Income Taxes
The components of (loss) income from continuing operations before income taxes and the related income tax benefit (provision) are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| Successor Company | | | Predecessor Company |
| Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2015 | | | 2015 |
U.S. | $ | (41,143 | ) | | $ | (53,843 | ) | | $ | (1,820 | ) | | | $ | 1,745,628 |
|
Non-U.S. | (316,870 | ) | | (1,482,928 | ) | | (295,686 | ) | | | (224,218 | ) |
Total | $ | (358,013 | ) | | $ | (1,536,771 | ) | | $ | (297,506 | ) | | | $ | 1,521,410 |
|
|
| | | | | | | | | | | | | | | | |
| Successor Company | | | Predecessor Company |
| Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2015 | | | 2015 |
Current: | | | | | |
| | | |
|
Federal | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
|
Foreign | 5,779 |
| | (291 | ) | | 2,502 |
| | | (1,104 | ) |
Total current income tax benefit (provision) | 5,779 |
| | (291 | ) | | 2,502 |
| | | (1,104 | ) |
Deferred: | | | | | |
| | | |
|
Federal | — |
| | 2,864 |
| | (403 | ) | | | (814 | ) |
State, net of Federal tax benefit (provision) | — |
| | 319 |
| | (45 | ) | | | (91 | ) |
Foreign | 568 |
| | — |
| | 2,961 |
| | | — |
|
Total deferred income tax benefit (provision) | 568 |
| | 3,183 |
| | 2,513 |
| | | (905 | ) |
Total income tax benefit (provision) | $ | 6,347 |
| | $ | 2,892 |
| | $ | 5,015 |
| | | $ | (2,009 | ) |
A reconciliation of the U.S. statutory Federal income tax rate to our effective tax rate as a percentage of (loss) income from continuing operations before income tax benefit (provision) is as follows:
|
| | | | | | | | |
| Successor Company | | | Predecessor Company |
| Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2015 | | | 2015 |
Statutory Federal tax rate | 35% | | 35% | | 35% | | | 35% |
Reorganization items | — | | — | | — | | | (46) |
Effect of foreign operations | — | | (2) | | (12) | | | — |
Effect of statutory Federal tax rate change on deferred tax asset | (37) | | — | | — | | | — |
Change in deferred tax asset valuation allowance | 16 | | (32) | | (20) | | | 9 |
Effect of permanent differences | (12) | | — | | — | | | — |
Other, net | — | | (1) | | (1) | | | 2 |
Effective tax rate | 2% | | — | | 2% | | | — |
The components of our deferred tax assets and liabilities consist of the following:
|
| | | | | | | |
| Successor Company |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | |
| | |
|
Net operating losses and capital loss carryforwards | $ | 6,509,165 |
| | $ | 6,363,915 |
|
Allowance for doubtful accounts | 20,122 |
| | 17,867 |
|
Accrued expenses | 53,867 |
| | 54,263 |
|
Accrual for contingent liabilities | 27,016 |
| | 24,669 |
|
Intangible assets | 121,122 |
| | 130,983 |
|
Property, plant and equipment | 143,701 |
| | 253,882 |
|
Leasing related activity | 27,519 |
| | 25,822 |
|
Equity compensation | 1,151 |
| | 1,182 |
|
Long term debt | 55,146 |
| | 53,159 |
|
Inventory reserve | 717 |
| | 1,729 |
|
Other | 1,004 |
| | 17,573 |
|
| 6,960,530 |
| | 6,945,044 |
|
Valuation allowance | (6,957,569 | ) | | (6,945,044 | ) |
Total deferred tax asset | 2,961 |
| | — |
|
Deferred tax liabilities: | | | |
Other | 2,432 |
| | — |
|
Total deferred tax liability | 2,432 |
| | — |
|
Net deferred tax asset | $ | 529 |
| | $ | — |
|
As of December 31, 2017, we had $1.4 billion of net operating loss carryforwards for U.S. Federal and state income tax purposes, which expire in various amounts beginning in 2027 through 2037. Due to our emergence from bankruptcy on June 26, 2015, the timing and manner in which we will utilize the net operating loss carryforwards in any year will be limited relating to changes in our ownership. The annual limitation is $40.2 million, and some of our net operating loss carryforwards will expire before use in the future due to this limitation. As a result of this limitation, our net operating loss carryforwards for U.S. Federal and state income tax purposes are $898.9 million.
As of December 31, 2017, our Brazilian subsidiaries had $2.1 billion of net operating loss carryforwards that can be carried forward indefinitely, but the amount that we can utilize annually is limited to 30% of Brazilian taxable income before the net operating loss deduction. Our foreign subsidiaries' ability to utilize the foreign tax net operating losses in any single year ultimately depends upon their ability to generate sufficient taxable income.
As of December 31, 2017, our holding companies in Luxembourg each had net operating losses ranging from $1.1 billion to $8.7 billion that can be carried forward indefinitely. An immaterial amount of losses generated in 2017 can be carried forward 17 years. Our holding companies in Spain had $964.2 million of net operating loss carryforwards that can be carried forward 18 years. Given the nature of activities that are considered taxable in these jurisdictions and the activities engaged in by the holding companies, these net operating loss carryforwards will never be utilized by our holding companies.
The deferred tax asset valuation allowances that our subsidiaries and holding companies had as of December 31, 2017 and 2016 are as follows:
|
| | | | | | | |
| Successor Company |
| 2017 | | 2016 |
| (in millions) |
Brazil | $ | 1,162.5 |
| | $ | 1,089.9 |
|
U.S. | 240.4 |
| | 367.2 |
|
Luxembourg | 5,313.7 |
| | 5,275.9 |
|
Spain | 241.0 |
| | 212.0 |
|
Total | $ | 6,957.6 |
| | $ | 6,945.0 |
|
The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. Valuation allowances are required to be recognized on deferred tax assets unless it is determined that it is “more-likely-than-not” that the asset will be realized. As of December 31, 2017, we continued to record full valuation allowances on the deferred tax assets of our foreign operating companies, our U.S. parent company and subsidiaries and our foreign holding companies due to substantial negative evidence, including the recent history of cumulative losses and the projected losses for 2018 and subsequent years.
We are subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which we operate and to potential examination by the relevant tax authorities. The earliest years that remain subject to examination by jurisdiction are: U.S. - 2007; Brazil - 2012, and Luxembourg, Netherlands and Spain - 2009. We regularly assess the potential outcome of future examinations in each of the taxing jurisdictions when determining the adequacy of our provision for income taxes. We have only recorded financial statement benefits for tax positions which we believe reflect the “more-likely-than-not” criteria incorporated in the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax accruals in accordance with this authoritative guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax accrual is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the amounts of the recorded financial statement benefits and tax accruals reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on the financial statements or may exceed the current income tax reserves in amounts that could be material.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. Federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; and (3) requiring a current inclusion in U.S. Federal taxable income of certain earnings of controlled foreign corporations, known as global intangible low-taxed income.
We have prepared an analysis of the effect of the Tax Act on our U.S. income taxes and have formed the following conclusions:
| |
• | In response to the reduction in the U.S. Federal tax rate to 21%, which was effective January 1, 2018, we have recorded our deferred tax asset and corresponding valuation allowance as of December 31, 2017 at the 21% tax rate with no impact to our income tax expense; |
| |
• | We have determined that no tax liability needs to be recorded for the one-time transition tax as our international subsidiaries have negative cumulative foreign earnings; and |
| |
• | We are electing to treat the tax on global intangible low-taxed income as an expense in the period in which we become liable for this tax and are not currently recording a deferred tax liability for this item. |
In accordance with Staff Accounting Bulletin, or SAB No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” our measurement period remains open with respect to the above items in order to allow us to evaluate all possible impacts of evolving guidance to be issued by the Internal Revenue Service and the FASB.