Income Taxes
Consolidated income before taxes for domestic and foreign operations consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 90,206 |
| | $ | 90,900 |
| | $ | (21,880 | ) |
Foreign | 470,063 |
| | 219,697 |
| | 311,127 |
|
Total | $ | 560,269 |
| | $ | 310,597 |
| | $ | 289,247 |
|
The income tax (benefit) provision attributable to income before income taxes is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | (19,856 | ) | | $ | 60 |
| | $ | (819 | ) |
State | 51 |
| | 79 |
| | — |
|
Foreign | 1,674 |
| | 1,633 |
| | 2,044 |
|
| (18,131 | ) | | 1,772 |
| | 1,225 |
|
Deferred | | | | | |
Federal | (309,423 | ) | | 5,081 |
| | 3,505 |
|
State | (1,431 | ) | | 1,275 |
| | 4,100 |
|
Foreign | — |
| | — |
| | (1,107 | ) |
| (310,854 | ) | | 6,356 |
| | 6,498 |
|
Total | $ | (328,985 | ) | | $ | 8,128 |
| | $ | 7,723 |
|
The income tax (benefit) provision differs from that computed at the federal statutory corporate tax rate as follows:
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Foreign tax credits, net of valuation allowance | (136.1 | )% | | (61.5 | )% | | (93.2 | )% |
Non-taxable foreign income | (20.1 | )% | | (20.7 | )% | | (23.1 | )% |
Foreign tax rate differential | (17.0 | )% | | (14.5 | )% | | (21.0 | )% |
Change in tax rate | (11.8 | )% | | — | % | | — | % |
Repatriation of foreign earnings | 81.0 | % | | 51.6 | % | | 97.9 | % |
Valuation allowance, other | 5.9 | % | | 7.5 | % | | 4.4 | % |
Other, net | 4.4 | % | | 5.2 | % | | 2.7 | % |
Effective tax rate | (58.7 | )% | | 2.6 | % | | 2.7 | % |
In November 2010, Wynn Macau SA received an exemption from Macau's 12% Complementary Tax on casino gaming profits, thereby exempting the casino gaming profits of Wynn Macau SA through December 31, 2015. In October 2015, Wynn Macau SA received an additional five-year exemption, effective January 1, 2016, from Macau's Complementary Tax on casino gaming profits through December 31, 2020. Accordingly, for the years ended December 31, 2017, 2016 and 2015, the Company was exempted from the payment of $63.0 million, $27.3 million and $41.6 million in such taxes or $0.61, $0.27 and $0.41 per diluted share, respectively. The Company's non-gaming profits remain subject to the Macau Complementary Tax and its casino winnings remain subject to the Macau special gaming tax and other levies in accordance with its concession agreement.
In July 2011, Wynn Macau SA received an extension of its agreement with the Macau government that provides for an annual payment of MOP 15.5 million (approximately $1.9 million) as complementary tax otherwise due by stockholders of Wynn Macau SA on dividend distributions through 2015. In August 2016, Wynn Macau SA received an extension of the agreement for an additional five years applicable to tax years 2016 through 2020. The extension agreement provides for an annual payment of MOP 12.8 million (approximately $1.6 million). As a result of the stockholder dividend tax agreements, income tax expense includes $1.6 million for each of the years ended December 31, 2017 and 2016 and $1.9 million for the year ended December 31, 2015.
The Macau special gaming tax is 35% of gross gaming revenue. U.S. tax laws only allow a foreign tax credit ("FTC") up to 35% of foreign source income. In February 2010, the Company and the IRS entered into a Pre-Filing Agreement ("PFA") providing that the Macau special gaming tax qualifies as a tax paid in lieu of an income tax and could be claimed as a U.S. FTC.
In December 2017, the U.S. Tax Cuts and Jobs Act ("U.S tax reform") was enacted. Also in December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. For the year ended December 31, 2017, the Company recorded a provisional net tax benefit of $339.9 million. The provisional net tax benefit primarily consists of a $273.9 million provisional tax benefit from the increase in the foreign tax credit carryovers, net of valuation allowance, generated as a result of the deemed repatriation of deferred foreign income as well as a $66.0 million provisional tax benefit resulting from the revaluation of the Company's net deferred tax liabilities due to the decrease in the U.S. corporate tax rate from 35% to 21%. This provisional net tax benefit is based on the Company's initial analysis of the U.S. tax reform and may be adjusted over the next 12 months as the Company collects additional information and evaluates any regulatory guidance. Any subsequent adjustment to this amount will be recorded to the current income tax expense in the period in which the amount is determined.
During the years ended December 31, 2017, 2016 and 2015, the Company recognized tax benefits of $746.6 million, $170.5 million and $264.1 million, respectively (net of valuation allowance and uncertain tax positions), for FTCs generated from the earnings of Wynn Macau SA.
Accounting standards require recognition of a future tax benefit to the extent that realization of such benefit is more likely than not; otherwise, a valuation allowance is applied. During the years ended December 31, 2017 and 2016, the aggregate valuation allowance for deferred tax assets increased by $103.7 million and decreased by $44.2 million, respectively. The 2017 increase is primarily related to FTC carryforwards and other foreign deferred tax assets that are not considered more likely than not realizable. The 2016 decrease is primarily related to a release of valuation allowance on prior year FTCs expected to be utilized as a result of the sale of a 49.9% ownership interest in Retail Joint Venture.
The Company recorded tax benefits resulting from the exercise of nonqualified stock options and the value of vested restricted stock and accrued dividends of $2.6 million, $0.8 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, in excess of the amounts reported for such items as compensation costs under accounting standards related to stock-based compensation.
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets—U.S.: | | | |
Foreign tax credit carryforwards | $ | 3,616,872 |
| | $ | 3,269,781 |
|
Receivables, inventories, accrued liabilities and other | 19,356 |
| | 37,391 |
|
Stock-based compensation | 5,084 |
| | 18,740 |
|
Pre-opening expenses | 2,716 |
| | 6,516 |
|
Other tax credit carryforwards | 1,999 |
| | 2,413 |
|
Intangibles and related other | 770 |
| | 21,404 |
|
Other | 86 |
| | 7,958 |
|
| 3,646,883 |
| | 3,364,203 |
|
Less: valuation allowance | (3,273,292 | ) | | (3,201,406 | ) |
| 373,591 |
| | 162,797 |
|
Deferred tax liabilities—U.S.: | | | |
Property and equipment | (106,979 | ) | | (176,611 | ) |
Redemption Note fair value | (13,139 | ) | | (42,806 | ) |
Prepaid insurance, maintenance and taxes | (10,391 | ) | | (7,913 | ) |
Other | (2,549 | ) | | (2,028 | ) |
| (133,058 | ) | | (229,358 | ) |
Deferred tax assets—Foreign: | | | |
Net operating loss carryforwards | 74,345 |
| | 50,258 |
|
Property and equipment | 36,299 |
| | 29,998 |
|
Pre-opening expenses | 10,717 |
| | 12,944 |
|
Other | 1,493 |
| | 2,946 |
|
| 122,854 |
| | 96,146 |
|
Less: valuation allowance | (117,175 | ) | | (85,317 | ) |
| 5,679 |
| | 10,829 |
|
Deferred tax liabilities—Foreign: | | | |
Property and equipment | (5,679 | ) | | (10,829 | ) |
| | | |
Net deferred tax asset (liability) | $ | 240,533 |
| | $ | (66,561 | ) |
As of December 31, 2017, the Company had FTC carryforwards (net of uncertain tax positions) of $3.62 billion. Of this amount, $590.6 million will expire in 2018, $110.9 million in 2019, $530.4 million in 2020, $540.3 million in 2021, $756.0 million in 2023, $710.7 million in 2024, $47.2 million in 2025 and $330.8 million in 2027. The Company has no U.S. tax loss carryforwards. The Company incurred foreign tax losses of $319.1 million, $317.3 million and $124.4 million during the tax years ended December 31, 2017, 2016 and 2015, respectively. These foreign tax loss carryforwards expire in 2020, 2019 and 2018, respectively.
In assessing the need for a valuation allowance, the Company considered whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. In the assessment of the valuation allowance, appropriate consideration was given to all positive and negative evidence including recent operating profitability, forecast of future earnings and the duration of statutory carryforward periods.
As of December 31, 2017 and 2016, the Company had valuation allowances of $3.27 billion and $3.20 billion, respectively, provided on FTCs expected to expire unutilized and valuation allowances of $3.5 million and $4.4 million provided on other U.S. deferred tax assets. As of December 31, 2017 and 2016, the Company had valuation allowances of $117.2 million and $85.3 million, respectively, provided on its foreign deferred tax assets.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Balance—beginning of year | $ | 90,523 |
| | $ | 88,314 |
| | $ | 88,884 |
|
Increases based on tax positions of the current year | 8,520 |
| | 5,930 |
| | 3,051 |
|
Settlements with taxing authorities | — |
| | — |
| | (354 | ) |
Lapses in statutes of limitations | (3,807 | ) | | (3,721 | ) | | (3,267 | ) |
Balance—end of year | $ | 95,236 |
| | $ | 90,523 |
| | $ | 88,314 |
|
As of December 31, 2017, 2016 and 2015, unrecognized tax benefits of $95.2 million, $90.3 million and $88.3 million, respectively, were recorded as reductions in deferred income taxes, net. As of December 31, 2016, $0.2 million of unrecognized tax benefits were recorded in other long-term liabilities. The Company had no unrecognized tax benefits recorded in other long-term liabilities as of December 31, 2017 and 2015.
As of December 31, 2017, 2016 and 2015, $26.9 million, $22.6 million and $20.9 million, respectively, of unrecognized tax benefits would, if recognized, impact the effective tax rate.
The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. During each of the years ended December 31, 2017 and 2016, the Company recognized $0.9 million in interest in the provision for income taxes. During the year ended 2015, the Company recognized $0 interest and penalties.
The Company anticipates that the 2013 statute of limitations will expire in the next 12 months for certain foreign tax jurisdictions. Also, the Company's unrecognized tax benefits include certain income tax accounting methods, which govern the timing and deductibility of income tax deductions. As a result, the Company's unrecognized tax benefits could increase up to $4.0 million over the next 12 months.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company's income tax returns are subject to examination by the IRS and other tax authorities in the locations where it operates. The Company's 2002 to 2013 domestic income tax returns remain subject to examination by the IRS to the extent tax attributes carryforward to future years. The Company's 2014 to 2016 domestic income tax returns also remain subject to examination by the IRS. The Company's 2013 to 2016 Macau income tax returns remain subject to examination by the Financial Services Bureau.
The Company has participated in the IRS Compliance Assurance Program ("CAP") for the 2012 through 2017 tax years and will continue to participate in the IRS CAP for the 2018 tax year.
In February 2016, 2017 and 2018 the Company received notification that the IRS completed its examination of the Company's 2014, 2015 and 2016 U.S. income tax returns, respectively. There were no changes in its unrecognized tax benefits as a result of the completion of these examinations.
In December 2015, the Financial Services Bureau completed an examination of the 2012 Macau income tax return of Wynn Macau SA. On December 31, 2015, the statute of limitations for the 2010 Macau Complementary Tax return expired. As a result of the exam settlement and the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.6 million.
On December 31, 2016, the statute of limitations for the 2011 Macau Complementary tax return expired. As a result of the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.7 million.
In April 2016, the Financial Services Bureau commenced an examination of the 2011 and 2012 Macau income tax returns of Palo. In June 2016, the Financial Services Bureau concluded its examination with no changes.
On December 31, 2017, the statute of limitations for the 2012 Macau Complementary tax return expired. As a result of the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.8 million.
In March 2017, the Financial Services Bureau commenced an examination of the 2013 and 2014 Macau income tax returns of Wynn Macau SA. As of December 31, 2017, based upon the current status of the examination, no changes to the unrecognized tax benefits are required.
In July 2017, the Financial Services Bureau commenced an examination of the 2013 and 2014 Macau income tax returns of Palo. In February 2018, the Financial Services Bureau concluded its examination with no changes.