Income Taxes
Income Tax Provision
The components of our provision for income taxes for the periods presented are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
Federal |
|
|
|
|
|
|
|
|
Current | $ | (687 | ) |
| $ | 6,412 |
|
| $ | 10,551 |
|
Deferred | (9,520 | ) |
| (1,608 | ) |
| 1,901 |
|
| (10,207 | ) |
| 4,804 |
|
| 12,452 |
|
State and Local |
|
|
|
|
|
|
|
|
Current | 1,954 |
|
| 7,014 |
|
| 9,075 |
|
Deferred | 572 |
|
| (2,026 | ) |
| 1,158 |
|
| 2,526 |
|
| 4,988 |
|
| 10,233 |
|
Foreign |
|
|
|
|
|
|
|
|
Current | 21,457 |
|
| 10,727 |
|
| 16,656 |
|
Deferred | (11,065 | ) |
| (17,231 | ) |
| (1,720 | ) |
| 10,392 |
|
| (6,504 | ) |
| 14,936 |
|
Total Provision | $ | 2,711 |
|
| $ | 3,288 |
|
| $ | 37,621 |
|
A reconciliation of effective income tax for the periods presented is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Pre-tax income (loss) attributable to taxable subsidiaries (a) | $ | 49,909 |
| | $ | (15,374 | ) | | $ | 72,343 |
|
| | | | | |
Federal provision (benefit) at statutory tax rate (35%) | $ | 17,468 |
| | $ | (5,380 | ) | | $ | 25,244 |
|
Rate differential | (13,134 | ) | | 892 |
| | (10,589 | ) |
Change in valuation allowance | 11,805 |
| | 6,477 |
| | 9,074 |
|
Non-taxable income | (8,073 | ) | | (5,399 | ) | | (5,475 | ) |
Revaluation of deferred taxes due to Tax Cuts and Jobs Act (b) | (7,826 | ) | | — |
| | — |
|
Windfall tax benefit (c) | (4,618 | ) | | — |
| | — |
|
Non-deductible expense | 3,010 |
| | 3,111 |
| | 6,982 |
|
State and local taxes, net of federal benefit | 1,115 |
| | 2,749 |
| | 6,151 |
|
Other | 2,964 |
| | 838 |
| | 6,234 |
|
Total provision | $ | 2,711 |
| | $ | 3,288 |
| | $ | 37,621 |
|
__________
| |
(a) | Pre-tax income attributable to taxable subsidiaries for 2017 excludes the impact of foreign exchange rates on an intercompany transaction related to the euro-denominated 2.25% Senior Notes issued in 2017 (Note 10) since it had no tax impact and eliminates in consolidation. Pre-tax loss attributable to taxable subsidiaries for 2016 was primarily driven by the impairment charges we recognized on international properties during the year (Note 8). |
| |
(b) | The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, lowered the U.S. corporate income tax rate from 35% to 21%. The dollar amount shown in the table reflects the net impact of the Tax Cuts and Jobs Act on our domestic TRSs. |
| |
(c) | Following the adoption of ASU 2016-09 during the first quarter of 2017, windfall tax benefits are reflected as a reduction to provision for income taxes. Under the former accounting guidance, windfall tax benefits were recognized within Additional paid-in capital in our consolidated statements of equity (Note 2). |
Deferred Income Taxes
Deferred income taxes at December 31, 2017 and 2016 consist of the following (in thousands):
|
| | | | | | | |
| At December 31, |
| 2017 | | 2016 |
Deferred Tax Assets | |
| | |
|
Net operating loss and other tax credit carryforwards | $ | 61,632 |
| | $ | 31,381 |
|
Basis differences — foreign investments | 31,472 |
| | 28,324 |
|
Unearned and deferred compensation | 21,192 |
| | 33,100 |
|
Other | 3,029 |
| | 5,560 |
|
Total deferred tax assets | 117,325 |
| | 98,365 |
|
Valuation allowance | (39,155 | ) | | (27,350 | ) |
Net deferred tax assets | 78,170 |
| | 71,015 |
|
Deferred Tax Liabilities | |
| | |
|
Basis differences — foreign investments (a) | (104,390 | ) | | (123,269 | ) |
Basis differences — equity investees | (23,950 | ) | | (17,282 | ) |
Deferred revenue | (3,784 | ) | | (7,318 | ) |
Total deferred tax liabilities | (132,124 | ) | | (147,869 | ) |
Net Deferred Tax Liability | $ | (53,954 | ) | | $ | (76,854 | ) |
__________
| |
(a) | Includes $17.3 million and $29.2 million as of December 31, 2017 and 2016, respectively, related to a portfolio of properties with locations in Canada, Mexico, and the United States leased to ABC Group Inc. |
Our deferred tax assets and liabilities are primarily the result of temporary differences related to the following:
| |
• | Basis differences between tax and GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, we assume the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets; |
| |
• | Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs, straight-line rent, prepaid rents, and intangible assets, as well as unearned and deferred compensation; |
| |
• | Basis differences in equity investments represents fees earned in shares recognized under GAAP into income and deferred for U.S. taxes based upon a share vesting schedule; and |
| |
• | Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions, that may be realized in future periods if the respective subsidiary generates sufficient taxable income. |
The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. If not utilized, our existing federal and state and local net operating losses will begin to expire in 2035 and our foreign net operating losses will begin to expire in 2018. As of December 31, 2017 and 2016, we recorded a valuation allowance related to these net operating loss carryforwards and basis differences in U.S. and foreign jurisdictions.
The net deferred tax liability in the table above is comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of $13.1 million and $14.0 million at December 31, 2017 and 2016, respectively, which are included in Other assets, net in the consolidated balance sheets, and other deferred tax liability balances of $67.0 million and $90.8 million at December 31, 2017 and 2016, respectively, which are included in Deferred income taxes in the consolidated balance sheets.
Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Beginning balance | $ | 5,586 |
| | $ | 4,304 |
|
Decrease due to lapse in statute of limitations | (1,853 | ) | | (97 | ) |
Addition based on tax positions related to prior years | 660 |
| | 1,264 |
|
Addition based on tax positions related to the current year | 639 |
| | 137 |
|
Foreign currency translation adjustments | 170 |
| | (22 | ) |
Ending balance | $ | 5,202 |
| | $ | 5,586 |
|
At December 31, 2017 and 2016, we had unrecognized tax benefits as presented in the table above that, if recognized, would have a favorable impact on our effective income tax rate in future periods. We recognize interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2017 and 2016, we had approximately $1.2 million and $1.1 million, respectively, of accrued interest related to uncertain tax positions.
Income Taxes Paid
Income taxes paid were $16.7 million, $19.3 million, and $49.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Owned Real Estate Operations
Effective February 15, 2012, we elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT. We conduct business primarily in North America and Europe, and as a result, we or one or more of our subsidiaries file income tax returns in the United States federal jurisdiction and various state, local, and foreign jurisdictions.
Investment Management Operations
We conduct our investment management services in our Investment Management segment through TRSs. Our use of TRSs enables us to engage in certain businesses while complying with the REIT qualification requirements and also allows us to retain income generated by these businesses for reinvestment without the requirement to distribute those earnings. Certain of our inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Periodically, shares in the Managed REITs that are payable to our TRSs in consideration of services rendered are distributed from TRSs to us.
Tax authorities in the relevant jurisdictions may select our tax returns for audit and propose adjustments before the expiration of the statute of limitations. Our tax returns filed for tax years 2012 through 2016 or any ongoing audits remain open to adjustment in the major tax jurisdictions.