3. Income Taxes



The provision for income taxes consisted of:









Income before income taxes and share of losses in equity method investments for U.S. and non-U.S. operations consisted of:





Deferred income tax assets and liabilities were comprised of:







The Company continues to regularly assess the realizability of all deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause the Company to adjust its valuation allowance on deferred tax assets, which would impact its income tax expense in the period the Company determines that these factors have changed. As of December 31, 2017, the Company had U.S. federal net operating losses (“NOLs”) carry forwards of approximately $400 million, which expire between 2032 and 2037, state NOL carry forwards, which expire between 2018 and 2037, and alternative minimum tax (“AMT”) and other tax credits carry forward of approximately $27 million. The Company had other non-U.S. NOL carry forwards of $345 million that expire between three years and indefinitely. The deferred tax asset in respect of these U.S. and non-U.S. NOL carry forwards and U.S. tax credits is $197 million. The Company believes that it is more likely than not that the benefit from certain U.S. federal, U.S. state and non-U.S. NOL carry forwards and other deferred tax assets will not be realized. Consequently, a valuation allowance of $187 million has been recorded against such deferred tax assets as of December 31, 2017. The AMT credit carry forwards previously had a valuation recorded against them; however, following the repeal of the AMT regime under the U.S. Tax Reforms, the Company has released the valuation allowance, the benefit of which is reflected in the income tax expense.



The Company regularly assesses its ability to realize deferred tax assets. As of December 31, 2017, the Company’s annual effective tax rate includes the impact of releasing a portion of the valuation allowance due to (i) an increase in taxable temporary differences that support deferred tax asset utilization and (ii) the repeal of the AMT regime under the U.S. Tax Reforms which will allow full realization of the Company’s AMT credit carry forwards. However, the Company has maintained a valuation allowance on the remaining deferred tax assets. Future realized earnings performance and changes in future earnings projections, among other factors, may cause an adjustment to the conclusion as to whether it is more likely than not that the benefit of the deferred tax assets will be realized. This would impact the income tax expense in the period for which it is determined that these factors have changed.



The ability of the Company to utilize its U.S. NOL carry-forwards to reduce future taxable income is subject to various limitations under the Internal Revenue Code Section 382 (“Section 382”). The utilization of such carry-forwards may be limited upon the occurrence of certain ownership changes, including the purchase or sale of shares by 5% shareholders and the offering of shares by the Company during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of a Company’s taxable income that can be offset by these carry-forwards.



As a result of equity transactions that took place in 2015 and 2016, the Company determined that ownership changes have occurred under Section 382 and, therefore, the ability to utilize its pre-ownership change NOL carry forwards is subject to an annual Section 382 limitation. As of December 31, 2017, the Company does not anticipate this limitation will restrict or reduce the utilization of U.S. NOL carry forwards; however, the Company continues to evaluate the potential impact of the Section 382 limitation.



Upon adoption of the new guidance on equity-based compensation (See Note 2-Summary of Significant Accounting Policies, Recently Issued Accounting Policies), the Company recognized  a $10 million deferred tax asset that arose directly from tax deductions related to equity-based compensation in excess of compensation recognized for financial reporting in prior periods. This deferred tax was fully offset by a valuation allowance recorded as it was more-likely-than-not that the deferred tax asset will not be realized. The Company uses ordering as prescribed under U.S. GAAP for purposes of determining when excess tax benefits have been realized.



Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such taxable temporary differences totaled $33 million as of December 31, 2017, and the amount of any unrecognized deferred income tax liability on this temporary difference is less than $1 million. 



The Company’s provision for income taxes differs from its tax (provision) benefit at the U.S. federal statutory rate of 35% as follows:







Travelport Worldwide Limited is a non-trading holding company tax resident in Bermuda where the statutory rate is 0%. The provision for income taxes on income from continuing operations has been reconciled in the table above to the expected provision amount calculated at the U.S. federal statutory rate of 35% due to both significant operations and the location of a significant proportion of its investor-base in the U.S.



The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. The Company’s provision for income taxes is likely to vary materially both from the benefit (provision) at the U.S. federal statutory tax rate and from year to year. While within a period there may be discrete items that impact the Company’s provision for income taxes, the following items consistently have an impact: (i) the Company is subject to income tax in numerous non-U.S. jurisdictions with varying tax rates, including the U.K. where the Company’s principal international business is headquartered, (ii) the Company’s earnings outside the U.S. and the U.K. are taxed at an effective rate that is lower than the U.S. federal rate and at a relatively consistent level of charge, (iii) the effective location of the Company’s debt is in the U.K. and (iv) a valuation allowance is established against the deferred tax assets relating to the Company’s losses to the extent they are unlikely to be realized.



The U.S. Tax Reforms, signed into law on December 22, 2017, have resulted in significant changes to the U.S. corporate income tax system. These changes include, among others, a federal statutory rate reduction from 35% to 21%, the repeal of the AMT credit carry forwards to be offset against future regular tax liabilities,  a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the “Transition Tax”) and accelerated depreciation on qualifying capital expenditure.  



Changes in tax rates and tax laws are accounted for in the period of enactment. The Company has not completed its accounting for the effects of the U.S. Tax Reforms; however, the Company has made a reasonable estimate of those effects. During the year ended December 31, 2017, the Company provisionally recognized (i) an increased tax charge due to a decrease in deferred tax assets of $51 million, fully offset by the release of the associated valuation allowance, (ii) an income tax benefit of $22 million from the remeasurement of deferred tax liabilities and (iii) a benefit of $2 million related to the release of a valuation allowance held on AMT credit carry forwards. In addition, the Company provisionally determined (i) Transition Tax income of approximately $6 million (tax of approximately $2 million), which was fully offset using U.S. federal NOLs, and (ii) a provisional impact of $3 million from the accelerated depreciation of qualifying capital expenditure, which is fully equalized and has no net impact on the provision for Income taxes.



The Company’s preliminary estimate of the impact of the U.S. Tax Reforms, including Transition Tax, is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the U.S. Tax Reforms, the impact on state income taxes, administrative interpretations or court decisions interpreting the U.S. Tax Reforms that may require further adjustments and changes in the Company’s estimates that could be beneficial or adverse. The Company expects to complete the accounting during the one-year measurement period from the enactment date.    



The Company’s provision for income taxes for the year ended December 31, 2017 also includes an increased tax charge of $7 million resulting from changes to U.K. tax legislation enacted in 2017, which limits the relief for interest expense.



Significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and tax positions where the ultimate tax determination is uncertain.



Although the Company believes there is appropriate support for the positions taken on its tax returns, the Company has recorded liabilities (or reduction of tax assets) representing estimated economic loss upon ultimate settlement for certain positions. The Company believes its tax provisions are adequate for all open years, based on the assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Although the Company believes the recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore, the Company’s assessments can involve both a series of complex judgments about future events and reliance on significant estimates and assumptions. While the Company believes the estimates and assumptions supporting the assessments are reasonable, the final determination of tax audits and any other related litigation could be materially different from that which is reflected in historical income tax provisions and recorded assets and liabilities.



With limited exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for tax years before 2006. The Company has undertaken an analysis of material tax positions in its tax accruals for all open years and has identified all outstanding tax positions. The Company expects up to a $1 million increase in unrecognized tax benefits within the next twelve months for the uncertain tax positions relating to certain interest exposures. The Company does not expect a significant reduction in the total amount of unrecognized tax benefits within the next twelve months as a result of payments.



The total amount of unrecognized tax benefits (including interest and penalties thereon) that, if recognized, would affect the Company’s effective tax rate is $100 million, $93 million and $92 million as of December 31, 2017,  2016 and 2015, respectively. The Company is subject to certain indemnification arrangements related to particular uncertain tax benefits. Tax audits and any related litigation could result in outcomes that are different from those reflected in the Company’s consolidated financial statements. The recognition of additional tax liability for which the Company is indemnified would impact the effective tax rate as any previously unrecorded indemnification receivables would be recorded within pre-tax income.



A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:







The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of the provision for income taxes. The Company accrued approximately $1 million for interest and penalties for each of the years ended December 31, 2017,  2016 and 2015. As of December 31, 2017 and 2016, the Company had cumulative accrued interest and penalties of $10 million and $9 million, respectively. Included in the ending balance of unrecognized tax benefits was $1 million as of December 31, 2017, which is expected to be realized in the next twelve months due to the lapsing of the statute of limitations.