |
| | — |
| | — |
|
State and local income tax, net of federal income tax effect | | 7,867 |
| | 8,693 |
| | 12,321 |
|
Domestic manufacturing deduction | | (2,940 | ) | | (9,870 | ) | | (6,580 | ) |
U.S. tax credits | | (2,474 | ) | | (3,013 | ) | | (3,186 | ) |
Tax law or rate change excluding U.S. tax act | | — |
| | 794 |
| | 2,383 |
|
U.S. tax act - transition tax | | 35,378 |
| | — |
| | — |
|
U.S. tax act - remeasurement of deferred taxes | | 20,413 |
| | — |
| | — |
|
Difference in effective tax rates of international operations | | (4,667 | ) | | (4,900 | ) | | (932 | ) |
Other - net | | (4,016 | ) | | (1,947 | ) | | (2,868 | ) |
Provision for income taxes | | $ | 147,180 |
| | $ | 115,799 |
| | $ | 118,224 |
|
Payments for income taxes in 2017, 2016 and 2015, net of refunds, were $67,782, $131,001 and $76,206, respectively.
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:
|
| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Postretirement and other employee benefits | | $ | 116,321 |
| | $ | 191,099 |
|
Product liability | | 32,668 |
| | 67,528 |
|
Net operating loss, capital loss, and tax credit carryforwards | | 14,174 |
| | 15,274 |
|
All other items | | 33,423 |
| | 48,718 |
|
Total deferred tax assets | | 196,586 |
| | 322,619 |
|
Deferred tax liabilities: | | | | |
Property, plant and equipment | | (101,720 | ) | | (160,075 | ) |
All other items | | (6,099 | ) | | (9,685 | ) |
Total deferred tax liabilities | | (107,819 | ) | | (169,760 | ) |
| | 88,767 |
| | 152,859 |
|
Valuation allowances | | (30,102 | ) | | (20,228 | ) |
Net deferred tax asset | | $ | 58,665 |
| | $ | 132,631 |
|
At December 31, 2017, the Company has gross U.S. federal and foreign tax losses available for carryforward of $6,731 and $64,972, respectively. The Company has $240 of state tax credits available for carryforward. The state tax attributes will expire from 2018 through 2027. Valuation allowances have been provided for those items for which, based upon an assessment, it is more likely than not that some portion may not be realized.
The Company assesses the available positive and negative evidence to estimate if future taxable income will be generated to realize existing deferred tax assets in their respective jurisdictions. In the United Kingdom, a significant piece of objective negative evidence evaluated was the cumulative losses that have now been incurred over the three-year period ended December 31, 2017. This significant piece of objective negative evidence limits the ability to consider other subjective evidence such as projections for future growth. On the basis of this evaluation, a full valuation allowance was recorded for the year ended December 31, 2017 which resulted in incremental deferred tax expense of $18,915.
In China, the Company achieved three years of cumulative pretax income through the period ended December 31, 2017 with Cooper Tire (China) Investment Co., Ltd. Based in part on that achievement, the Company determined that sufficient positive evidence exists as of December 31, 2017 to conclude that it is more likely than not that additional deferred taxes of $6,671 are now realizable and therefore released the valuation allowance accordingly.
The Company applies the rules under ASC 740-10 in its Accounting for Uncertainty in Income Taxes for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the largest amount that meets the more likely than not recognition threshold. The Company’s unrecognized tax benefits, exclusive of interest, totaled approximately $2,283 at December 31, 2017, as itemized in the tabular roll forward below. The unrecognized tax benefits at December 31, 2017 relate to uncertain tax positions in tax years 2013 through 2017. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
|
| | | |
| Unrecognized Tax Benefits |
Balance at December 31, 2014 | $ | 8,314 |
|
Settlements for tax positions of prior years | (367 | ) |
Additions for tax positions of prior years | 1,151 |
|
Reductions for tax positions of prior years | (942 | ) |
Statute lapses | (2,313 | ) |
Balance at December 31, 2015 | 5,843 |
|
Settlements for tax positions of prior years | (518 | ) |
Additions for tax positions of the current year | 714 |
|
Additions for tax positions of prior years | 1,518 |
|
Statute lapses | (4,360 | ) |
Balance at December 31, 2016 | 3,197 |
|
Settlements for tax positions of prior years | (139 | ) |
Additions for tax positions of the current year | 47 |
|
Additions for tax positions of prior years | 438 |
|
Statute lapses | (1,260 | ) |
Balance at December 31, 2017 | $ | 2,283 |
|
Of this amount, the effective rate would change upon the recognition of approximately $2,283 of these unrecognized tax benefits. The Company recorded, through the tax provision, approximately $17 of benefit on interest reduction for 2017, $347 of benefit on interest reduction for 2016, and $63 of interest expense for 2015. At December 31, 2017, the Company has $124 of interest accrued as an ASC 740-10 reserve.
The Company operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for years before 2014 and state and local examinations for years before 2013, with limited exceptions. Furthermore, the Company’s non-U.S. subsidiaries are generally no longer subject to income tax examinations in major foreign taxing jurisdictions for years prior to 2008. The income tax returns of certain of our subsidiaries in various jurisdictions are currently under examination and it is possible that these examinations will conclude within the next twelve months. However, it is not possible to estimate net increases or decreases to the Company’s unrecognized tax benefits during the next twelve months.