Belmond Ltd.

Income taxes

The Company is incorporated in Bermuda and migrated its tax residence to the United Kingdom on April 1, 2015. Belmond’s effective tax rate is significantly affected by its mix of income and loss in various jurisdictions as there is significant variation in the income tax rate imposed and also by the effect of losses in jurisdictions where the tax benefit is not recognized.

Accordingly, the income tax provision is attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax, and is impacted by the effect of valuation allowances and uncertain tax positions. The income tax provision is also affected by certain items that may occur in any given year, but are not consistent from year to year. The most significant item which impacts the tax charge for the year ended December 31, 2017 is the deferred tax benefit of $19,807,000 arising as a result of the reduction in corporate tax rate in the U.S., as explained below.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes complex changes to U.S. tax code that impacts U.S. subsidiaries of Belmond Ltd. at December 31, 2017.

The Act reduces the corporate tax rate from 35 to 21 percent, effective January 1, 2018. Consequently, Belmond has recorded a decrease related to deferred tax liabilities of $19,807,000, with a corresponding adjustment to deferred income tax benefit of $19,807,000 for the year ended December 31, 2017.

The Deemed Repatriation Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries owned directly or indirectly by Belmond's U.S. entities. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Belmond believes it is able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $2,330,000. However, the analysis is incomplete, and Belmond is continuing to gather additional information to more precisely compute the amount of the Transition Tax. Our analysis in respect of the tax rate is complete.

The provision for income taxes consists of the following:



			Provision for income taxes
Year ended December 31, 2017	Pre-tax (loss)/ income $’000		Current $’000	Deferred $’000		Total $’000

UK	(18,518	)	1,671	(372	)	1,299
Bermuda	(34,873	)	—	—		—
United States	(1,850	)	3,332	(12,987	)	(9,655	)
Brazil	2,193		2,322	(804	)	1,518
Italy	20,265		5,359	972		6,331
Peru	14,367		4,712	248		4,960
Rest of the world	(9,887	)	2,800	(699	)	2,101

	(28,303	)	20,196	(13,642	)	6,554



			Provision for income taxes
Year ended December 31, 2016	Pre-tax (loss)/ income $’000		Current $’000		Deferred $’000		Total $’000

UK	(6,702	)	949		(444	)	505
Bermuda	160		—		—		—
United States	2,681		(1,510	)	(1,978	)	(3,488	)
Brazil	15,303		5,498		(121	)	5,377
Italy	19,971		4,468		1,998		6,466
Peru	13,965		4,261		1,625		5,886
Rest of the world	(4,622	)	3,007		(1,385	)	1,622

	40,756		16,673		(305	)	16,368



			Provision for income taxes
Year ended December 31, 2015	Pre-tax (loss)/ income $’000		Current $’000	Deferred $’000		Total $’000

UK	(18,965	)	1,585	(2,262	)	(677	)
Bermuda	(4,315	)	—	—		—
United States	1,439		1,310	1,698		3,008
Brazil	10,380		2,768	760		3,528
Italy	17,351		4,006	(824	)	3,182
Peru	12,078		3,154	(677	)	2,477
Rest of the world	7,386		4,341	1,182		5,523

	25,354		17,164	(123	)	17,041

The reconciliation of (losses)/earnings before provision for income taxes and earnings from unconsolidated companies, net of tax at the statutory tax rate to the provision for income taxes is shown in the table below:



	2017		2016		2015
Year ended December 31,	$'000		$'000		$'000

(Losses)/earnings before provision for income taxes and earnings from unconsolidated companies, net of tax	(28,303	)	40,756		25,354

Tax (benefit)/charge at statutory tax rate of 19.25%, 20% and 15% ⁽¹⁾	(5,448	)	8,151		3,803

Exchange rate movements on deferred tax	2,400		(1,785	)	(1,912	)
Notional interest deductions	(960	)	(1,812	)	(1,867	)
Imputed cross border charges	763		995		716
Disallowable goodwill impairment charges	—		—		2,198
Other permanent disallowable expenditure	3,664		483		5,762
Unrecognized tax loss generated on disposal of Hotel Ritz by Belmond	—		—		(16,029	)
Change in valuation allowance	2,215		4,876		16,320
Difference in taxation rates	13,874		9,509		12,948
Adjustment to deferred tax for VIE	7,263		—		—
Change in provisions for uncertain tax positions	160		(3,350	)	279
Change in tax rates	(19,807	)	(643	)	(5,121	)
Transition tax in U.S.	2,330		—		—
Other	100		(56	)	(56	)

Provision for income taxes	6,554		16,368		17,041

⁽¹⁾ The Company migrated its tax residence to the United Kingdom on April 1, 2015, which has a statutory tax rate of 19.25% for the year ended December 31, 2017 (2016: 20%). Prior to that date, the Company was tax resident in Bermuda, which does not impose an income tax. The statutory tax rate of 15% represents the average statutory tax rate for the year ended December 31, 2015.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following summarizes Belmond’s net deferred tax assets and liabilities:



	2017		2016		2015
Year ended December 31,	$’000		$’000		$’000

Operating loss carry-forwards	58,185		82,292		89,513
Pensions	95		255		63
Share-based compensation	703		3,617		2,978
Other	8,184		8,283		8,952
Less: Valuation allowance	(49,337	)	(70,241	)	(69,928	)

Net deferred tax assets	17,830		24,206		31,578

Other	(4,817	)	(5,032	)	(7,427	)
Property, plant and equipment	(128,206	)	(141,231	)	(147,265	)

Deferred tax liabilities	(133,023	)	(146,263	)	(154,692	)

Net deferred tax liabilities	(115,193	)	(122,057	)	(123,114	)

Non-current deferred income tax liabilities are presented separately on the face of the consolidated balance sheets for all periods and non-current deferred tax assets are included within Other assets.

The gross amount of tax loss carry-forwards is $316,418,000 at December 31, 2017 (2016 - $369,523,000). Of this amount, $11,037,000 will expire in the five years ending December 31, 2022 and a further $11,272,000 will expire in the five years ending December 31, 2027. The remaining losses of $294,109,000 will expire after December 31, 2027 or have no expiry date. After weighing all positive and negative evidence, a valuation allowance has been provided against deferred tax assets where management believes it is more likely than not that the benefits associated with these assets will not be realized.

A deferred tax liability of $1,611,000 (2016 - $1,669,000) has been recognized in respect of income taxes and foreign withholding taxes on the excess of the amount for financial reporting purposes over the tax basis of the investments in foreign joint ventures. Except for earnings that are currently distributed, income taxes and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The cumulative amount of such unremitted earnings is approximately $1,406,000,000 at December 31, 2017 (2016 - $1,355,000,000). The determination of the additional deferred taxes that have not been provided is not practical.

Belmond’s 2017 tax charge of $6,554,000 (2016 - tax charge of $16,368,000; 2015 - tax charge of $17,041,000) included a charge of $160,000 (2016 - credit of $3,350,000; 2015 - charge of $279,000) in respect of the provision for uncertain tax positions, of which a charge of $15,000 (2016 - charge of $639,000; 2015 - charge of $247,000) related to the potential interest and penalty costs associated with the uncertain tax positions.

The 2017 provision for income taxes included a deferred tax provision of $2,215,000 in respect of valuation allowances due to a change in judgment concerning Belmond’s ability to realize loss carryforwards and other deferred tax assets in certain jurisdictions compared to a $4,876,000 provision in 2016.

At December 31, 2017, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2017	$’000		$’000		$’000		$’000

Balance, January 1, 2017	318		249		21		48
Additional uncertain tax provision identified during the year	215		197		1		17
Increase to uncertain tax provision on prior year positions	27		17		7		3
Uncertain tax provisions settled during the year	—		—		—		—
Decreases as a result of expiration of the statute of limitations	(82	)	(69	)	(3	)	(10	)
Foreign exchange	54		44		—		10

Balance at December 31, 2017	532		438		26		68

At December 31, 2017, Belmond recognized a $532,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2017, if recognized, would affect the effective tax rate.

At December 31, 2016, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2016	$’000		$’000		$’000		$’000

Balance at January 1, 2016	3,678		2,967		656		55
Additional uncertain tax provision identified during the year	78		61		4		13
Increase to uncertain tax provision on prior year positions	4		—		4		—
Uncertain tax provisions settled during the year	(3,308	)	(2,668	)	(640	)	—
Decreases as a result of expiration of the statute of limitations	(124	)	(104	)	(2	)	(18	)
Foreign exchange	(10	)	(7	)	(1	)	(2	)

Balance at December 31, 2016	318		249		21		48

At December 31, 2016, Belmond recognized a $318,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2016, if recognized, would affect the effective tax rate.

At December 31, 2015, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2015	$’000		$’000		$’000		$’000

Balance, January 1, 2015	3,437		2,966		416		55
Additional uncertain tax provision identified during the year	78		62		7		9
Increase to uncertain tax provision on prior year positions	236		—		236		—
Decreases as a result of expiration of the statute of limitations	(35	)	(30	)	(2	)	(3	)
Foreign exchange	(38	)	(31	)	(1	)	(6	)

Balance, December 31, 2015	3,678		2,967		656		55

At December 31, 2015, Belmond recognized a $3,678,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2015, if recognized, would affect the effective tax rate.

Certain subsidiaries of the Company are subject to taxation in the United States and various states and other non-U.S. jurisdictions. As of December 31, 2017, the earliest year in any jurisdiction which is open to examination by the tax authorities is 2003.

Belmond believes that it is reasonably possible that within the next 12 months the uncertain tax provision will decrease by approximately $100,000 as a result of expiration of uncertain tax positions in certain jurisdictions in which Belmond operates. These amounts relate primarily to transfer pricing inquiries with the tax authorities.