Income Taxes
Accounting for Uncertainty in Income Taxes
As of March 31, 2017, 2016 and 2015, the Company’s unrecognized tax benefits totaled $15,196, $16,675 and $17,752, respectively, of which $7,710 would impact the Company’s March 31, 2017 effective tax rate if recognized. The following table presents the changes to unrecognized tax benefits during the years ended March 31, 2017, 2016 and 2015:
|
| | | | | | | | | |
| 2017 | 2016 | 2015 |
Balance at April 1 | $ | 16,675 |
| $ | 17,752 |
| $ | 12,635 |
|
Increase for current year tax positions | 275 |
| 24 |
| 7,260 |
|
Reduction for prior year tax positions | (1,764 | ) | (223 | ) | (1,055 | ) |
Impact of changes in exchange rates | 10 |
| (878 | ) | (1,088 | ) |
Balance at March 31 | $ | 15,196 |
| $ | 16,675 |
| $ | 17,752 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended March 31, 2017 and 2016, the Company accrued (reduced) interest, penalties and related exchange losses related to unrecognized tax benefits by $255 and $(224), respectively. As of March 31, 2017, accrued interest and penalties totaled $1,545 and $818, respectively. During the year ending March 31, 2017, the Company reduced its accrued interest and penalties for $287 related to the expiration of statute of limitations. As of March 31, 2016, accrued interest and penalties totaled $1,315 and $793, respectively.
During the fiscal year ending March 31, 2017, the Company’s total liability for unrecognized tax benefits, including the related interest and penalties, decreased from $18,784 to $17,558. The change in the liability for unrecognized tax benefits relates to expiration of statute of limitations of approximately $505 and decreases related to current period activity of approximately $721.
The Company expects to continue accruing interest expenses related to the remaining unrecognized tax benefits. Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Alliance One International, Inc. and Subsidiaries
(in thousands)
Note 12 – Income Taxes (continued)
Income Tax Provision (continued)
During the fiscal year ending March 31, 2017, the Zimbabwe High Court of Harare rejected the Company’s appeal relating to the recovery of an income tax receivable for certain withholding taxes which were assessed against the Company’s subsidiary in Switzerland. As a result, the Company concluded it was no longer more-likely-than-not that the receivable will be realized and a non-cash tax provision of approximately $9,000 was recorded as an adjustment to tax expense. The tax expense recognized this fiscal year does not impact cash flow as the Company had previously made a deposit of the amount due as part of the appeal process. The Company is in the process of appealing the decision to the Supreme Court of Zimbabwe.
It is reasonably possible that the Company's unrecognized tax benefits may decrease in the next twelve months by $261 due to the expiration of the statute of limitations, but the Company must acknowledge circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly have not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.
The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2017, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2014; however, the Company's net operating loss carryovers from prior periods remain subject to adjustment. Open tax years in state and foreign jurisdictions generally range from three to six years.
Income Tax Provision
The components of income (loss) before income taxes, equity in net income of investee companies and minority interests consisted of the following:
|
| | | | | | | | | |
| Years Ended March 31, |
| 2017 | 2016 | 2015 |
U.S. | $ | (87,963 | ) | $ | (55,073 | ) | $ | (24,749 | ) |
Non-U.S. | 48,321 |
| 146,747 |
| 15,810 |
|
Total | $ | (39,642 | ) | $ | 91,674 |
| $ | (8,939 | ) |
The details of the amount shown for income taxes in the Consolidated Statements of Operations follow:
|
| | | | | | | | | |
| Years Ended March 31, |
| 2017 | 2016 | 2015 |
Current | | | |
Federal | $ | (926 | ) | $ | — |
| $ | — |
|
State | — |
| — |
| — |
|
Non-U.S. | 23,974 |
| 26,476 |
| 19,850 |
|
| $ | 23,048 |
| $ | 26,476 |
| $ | 19,850 |
|
Deferred | | | |
Federal | $ | — |
| $ | — |
| $ | — |
|
State | — |
| — |
| — |
|
Non-U.S. | 432 |
| 5,739 |
| 2,068 |
|
| $ | 432 |
| $ | 5,739 |
| $ | 2,068 |
|
Total | $ | 23,480 |
| $ | 32,215 |
| $ | 21,918 |
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Alliance One International, Inc. and Subsidiaries
(in thousands)
Note 12 - Income Taxes (continued)
Income Tax Provision (continued)
The reasons for the difference between income tax expense based on income before income taxes, equity in net income of investee companies and minority interests and the amount computed by applying the U.S. statutory federal income tax rate to such income are as follows:
|
| | | | | | | | | |
| Years Ended March 31, |
| 2017 | 2016 | 2015 |
Tax expense (benefit) at U.S. statutory rate | $ | (13,875 | ) | $ | 32,086 |
| $ | (3,129 | ) |
Effect of non-U.S. income taxes | (6,410 | ) | (15,131 | ) | 647 |
|
U.S. taxes on non-U.S. income | 3,736 |
| 23,734 |
| 14,768 |
|
Foreign tax credits expiration | — |
| 47,552 |
| — |
|
Change in valuation allowance | 13,748 |
| (47,135 | ) | (14,908 | ) |
Increase (decrease) in reserves for uncertain tax positions | 264 |
| (1,203 | ) | 5,227 |
|
Change in tax rates | (308 | ) | 2,480 |
| — |
|
Exchange effects and currency translation | 6,046 |
| 15,492 |
| 14,308 |
|
Permanent items | 4,859 |
| 891 |
| 5,005 |
|
Write-down of state tax loss carryovers | 6,430 |
| — |
| — |
|
Nontaxable gain - Zimbabwe subsidiary reconsolidation | — |
| (26,551 | ) | — |
|
Write-down of withholding tax recoverable | 8,990 |
| — |
| — |
|
Actual tax expense | $ | 23,480 |
| $ | 32,215 |
| $ | 21,918 |
|
The deferred tax liabilities (assets) are comprised of the following:
|
| | | | | | |
| March 31, 2017 | March 31, 2016 |
Deferred tax liabilities: | | |
Unremitted earnings of foreign subsidiaries | $ | 30,581 |
| $ | 27,641 |
|
Intangible assets | 8,397 |
| 9,334 |
|
Fixed assets | 7,242 |
| 11,435 |
|
Total deferred tax liabilities | $ | 46,220 |
| $ | 48,410 |
|
Deferred tax assets: | | |
Reserves and accruals | $ | (24,308 | ) | $ | (23,870 | ) |
Tax credits | (7,286 | ) | (8,191 | ) |
Tax loss carryforwards | (125,601 | ) | (104,337 | ) |
Derivative transactions | (669 | ) | (892 | ) |
Postretirement and other benefits | (28,512 | ) | (30,635 | ) |
Unrealized exchange loss | (4,046 | ) | (12,645 | ) |
Other | (8,471 | ) | (8,207 | ) |
Gross deferred tax assets | (198,893 | ) | (188,777 | ) |
Valuation allowance | 131,774 |
| 118,518 |
|
Total deferred tax assets | $ | (67,119 | ) | $ | (70,259 | ) |
Net deferred tax asset | $ | (20,899 | ) | $ | (21,849 | ) |
The following table presents the breakdown between non-current (assets) liabilities:
|
| | | | | | |
| March 31, 2017 | March 31, 2016 |
Non-current asset | $ | (38,507 | ) | $ | (38,773 | ) |
Non-current liability | 17,608 |
| 16,924 |
|
Net deferred tax asset | $ | (20,899 | ) | $ | (21,849 | ) |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Alliance One International, Inc. and Subsidiaries
(in thousands)
Note 12 - Income Taxes (continued)
Income Tax Provision (continued)
During the year ended March 31, 2017, the net deferred tax asset balance decreased by $(454) for certain adjustments not included in the deferred tax expense (benefit), primarily for deferred tax assets related to pension accruals recorded in equity as part of Other Comprehensive Income (Loss) and currency translation adjustments.
For the year ended March 31, 2017, the valuation allowance increased by $13,256 which is inclusive of $(595) related to adjustments in other comprehensive income and $100 related primarily to currency translation adjustments. The valuation allowance increased primarily due to U.S. federal, U.S. state and non-U.S. tax losses. The valuation allowance is based on the Company's assessment that it is more likely than not that certain deferred tax assets, primarily foreign tax credits and net operating loss carryovers, will not be realized in the foreseeable future. Recent years' cumulative losses incurred in the United States as of March 31, 2017, combined with the effects of certain changes in the market, provide significant objective negative evidence in the evaluation of whether the U.S. entity will generate sufficient taxable income to realize the tax benefits of the deferred tax assets. This negative evidence carries greater weight than the more subjective positive evidence of favorable future projected income in the assessment of whether realization of the tax benefits of the deferred tax assets is more likely than not. Therefore, based on the
weight of presently objectively verifiable positive and negative evidence, it is management's judgment that realization of the tax benefits of the deferred tax assets is less than more likely than not.
At March 31, 2017, the Company has U.S federal tax loss carryovers of $324,608, non-U.S. tax loss carryovers of $75,873, and U.S. state tax loss carryovers of $575,419. The U.S. federal tax loss carryovers will expire in 2030 and thereafter. Of the non-U.S. tax loss carryovers, $29,129 will expire within the next 5 years, $31,586 will expire in later years, and $15,158 can be carried forward indefinitely. Of the U.S. state tax loss carryovers, $1,854 will expire within the next five years and $573,565
will expire thereafter. At March 31, 2017, the Company has foreign tax credit carryovers in the United States of $4,348, of which $2,195 will expire within the next five years.
Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryovers. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased if estimates of future taxable income change during the carryover period.
A provision of $30,581 has been made for U.S. or foreign taxes that may result from future remittances of foreign earnings of $95,662. No provision has been made for U.S. or foreign taxes that may result from future remittances of approximately $353,032 at March 31, 2017 and $334,445 at March 31, 2016 of undistributed earnings of foreign subsidiaries because management expects that such earnings will be reinvested overseas indefinitely. Determination of the amount of any unrecognized deferred income tax liability on these unremitted earnings is not practicable.