INCOME TAXES
The Company’s provision for income taxes from continuing operations consists of the following:
|
| | | | | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
Current: | | | |
United States federal |
| $32.7 |
|
| $0.1 |
|
| ($21.3 | ) |
Non-U.S. | 20.2 |
| 40.5 |
| 25.3 |
|
State and local | 2.9 |
| 2.4 |
| — |
|
Total current | 55.8 |
| 43.0 |
| 4.0 |
|
Deferred: | | | |
United States federal | (35.0 | ) | 14.7 |
| 6.0 |
|
Non-U.S. | 29.5 |
| (5.0 | ) | (4.3 | ) |
State and local | 8.1 |
| 0.2 |
| 2.9 |
|
Total deferred | 2.6 |
| 9.9 |
| 4.6 |
|
Total |
| $58.4 |
|
| $52.9 |
|
| $8.6 |
|
The Company’s combined pre-tax earnings from continuing operations relating to non-U.S. subsidiaries or branches were $153.2, $156.1 and $139.5 during 2017, 2016 and 2015, respectively.
The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% in 2018, eliminating certain deductions, imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. While the effective date of the new corporate tax rates for the Company is January 1, 2018, the Company is required to calculate the effects of changes in tax rates and laws on deferred tax balances (including the effects of the one-time transition tax) in 2017, the period in which the legislation was enacted. The Company has not completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals. However, the Company has reasonably estimated the effects of the 2017 Tax Act to be an increase in income tax expense of $34.1. The Company recorded the $34.1 income tax expense as a provisional estimate of the 2017 Tax Act in the consolidated financial statements as of December 31, 2017. The significant components of this expense include (i) the remeasurement of net deferred tax liabilities at the lower enacted U.S. federal corporate tax rate, which resulted in a net $97.9 decrease in income tax expense; (ii) a $20.3 net tax expense comprised of foreign withholding taxes related to certain non-U.S. earnings subject to repatriation offset by reversal of a deferred tax liability on previously undistributed foreign earnings; and (iii) the deemed repatriation tax on unremitted non-U.S. earnings and profits that were previously tax deferred and other tax impacts of the 2017 Tax Act, which resulted in a $111.7 increase in income tax expense, net of deductions and credits. The Company has not completed its analysis of the tax impact of the currency translation adjustment related to the change in indefinite reinvestment assertion as the computation is significantly impacted by the provisional estimates discussed above. As the Company completes its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made.
The following is a reconciliation of the statutory federal income tax rate with the effective tax rate from continuing operations for the tax expense in 2017, 2016 and 2015, respectively:
|
| | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % |
Permanent differences | 3.1 |
| 4.5 |
| 2.3 |
|
State and local income taxes, net of federal income tax | 1.1 |
| 0.9 |
| 1.1 |
|
International rate differential, including tax holidays | (24.5 | ) | (24.5 | ) | (21.2 | ) |
Non-U.S. valuation allowances | 2.4 |
| 2.1 |
| 1.0 |
|
Adjustments for uncertain tax positions | (1.0 | ) | (0.2 | ) | (12.9 | ) |
Legal entity restructuring charges | — |
| 2.3 |
| — |
|
Tax credits and other | (3.6 | ) | (0.1 | ) | 0.6 |
|
Foreign repatriation, net of foreign tax credits | 1.1 |
| 8.5 |
| (1.0 | ) |
Impact of the 2017 Tax Act | | | |
Deemed repatriation of non-U.S. earnings, net of foreign tax credits, and other | 62.1 |
| — |
| — |
|
Non-U.S. withholding taxes related to certain non-U.S. earnings subject to repatriation | 11.3 |
| — |
| — |
|
Remeasurement of U.S. net deferred tax liabilities from 35% to 21% | (54.5 | ) | — |
| — |
|
Effective rate | 32.5 | % | 28.5 | % | 4.9 | % |
The increase in the effective income tax rate in 2017 was primarily due to additional tax expense of $34.1 related to enactment of the 2017 Tax Act. This additional expense included $20.3 of net tax expense to record the deferred tax liability associated with a change in classification for a portion of undistributed earnings of the Company’s foreign subsidiaries, reflecting management’s plans to repatriate certain undistributed earnings of the Company’s foreign subsidiaries. This increase in the 2017 effective income tax rate was slightly offset by a shift in the geographical mix of worldwide income. The 2016 effective income tax rate was driven by the restructuring of the Company’s legal entity structure and repatriation of earnings into primarily non-U.S. jurisdictions to provide the Company with increased flexibility to manage its strategic priorities.
The 2017 Tax Act imposes a mandatory one-time tax on certain accumulated earnings of non-U.S. subsidiaries and, as a result, all previously undistributed earnings have now been subjected to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company recorded deferred tax liabilities of $34.9 related to non-U.S. withholding taxes related to certain earnings likely to be repatriated in the future. As of December 31, 2017, the Company had $390.6 of undistributed earnings of its non-U.S. subsidiaries for which it has not provided for non-U.S. withholding taxes because such earnings are intended to be reinvested indefinitely. It is not practicable to determine the amount of applicable taxes that would be due if such earnings were distributed.
The Company’s non-U.S. taxes for 2017, 2016 and 2015 included $5.2, $5.1 and $6.3, respectively, of benefit derived from tax holidays in the Philippines, the Dominican Republic, Costa Rica, El Salvador, Malaysia, Honduras, Nicaragua and Tunisia. This resulted in (2.9)%, (2.8)% and (3.6)% impact to the effective tax rate in 2017, 2016 and 2015, respectively. The tax holidays in the Philippines began to expire in 2017 and will continue to expire through 2020. The Company will apply to extend these tax holidays for additional terms of one to two years in accordance with local law. The tax holiday in Malaysia expired October 2, 2017.
The components of deferred tax assets and liabilities are as follows:
|
| | | | | | |
| At December 31, |
| 2017 | 2016 |
Deferred tax assets: | | |
Loss and credit carryforwards |
| $84.9 |
|
| $95.0 |
|
Pension and employee benefits | 32.1 |
| 35.4 |
|
Deferred revenue | 3.8 |
| 6.0 |
|
Foreign currency hedges | — |
| 15.9 |
|
Intercompany payables/receivables | 0.2 |
| 57.2 |
|
Other | 25.5 |
| 27.9 |
|
Valuation allowances | (49.1 | ) | (37.6 | ) |
Total deferred tax assets | 97.4 |
| 199.8 |
|
Deferred tax liabilities: | | |
Depreciation and amortization | 177.7 |
| 270.5 |
|
Contingent debt and accrued interest | 67.4 |
| 89.5 |
|
Foreign currency hedges | 3.5 |
| — |
|
Unremitted non-U.S. earnings | 42.0 |
| 15.9 |
|
Other | 8.1 |
| 4.0 |
|
Total deferred tax liabilities | 298.7 |
| 379.9 |
|
Net deferred tax liabilities |
| ($201.3 | ) |
| ($180.1 | ) |
The Company recorded a provisional adjustment to its U.S. federal deferred income tax assets and liabilities as of December 31, 2017 to reflect the reduction in the U.S. federal corporate income tax rate from 35% to 21% resulting from the 2017 Tax Act.
Deferred tax assets and liabilities in the preceding table, after netting by taxing jurisdiction, are in the following captions in the Consolidated Balance Sheets at December 31, 2017 and 2016.
|
| | | | | | |
| At December 31, |
| 2017 | 2016 |
Non-current deferred tax asset |
| $21.3 |
|
| $17.7 |
|
Non-current deferred tax liability | 222.6 |
| 197.8 |
|
Total deferred tax liability |
| ($201.3 | ) |
| ($180.1 | ) |
As of December 31, 2017 and 2016, $16.9 and $11.3, respectively, of the valuation allowances relate to the Company’s non-U.S. operations.
As of December 31, 2017, the Company has federal, state, and non-U.S. operating loss carryforwards of $43.1, $840.2 and $90.2, respectively. The federal operating loss carryforwards and state operating loss carryforwards expire between 2018 and 2037. The non-U.S. operating loss carryforwards include $35.7 with no expiration date; the remainder will expire between 2018 and 2036. The federal and state operating loss carryforwards include losses of $41.4 and $101.6, respectively, which were acquired in connection with business combinations. Utilization of the acquired federal and state tax loss carryforwards may be limited pursuant to Section 382 of the Internal Revenue Code of 1986.
As of December 31, 2017 and 2016, the liability for unrecognized tax benefits was $21.3 and $20.8, respectively, including $11.9 and $11.5 of accrued interest and penalties, respectively, and is recorded in Other long-term liabilities in the Consolidated Balance Sheets. The total amount of net unrecognized tax benefits that would affect income tax expense, if ever recognized in the Consolidated Financial Statements, is $17.2. This amount includes net interest and penalties of $9.7. The Company’s policy is to recognize interest and penalties accrued on unrecognized tax benefits as part of income tax expense. During 2017, the Company recognized a net benefit of $0.1 in interest and penalties, compared to a net benefit of $0.6 during 2016. The net benefit of $0.1 in 2017 includes $0 of expense related to interest and penalties accrued on positions still outstanding as of December 31, 2017.
A reconciliation of the beginning and ending total amounts of unrecognized tax benefits (exclusive of interest and penalties) is as follows:
|
| | | | | | |
| 2017 | 2016 |
Balance at January 1 | $ | 10.5 |
| $ | 21.6 |
|
Additions based on tax positions related to the current year | 0.6 |
| 0.4 |
|
Additions for tax positions of prior years | 0.2 |
| 0.3 |
|
Settlements | (1.0 | ) | 0.4 |
|
Reductions for tax positions of prior years | (0.2 | ) | — |
|
Lapse of statutes of limitations | (0.7 | ) | (12.2 | ) |
Balance at December 31 |
| $9.4 |
|
| $10.5 |
|
The liability for unrecognized tax benefits related to discontinued operations at December 31, 2017 and 2016 was $1.5 and $1.3, respectively.
The Company is currently attempting to resolve income tax audits relating to prior years in various jurisdictions. The Company has received assessments from these jurisdictions related to transfer pricing and deductibility of expenses. The Company believes that it is appropriately reserved with regard to these assessments as of December 31, 2017. Furthermore, the Company believes that it is reasonably possible that the total amounts of unrecognized tax benefits including interest will decrease between $0.6 and $16.2 prior to December 31, 2018, based upon resolution of audits; however, actual developments could differ from those currently expected.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and non-U.S. jurisdictions. With a few exceptions, the Company is no longer subject to examinations by tax authorities for years before 2002.