NOTE 16. Income Taxes
Income Tax Provision
Details of the Company's income tax provision from continuing operations are provided in the table below:
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (Dollars in Millions) |
Income (Loss) Before Income Taxes: (a) | | | | | |
U.S | $ | 84 |
| | $ | 41 |
| | $ | (69 | ) |
Non-U.S | 132 |
| | 118 |
| | 131 |
|
Total income before income taxes | $ | 216 |
| | $ | 159 |
| | $ | 62 |
|
Current Tax Provision: | | | | | |
U.S. federal | $ | — |
| | $ | (11 | ) | | $ | (18 | ) |
Non-U.S | 42 |
| | 54 |
| | 71 |
|
U.S. state and local | — |
| | — |
| | — |
|
Total current tax provision | 42 |
| | 43 |
| | 53 |
|
Deferred Tax Provision (Benefit): | | | | | |
U.S. federal | — |
| | — |
| | — |
|
Non-U.S | 6 |
| | (13 | ) | | (26 | ) |
Total deferred tax provision (benefit) | 6 |
| | (13 | ) | | (26 | ) |
Provision for income taxes | $ | 48 |
| | $ | 30 |
| | $ | 27 |
|
| | | | | |
(a) Income (loss) before income taxes excludes equity in net income of non-consolidated affiliates. |
A summary of the differences between the provision for income taxes calculated at the U.S. statutory tax rate of 35% and the consolidated provision for income taxes is shown below:
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (Dollars in Millions) |
Tax provision (benefit) at U.S. statutory rate of 35% | $ | 76 |
| | $ | 56 |
| | $ | 22 |
|
Impact of foreign operations | (5 | ) | | (26 | ) | | 33 |
|
Non-U.S withholding taxes | 15 |
| | 13 |
| | 9 |
|
Tax holidays in foreign operations | (7 | ) | | (7 | ) | | (10 | ) |
State and local income taxes | (1 | ) | | (1 | ) | | 1 |
|
Tax reserve adjustments | (14 | ) | | 5 |
| | (9 | ) |
Change in valuation allowance | (270 | ) | | 25 |
| | (53 | ) |
Impact of U.S. tax reform | 250 |
| | — |
| | — |
|
Impact of tax law change | 5 |
| | 26 |
| | 2 |
|
Worthless stock deduction | — |
| | (58 | ) | | — |
|
Research credits | (1 | ) | | (3 | ) | | — |
|
Germany interiors divestiture | — |
| | — |
| | 48 |
|
Tax benefits allocated to loss from continuing operations | — |
| | — |
| | (18 | ) |
Other | — |
| | — |
| | 2 |
|
Provision for income taxes | $ | 48 |
| | $ | 30 |
| | $ | 27 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the migration from a worldwide tax system to a territorial system, which institutes a dividends received deduction for foreign earnings with a one-time transition tax on cumulative post-1986 foreign earnings, a modification of the characterization and treatment of certain intercompany transactions and the creation of a new U.S. corporate minimum tax on certain earnings of foreign subsidiaries. The Company has calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance with the guidance available as of the date of this filing. Accordingly, the Company has recognized a provisional income tax charge of $250 million, the impact of which was entirely offset by a corresponding income tax benefit associated with a reduction in the U.S. valuation allowance. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $267 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $19 million, which was more than offset by the $36 million reversal of the Company’s existing deferred tax liability (net of foreign tax credits) associated with repatriation of unremitted foreign earnings. The Company continues to gather information related to estimates surrounding the remeasurement of deferred taxes and information related to unremitted earnings from foreign affiliates to more precisely analyze and compute the remeasurement of deferred taxes and the impact of the transition tax under the Act. Any subsequent adjustment to these amounts is not expected to have a significant impact to income tax expense due to the U.S. valuation allowance.
Other items impacting the Company’s effective tax rate include the favorable impact of foreign operations of $5 million which includes a $34 million favorable variance due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate partially offset by $29 million related to U.S. income taxes in connection with repatriation of earnings, excluding the transition tax on the deemed repatriation of foreign earnings described above, entirely offset by a corresponding $29 million decrease in the U.S. valuation allowance. Tax reserve adjustments of $14 million primarily reflects the $16 million decrease in uncertain tax benefits in connection with the Internal Revenue Service completing its audit during the first quarter of 2017 which was fully offset by the U.S. valuation allowance, while adverse tax reserve adjustments of $2 million related to various matters in the U.S. and India for which the uncertainty is expected to be resolved while a full valuation allowance is maintained, and thus, are entirely offset by a corresponding reduction in the valuation allowance. The $5 million unfavorable impact of tax law change in 2017 (excluding the Act) reflects the reduction in deferred tax assets, including net operating loss carryforwards, primarily attributable to the reduction in the corporate income tax rates in France and Argentina, which were entirely offset by the related valuation allowances in those jurisdictions.
The Company’s provision for income tax for continuing operations was $30 million for year ended December 31, 2016. The favorable impact of foreign operations of $26 million includes a $19 million favorable variance due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, and a $7 million tax benefit, net of foreign tax credits, related to U.S. income taxes in connection with repatriation of earnings, entirely offset by a corresponding $7 million increase in the U.S. valuation allowance. The favorable worthless stock deduction variance relates to the Company’s investment in its Argentina Climate subsidiary where manufacturing operations have ceased, resulting in a $58 million tax benefit that generated a current year U.S. net operating loss, the majority of which was offset by the U.S. valuation allowance, while $3 million reduced the Company’s income tax liability for the 2015 tax year and $8 million reduced the Company’s unrecognized tax benefits that impact the effective tax rate. Tax reserve adjustments of $5 million primarily reflect adverse developments associated with ongoing negotiations to settle certain transfer pricing issues raised with an ongoing audit in Mexico of $2 million and $3 million related to various matters in the U.S. and India for which the uncertainty is expected to be resolved while a full valuation allowance is maintained, and thus, are entirely offset by a corresponding reduction in the valuation allowance. The $26 million unfavorable impact of tax law change in 2016 reflects the reduction in deferred tax assets, including net operating loss carryforwards, primarily attributable to the reduction in the corporate income tax rates in Hungary and Japan, which were largely offset by the related valuation allowance in Hungary of $24 million.
The Company's provision for income tax for continuing operations was $27 million for year ended December 31, 2015. The unfavorable impact of foreign operations of $33 million includes a $25 million favorable variance due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate. These amounts were more than offset by $27 million U.S. and non-U.S. income taxes related to the repatriation of earnings, and $31 million represents foreign tax credit adjustments primarily related to electing to deduct expiring credits. The U.S. income tax consequences of repatriation of earnings and foreign tax credit adjustment items approximate $58 million and were entirely offset by the U.S. valuation allowance. Tax reserve adjustments of $9 million primarily related to favorable audit developments in Asia during the first quarter of 2015, and statue expirations in Europe during the fourth quarter of 2015. The unfavorable $48 million variance related to the German interiors divestiture primarily reflects the inability to recognize the loss for German tax purposes, partially offset by a loss recognized for U.S. tax purposes and other adjustments which were fully offset by the U.S. valuation allowance.
Accounting for income taxes generally requires that the amount of tax expense or benefit allocated to continuing operations be determined without regard to the tax effects of other categories of income or loss, such as discontinued operations and other comprehensive income. However, an exception to the general rule is provided when there is a pretax loss from continuing operations and aggregate pretax income from other categories in the current year. In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in continuing operations even when a valuation allowance has been established against the deferred tax assets.
Prior to considering the effects of income taxes, the Company’s operations in the U.S. reported losses from continuing operations primarily as a result of the Germany Interiors Divestiture completed during the fourth quarter of 2015. Also in 2015, the Company reported net pretax income from other categories of income or loss, in particular, U.S. pretax income from discontinued operations attributable to the Climate Divestiture. The exception described in the preceding paragraph resulted in a tax charge to discontinued operations of $18 million and an offsetting tax benefit was recognized in continuing operations.
Deferred Income Taxes and Valuation Allowances
The Company recorded deferred tax liabilities, net of valuation allowances, for U.S. and non-U.S. income taxes and non-U.S. withholding taxes of approximately $19 million and $16 million as of December 31, 2017 and 2016, respectively; on the undistributed earnings of certain consolidated and unconsolidated foreign affiliates as such earnings are intended to be repatriated in the foreseeable future. The amount the Company expects to repatriate is based upon a variety of factors including current year earnings of the foreign affiliates, foreign investment needs and the cash flow needs the Company has in the U.S. and this practice has not changed following incurring the transition tax under the Act. The Company has not provided for deferred income taxes or foreign withholding taxes on the remainder of undistributed earnings from consolidated foreign affiliates because such earnings are considered to be permanently reinvested. It is not practicable to determine the amount of deferred tax liability on such earnings as the actual tax liability, if any, is dependent on circumstances existing when remittance occurs.
The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses, in particular, when there is a cumulative loss incurred over a three-year period. In regards to the full valuation allowance recorded against the U.S. net deferred tax assets, the cumulative U.S. pretax book loss adjusted for significant permanent items incurred over the three-year period ended December 31, 2017 limits the ability to consider other subjective evidence such as the Company’s plans to improve U.S. profits, and as such, the Company continues to maintain a full valuation allowance against the U.S. net deferred tax assets. Based on the Company’s current assessment, it is possible that within the next 12 to 24 months, the existing valuation allowance against the U.S. net deferred tax assets could be partially released. Any such release is dependent upon the sustained improvement in U.S. operating results, and, if such a release of the valuation allowance were to occur, it could have a significant impact on net income in the quarter in which it is deemed appropriate to partially release the reserve.
The components of deferred income tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
| (Dollars in Millions) |
Deferred Tax Assets: | | | |
Employee benefit plans | $ | 74 |
| | $ | 119 |
|
Capitalized expenditures for tax reporting | 3 |
| | 15 |
|
Net operating losses and credit carryforwards | 1,178 |
| | 1,495 |
|
Fixed assets and intangibles
| 10 |
| | 15 |
|
Restructuring | 7 |
| | 26 |
|
Deferred income | 9 |
| | 10 |
|
Warranty | 13 |
| | 16 |
|
Other | 46 |
| | 65 |
|
Valuation allowance | (1,242 | ) | | (1,532 | ) |
Total deferred tax assets | $ | 98 |
| | $ | 229 |
|
Deferred Tax Liabilities: | | | |
Fixed assets and intangibles | $ | 15 |
| | $ | 21 |
|
Outside basis investment differences, including withholding tax | 54 |
| | 174 |
|
All other | 6 |
| | 6 |
|
Total deferred tax liabilities | $ | 75 |
| | $ | 201 |
|
Net deferred tax assets (liabilities) | $ | 23 |
| | $ | 28 |
|
Consolidated Balance Sheet Classification: | | | |
Other non-current assets | 46 |
| | 48 |
|
Deferred tax liabilities non-current | 23 |
| | 20 |
|
Net deferred tax assets (liabilities) | $ | 23 |
| | $ | 28 |
|
At December 31, 2017, the Company had available non-U.S. net operating loss carryforwards and capital loss carryforwards of $1.5 billion and $5 million, respectively, which have carryforward periods ranging from 5 years to indefinite. The Company had available U.S. federal net operating loss carryforwards of $1.5 billion at December 31, 2017, which will expire at various dates between 2028 and 2030. U.S. foreign tax credit carryforwards are $393 million at December 31, 2017. These credits will begin to expire in 2020. U.S. research tax credit carryforwards are $14 million at December 31, 2017. These credits will begin to expire in 2030. The Company had available tax-effected U.S. state operating loss carryforwards of $33 million at December 31, 2017, which will expire at various dates between 2018 and 2037.
In connection with the Company's emergence from bankruptcy and resulting change in ownership on the Effective Date, an annual limitation was imposed on the utilization of U.S. net operating losses, U.S. credit carryforwards and certain U.S. built-in losses (collectively referred to as “tax attributes”) under Internal Revenue Code (“IRC”) Sections 382 and 383. The collective limitation is approximately $120 million per year on tax attributes in existence at the date of change in ownership. Additionally, the Company has approximately $393 million of U.S. foreign tax credits that are not subject to any current limitation since they were realized after the Effective Date.
As of December 31, 2017, valuation allowances totaling $1.2 billion have been recorded against the Company’s deferred tax assets. Of this amount, $813 million relates to the Company’s deferred tax assets in the U.S. and $429 million relates to deferred tax assets in certain foreign jurisdictions, primarily Germany and France.
Unrecognized Tax Benefits, Inclusive of Discontinued Operations
The Company operates in multiple jurisdictions throughout the world and the income tax returns of its subsidiaries in various tax jurisdictions are subject to periodic examination by respective tax authorities. The Company regularly assesses the status of these examinations and the potential for adverse and/or favorable outcomes to determine the adequacy of its provision for income taxes. The Company believes that it has adequately provided for tax adjustments that it believes are more likely than not to be realized as a result of any ongoing or future examination. Accounting estimates associated with uncertain tax positions require the Company to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If the Company determines it is more likely than not a tax position will be sustained based on its technical merits, the Company records the largest amount that is greater than 50% likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Due to the complexity of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the liabilities recorded.
Gross unrecognized tax benefits at December 31, 2017 and 2016 were $18 million and $35 million, respectively. Of these amounts, approximately $9 million and $12 million, respectively, represent the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. The gross unrecognized tax benefit differs from that which would impact the effective tax rate due to uncertain tax positions embedded in other deferred tax attributes carrying a full valuation allowance. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense and related amounts accrued at December 31, 2017 and 2016 were $3 million and $4 million, respectively.
There were several items that impacted the Company’s unrecognized tax benefits resulting in a $2 million net reduction in income tax expense, inclusive of interest and penalties, during 2017, which was substantially reflected in discontinued operations. During 2017, the IRS completed the audit of the Company's U.S. tax returns for the 2012 and 2013 tax years. The closing of the audit did not have a material impact on the Company's effective tax rate due to the valuation allowances maintained against the Company's U.S. tax attributes resulting in a decrease in unrecognized tax benefits of $16 million. Also during 2017, the Company settled tax assessments for $2 million related to audits in Mexico and for $1 million related to audits in Spain and France in connection with the Company’s former operations in those jurisdictions.
During 2016, there were several items that impacted the Company’s unrecognized tax benefits resulting in a $10 million net reduction in income tax expense, inclusive of interest and penalties, during 2016, of which $7 million and $3 million of income tax benefits were reflected in continuing operations and discontinued operations, respectively. The $7 million income tax benefit in continuing operations reflects the $8 million reduction in unrecognized tax benefits that impact the effective rate due to the ability to utilize estimated U.S. net operating loss via carryback against U.S. income tax liabilities, partially offset by primarily adverse audit developments in Mexico. The $3 million income tax benefit in discontinued operations primarily relates to change in estimates associated with the filing of the Company’s 2015 U.S. tax returns that resulted in a reduction in U.S. income tax after utilizing available tax attributes related to the 2015 Climate Transaction, partially offset by adverse developments in connection with several ongoing audits related to former discontinued operations.
With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2014 or state, local, or non-U.S. income tax examinations for years before 2003 although U.S. net operating losses and other tax attributes carried forward into open tax years technically remain open to adjustment. During the second quarter of 2017, the IRS contacted the Company to begin the examination process of the Company’s U.S. tax returns for 2014 and 2015. Although it is not possible to predict the timing of the resolution of all other ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in Europe, Asia, and Mexico could conclude within the next twelve months and result in a significant increase or decrease in the balance of gross unrecognized tax benefits. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits. The long-term portion of uncertain income tax positions (including interest) in the amount of $12 million, is included in Other non-current liabilities on the consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
|
| | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 |
| (Dollars in Millions) |
Beginning balance | $ | 35 |
| | $ | 37 |
|
Tax positions related to current period | | | |
Additions | 3 |
| | 4 |
|
Tax positions related to prior periods | | | |
Additions | — |
| | 3 |
|
Reductions | (18 | ) | | (2 | ) |
Settlements with tax authorities | (3 | ) | | (7 | ) |
Effect of exchange rate changes | 1 |
| | — |
|
Ending balance | $ | 18 |
| | $ | 35 |
|
During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) related to the sale of its chassis business to a third party, which required a deposit in the amount of $16 million during 2013 necessary to open a judicial proceeding against the government in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities after attempts to reopen an appeal of the administrative decision failed. Adjusted for currency impacts and accrued interest, the deposit amount is approximately $16 million, as of December 31, 2017. The Company believes that the risk of a negative outcome is remote once the matter is fully litigated at the highest judicial level. These appeal payments, as well as income tax refund claims associated with other jurisdictions, total $19 million as of December 31, 2017, and are included in Other non-current assets on the consolidated balance sheet.