18. INCOME TAXES

 

The Company files a consolidated federal income tax return. The components of income before income taxes and income tax expense are as follows:

 

 

A reconciliation of recorded federal provision for income taxes to the expected amount computed by applying the federal statutory rate of 35% for all periods to income before income taxes is as follows:

 

 

For the year ended December 31, 2017, the Company’s income tax expense reflects the impact of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017. H.R. 1 (the “2017 Tax Reform”) was enacted on December 22, 2017, permanently reduced the corporate tax rate to 21% from 35%, effective January 1, 2018, and implemented a change from a system of worldwide taxation with deferral to a hybrid territorial system. These changes resulted in an income tax benefit to the Company of approximately $64.9 million primarily related to the revaluation of its domestic deferred tax liabilities, offset in part by the addition of a valuation allowance against its foreign tax credit carryforward.

 

The 2017 Tax Reform includes a provision designed to tax global intangible low-taxed income ("GILTI") starting in 2018. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company has elected to treat any potential GILTI inclusions as a period cost in the applicable tax year as the Company is not projecting any material impact from GILTI inclusions.

 

Deferred tax assets and liabilities consist of the following:

 

 

At December 31, 2017, the Company has approximately $20.3 million of U.S. federal net operating loss carryovers (“NOLs”), approximately $6.1 million of capital losses, and approximately $40.2 million of foreign tax credits that expire at various times through the year 2034. Pursuant to Section 382 of the Internal Revenue Code, the Company’s utilization of such NOLs is subject to an annual limitation. At December 31, 2017, the Company has state income tax NOLs of approximately $458.1 million, approximately $6.1 million of capital losses, and state credits of approximately $9.9 million available to offset future state taxable income. The state NOLs, capital losses, and credits will expire at various times through the year 2036. The Company believes it is more likely than not that the foreign tax credit, capital losses and a portion of the state credits will expire before being utilized. Therefore, in accordance with ASC 740-10-30, “Income Taxes—Overall—Initial Measurement,” the Company has established a valuation allowance against the foreign tax credit, capital losses, and a portion of the state credits that the Company expects to expire prior to utilization. The Company has $101.5 million of foreign NOLs, $3.3 million of foreign capital losses, and $1.3 million of a foreign minimum alternative tax credit at December 31, 2017. The foreign NOLs and capital losses have an unlimited carryforward period and the foreign minimum alternative tax credit expires at various times through 2031. The Company does not believe it is more likely than not that the NOLs or capital losses will be utilized and has therefore established a full valuation allowance against them. The Company’s valuation allowance increased $31.7 million, $2.5 million and $29.2 million during the years ended December 31, 2017, 2016 and 2015, respectively. The change in the valuation allowance during the year ended December 31, 2017 is primarily the result of recording a valuation allowance against the Company’s foreign tax credits as a result of the passage of the 2017 Tax Reform.

 

With the passage of the 2017 Tax Reform, all previously untaxed earnings and profits (“E&P”) are required to be taxed. The Company had an estimated $325.2 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized $78.2 million of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. The transition tax was fully offset by foreign tax credits. The transition tax resulted in additional tax basis with respect to investments in certain foreign subsidiaries. U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in certain foreign subsidiaries that is permanently reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of these foreign subsidiaries in its operations outside the United States to support its international growth.

 

Should certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of carryovers and credits that can be utilized. The impact of such a limitation would likely not be significant.

 

As a result of the adoption of ASU 2016-09 in 2017, the net tax benefit or expense resulting from the vesting of restricted shares and other employee stock programs is now recorded as a component of income tax expense. Prior to the adoption of ASU 2016-09, the net tax (expense) benefit related to stock-based compensation recorded in additional paid-in capital was approximately $(1.7) million and $20.1 million for the years ended December 31, 2016 and 2015, respectively. The net tax benefit (expense) of the change in the carrying value of the Euro-denominated Senior Notes due 2022 and 2023 due to foreign exchange fluctuations that was recorded directly to other comprehensive income was approximately $26.2 million and $(2.4) million for the years ended December 31, 2017 and 2016, respectively.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 

 

Included in the balance at December 31, 2017 are tax positions reclassified from deferred income taxes. Deductibility or taxability is highly certain for these tax positions but there is uncertainty about the timing of such deductibility or taxability. As a result of the passage of the 2017 Tax Reform, any rate differential between the reserved tax position and the related deferred tax asset or liability, along with interest and penalties, could impact the annual effective tax rate.  This timing uncertainty could also accelerate the payment of cash to the taxing authority to an earlier period.

 

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has potential cumulative interest and penalties with respect to unrecognized tax benefits of approximately $41.6 million, $39.4 million and $31.9 million at December 31, 2017, 2016 and 2015, respectively. For the years ended December 31, 2017, 2016 and 2015, the Company recorded approximately $5.5 million, $8.1 million and $4.5 million, respectively, in potential interest and penalties with respect to unrecognized tax benefits.

 

At December 31, 2017, 2016 and 2015, the Company had unrecognized tax benefits of approximately $170.0 million, $121.4 million and $107.9 million, respectively that, if recognized, would impact the effective tax rate. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.

 

The Company files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. With some exceptions, the tax returns filed by the Company for years before 2012 are no longer subject to U.S. federal income tax examinations or state and local examinations. With some exceptions, the tax returns filed by the Company for years before 2013 are no longer subject to foreign income tax examinations.