6. INCOME TAXES
On December 22, 2017, the U.S. enacted comprehensive and complex tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). The legislation included changes that impacted 2017, including but not limited to, a permanent reduction in the corporate tax rate to 21% and a one-time mandatory tax on certain undistributed earnings of foreign subsidiaries (“repatriation tax”).
U.S. Tax Reform also puts in place several new tax laws that are generally effective prospectively from January 1, 2018, including but not limited to: a base erosion and anti-abuse tax; elimination of U.S. federal taxes on substantially all dividends from foreign subsidiaries; a lower U.S. tax rate on certain revenues from sources outside the U.S.; and, implementation of a new provision to tax certain global intangible low-taxed income of foreign subsidiaries.
U.S. GAAP generally requires that the overall impact of tax legislation is recorded in the quarter of enactment. However, given the fundamental complexity of U.S. Tax Reform, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) that allows the Company to record provisional amounts for the impacts of the legislation, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment of the legislation. As of December 31, 2017, the Company has not completed the accounting in its entirety for the tax effects of the legislation. However, the Company was able to make a reasonable estimate of the impact of U.S. Tax Reform and we have recorded a provisional tax expense of $130 million in the year ended December 31, 2017. This provisional tax expense includes a $94 million tax expense to remeasure the net U.S. deferred tax assets to the newly enacted 21% corporate income tax rate. We believe this calculation is complete except for changes in estimates that can result from finalizing the filing of our 2017 U.S. corporate income tax return, as well as changes that may be a direct impact of other provisional amounts recorded due to the enactment of U.S. Tax Reform. The net provisional tax expense also includes a $36 million tax expense related to the repatriation tax. We believe that our preliminary calculations result in a reasonable estimate of the repatriation tax and related foreign tax credits and, as such, have included those amounts in our year-end income tax provision. As the analysis of accumulated foreign earnings and profits, related foreign tax paid, and state tax consequences are completed, we will update our provisional estimate of the repatriation tax in future periods.
The Company continues to evaluate the realizability of deferred tax assets for foreign tax credit carryforwards under U.S. Tax Reform. Due to the complexity associated with changes to the foreign tax credit laws, we have determined that the accounting is incomplete pursuant to SAB 118 and we have reverted to tax law that existed prior to U.S. Tax Reform. Specifically, we are still evaluating the impact on our future foreign tax credit limitations for our branches and other foreign tax credit carryforwards when applying new laws incorporated within U.S. Tax Reform. Based on prior law that existed before U.S. Tax Reform, the Company concluded that its available foreign tax credits are fully realizable.
We also continue to evaluate our intention concerning future repatriation of earnings from our foreign subsidiaries; however, due to the inability to evaluate the overall impact of U.S. Tax Reform to our organization, we have determined that the accounting is incomplete pursuant to SEC guidance and we have reverted to tax law that existed prior to U.S. Tax Reform. As such, NCR did not provide for additional U.S. income tax or foreign withholding taxes, if any, beyond the repatriation tax in 2017, on approximately $2.5 billion of undistributed earnings of its foreign subsidiaries as such earnings are intended to be reinvested indefinitely unless it is determined future repatriation would give rise to little or no net tax costs. Due to the complexities in the tax laws, the assumptions that we would have to make and the availability and calculation of associated foreign tax credits, it is not practicable to determine the amount of the related unrecognized deferred income tax liability associated with these undistributed earnings.
Completion of our accounting concerning future repatriation of earnings from our foreign subsidiaries and the realizability of foreign tax credits could lead to a material increase or decrease in our effective tax rate during 2018.
For the years ended December 31, income (loss) from continuing operations before income taxes consisted of the following:
|
| | | | | | | | | | | | |
In millions | | 2017 | | 2016 | | 2015 |
Income (loss) before income taxes | | | | | | |
United States | | $ | 149 |
| | $ | 35 |
| | $ | (24 | ) |
Foreign | | 333 |
| | 344 |
| | (71 | ) |
Total income (loss) from continuing operations before income taxes | | $ | 482 |
| | $ | 379 |
| | $ | (95 | ) |
For the years ended December 31, income tax expense (benefit) consisted of the following:
|
| | | | | | | | | | | | |
In millions | | 2017 | | 2016 | | 2015 |
Income tax expense (benefit) | | | | | | |
Current | | | | | | |
Federal | | $ | 14 |
| | $ | 18 |
| | $ | (7 | ) |
State | | 2 |
| | 4 |
| | 1 |
|
Foreign | | 54 |
| | 60 |
| | 37 |
|
Deferred | | | | | |
|
Federal | | 178 |
| | 12 |
| | 23 |
|
State | | (3 | ) | | 1 |
| | (6 | ) |
Foreign | | (3 | ) | | (3 | ) | | 7 |
|
Total income tax expense (benefit) | | $ | 242 |
| | $ | 92 |
| | $ | 55 |
|
The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:
|
| | | | | | | | | | | | |
In millions | | 2017 | | 2016 | | 2015 |
Income tax expense (benefit) at the U.S. federal tax rate of 35% | | $ | 169 |
| | $ | 133 |
| | $ | (33 | ) |
Foreign income tax differential | | (38 | ) | | (26 | ) | | 33 |
|
U.S. permanent book/tax differences | | 2 |
| | — |
| | (5 | ) |
Tax audit settlements | | — |
| | — |
| | (10 | ) |
Change in liability for unrecognized tax benefits | | (2 | ) | | (12 | ) | | (7 | ) |
Nondeductible transaction costs | | — |
| | — |
| | (1 | ) |
Goodwill impairment | | — |
| | — |
| | 5 |
|
U.S. valuation allowance | | — |
| | — |
| | (3 | ) |
U.S. manufacturing deduction | | (9 | ) | | (7 | ) | | — |
|
Settlement of UK London pension plan | | — |
| | — |
| | 77 |
|
U.S. Tax Reform | | 130 |
| | — |
| | — |
|
Employee share-based payments | | (8 | ) | | — |
| | — |
|
Other, net | | (2 | ) | | 4 |
| | (1 | ) |
Total income tax expense (benefit) | | $ | 242 |
| | $ | 92 |
| | $ | 55 |
|
NCR's tax provisions include a provision for income taxes in certain tax jurisdictions where its subsidiaries are profitable, but reflect only a portion of the tax benefits related to certain foreign subsidiaries' tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. During 2017, the tax rate was impacted by a provisional charge of $130 million relating to U.S. Tax Reform. During 2016, the tax rate was impacted by a less favorable mix of earnings, primarily driven by actuarial pension losses in foreign jurisdictions with valuation allowance against deferred tax assets. During 2015, there was no tax benefit recorded on the $427 million charge related to the settlement of the UK London pension plan due to a valuation allowance against deferred tax assets in the United Kingdom. Refer to Note 8, “Employee Benefit Plans” for additional discussion on the settlement of the UK London pension plan. Additionally, we favorably settled examinations with Canada for tax years 2002 through 2006 that resulted in a tax benefit of $10 million.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income/loss, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Given current earnings and anticipated future earnings at certain subsidiaries, the Company believes that there is a reasonable possibility sufficient positive evidence may become available that would allow the release of a valuation allowance within the next twelve months.
Deferred income tax assets and liabilities included in the Consolidated Balance Sheets as of December 31 were as follows:
|
| | | | | | | | |
In millions | | 2017 | | 2016 |
Deferred income tax assets | | | | |
Employee pensions and other benefits | | $ | 230 |
| | $ | 313 |
|
Other balance sheet reserves and allowances | | 185 |
| | 251 |
|
Tax loss and credit carryforwards | | 525 |
| | 578 |
|
Capitalized research and development | | 50 |
| | 99 |
|
Property, plant and equipment | | 6 |
| | 6 |
|
Other | | 27 |
| | 38 |
|
Total deferred income tax assets | | 1,023 |
| | 1,285 |
|
Valuation allowance | | (415 | ) | | (445 | ) |
Net deferred income tax assets | | 608 |
| | 840 |
|
Deferred income tax liabilities | | | | |
Intangibles | | 129 |
| | 239 |
|
Capitalized software | | 27 |
| | 43 |
|
Other | | 16 |
| | 7 |
|
Total deferred income tax liabilities | | 172 |
| | 289 |
|
Total net deferred income tax assets | | $ | 436 |
| | $ | 551 |
|
NCR recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of the future benefits from those assets. The valuation allowances cover deferred tax assets, primarily tax loss carryforwards, in tax jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those tax losses. If we are unable to generate sufficient future taxable income in the time period within which the temporary differences underlying our deferred tax assets become deductible, or before the expiration of our loss and credit carryforwards, additional valuation allowance could be required.
As of December 31, 2017, NCR had U.S. federal, U.S. state (tax effected), and foreign tax attribute carryforwards of approximately $1.5 billion. The net operating loss carryforwards that are subject to expiration will expire in the years 2018 through 2036. This includes U.S. tax credit carryforwards of $179 million. Approximately $21 million of the credit carryforwards do not expire, and $158 million of the credit carryforwards expire in the years 2018 through 2037. As a result of stock ownership changes our U.S. tax attributes could be subject to limitations under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, if further material stock ownership changes occur.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the years ended December 31:
|
| | | | | | | | | | | | |
In millions | | 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits - January 1 | | $ | 183 |
| | $ | 209 |
| | $ | 248 |
|
Increases related to tax positions from prior years | | 3 |
| | 3 |
| | 17 |
|
Decreases related to tax positions from prior years | | (1 | ) | | (34 | ) | | (37 | ) |
Increases related to tax provisions taken during the current year | | 23 |
| | 23 |
| | 35 |
|
Settlements with tax authorities | | (4 | ) | | (6 | ) | | (33 | ) |
Lapses of statutes of limitation | | (8 | ) | | (12 | ) | | (21 | ) |
Total gross unrecognized tax benefits - December 31 | | $ | 196 |
| | $ | 183 |
| | $ | 209 |
|
Of the total amount of gross unrecognized tax benefits as of December 31, 2017, $97 million would affect NCR’s effective tax rate if realized. The Company’s liability arising from uncertain tax positions is recorded in income tax accruals and other current liabilities in the Consolidated Balance Sheets.
We recognized interest and penalties associated with uncertain tax positions as part of the provision for income taxes in our Consolidated Statements of Operations of $2 million of expense, zero, and $4 million of benefit for the years ended December 31, 2017, 2016, and 2015, respectively. The gross amount of interest and penalties accrued as of December 31, 2017 and 2016 was $45 million and $41 million, respectively.
In the U.S., NCR files consolidated federal and state income tax returns where statutes of limitations generally range from three to five years. The Company resolved examinations for the tax years of 2009 and 2010 with the IRS in 2014, and U.S. federal tax years remain open from 2011 forward. In 2014, the IRS commenced an examination of our 2011, 2012, and 2013 income tax returns, which is ongoing. Years beginning on or after 2001 are still open to examination by certain foreign taxing authorities, including India, Korea, and other major taxing jurisdictions.
During 2018, the Company expects to resolve certain tax matters related to U.S. and foreign jurisdictions. As of December 31, 2017, we estimate that it is reasonably possible that unrecognized tax benefits may decrease by $35 million to $40 million in the next 12 months due to the resolution of these tax matters.