Income Taxes:
The income tax expense/(benefit) recognized for the years ended December 31, 2017, 2016 and 2015 is comprised of the following (amounts in thousands):
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| | | | | | | | | | | | | | | |
| Federal | | State | | Foreign | | Total |
For the year ended December 31, 2017: | | | | | | | |
Current tax expense | $ | 77,656 |
| | $ | 16,543 |
| | $ | 25,087 |
| | $ | 119,286 |
|
Deferred tax (benefit) | (112,118 | ) | | (2,051 | ) | | (16,653 | ) | | (130,822 | ) |
Total income tax expense/(benefit) | $ | (34,462 | ) | | $ | 14,492 |
| | $ | 8,434 |
| | $ | (11,536 | ) |
For the year ended December 31, 2016: | | | | | | | |
Current tax expense | $ | 38,986 |
| | $ | 5,037 |
| | $ | 20,868 |
| | $ | 64,891 |
|
Deferred tax expense/(benefit) | (7,350 | ) | | 575 |
| | (14,925 | ) | | (21,700 | ) |
Total income tax expense | $ | 31,636 |
| | $ | 5,612 |
| | $ | 5,943 |
| | $ | 43,191 |
|
For the year ended December 31, 2015: | | | | | | | |
Current tax expense | $ | 62,869 |
| | $ | 9,399 |
| | $ | 25,692 |
| | $ | 97,960 |
|
Deferred tax expense/(benefit) | 2,887 |
| | (600 | ) | | (10,856 | ) | | (8,569 | ) |
Total income tax expense | $ | 65,756 |
| | $ | 8,799 |
| | $ | 14,836 |
| | $ | 89,391 |
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On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to the following provisions which are most relevant the Company, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations referred to as Global Intangible Low-Taxed Income (“GILTI”); (5) creating the base erosion anti-abuse tax, a new minimum tax; (6) creating a new limitation on deductible interest expense; and (7) increased limitations on the deductibility of executive compensation.
The Company has not completed its accounting for the income tax effects of the Tax Act. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SEC Staff Accounting Bulletin No. 118. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.
The Company’s accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, has recorded provisional amounts as follows:
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• | Revaluation of deferred tax assets and liabilities: The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company has evaluated these changes and has recorded a provisional decrease to net deferred tax liabilities of $73.8 million with a corresponding increase to deferred tax benefit. The Company is still completing its calculation of the impact of these changes in its deferred tax balances. |
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• | Transition Tax on unrepatriated foreign earnings: The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of the Company’s foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income tax paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and has provisionally recorded no Transition Tax expense. The Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax to complete its calculation of E&P as well as the final determination of non-U.S. income taxes paid. |
The Company’s accounting for the following elements of the Tax Act is incomplete, and it has not yet been able to make reasonable estimates of certain effects of these items. Therefore, no provisional amounts were recorded.
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• | GILTI: The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate the provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of its deferred taxes. The Company has not yet completed its analysis of GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI. |
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• | Indefinite reinvestment assertion: Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from ten percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income will now be exempt from U.S. federal tax in the hands of U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-28 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. While the Company has provisionally determined that it owes no Transition Tax on the untaxed E&P of the Company's foreign subsidiaries, the Company was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for its remaining outside basis differences or evaluate how the Tax Act will affect the Company’s existing accounting position to indefinitely reinvest unremitted foreign earnings. Therefore, the Company has not included a provisional amount for this item in its financial statements for 2017. The Company will record amounts as needed for this item beginning in the first reporting period during the measurement period in which the Company obtains necessary information and is able to prepare a reasonable estimate. |
A reconciliation of the Company's expected tax expense at the statutory federal tax rate to actual tax expense/(benefit) for the years ended December 31, 2017, 2016 and 2015 is as follows (amounts in thousands):
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| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income tax expense at statutory federal rates | $ | 55,139 |
| | $ | 46,929 |
| | $ | 90,133 |
|
State tax expense, net of federal tax benefit | 9,072 |
| | 3,696 |
| | 5,719 |
|
Foreign rate difference | (4,681 | ) | | (7,839 | ) | | (9,495 | ) |
Federal rate change | (73,779 | ) | | — |
| | — |
|
Other | 2,713 |
| | 405 |
| | 3,034 |
|
Total income tax (benefit)/expense | $ | (11,536 | ) | | $ | 43,191 |
| | $ | 89,391 |
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The Company recognized a net deferred tax liability of $113.7 million and $229.9 million as of December 31, 2017 and 2016, respectively. The components of the net deferred tax liability are as follows (amounts in thousands):
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| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Employee compensation | $ | 5,190 |
| | $ | 9,120 |
|
Net operating loss carryforward | 42,332 |
| | 48,298 |
|
Accrued liabilities | 2,750 |
| | 5,136 |
|
Interest | 11,027 |
| | 10,596 |
|
Finance receivable revenue recognition - international | 27,835 |
| | 8,274 |
|
Other | 9,165 |
| | 6,154 |
|
Total deferred tax asset | 98,299 |
| | 87,578 |
|
Deferred tax liabilities: | | | |
Depreciation expense | 15,417 |
| | 7,610 |
|
Intangible assets and goodwill | 8,856 |
| | 10,625 |
|
Convertible debt | 14,645 |
| | 6,955 |
|
Finance receivable revenue recognition - IRS settlement | 117,026 |
| | — |
|
Finance receivable revenue recognition - domestic | 16,957 |
| | 239,337 |
|
Other | — |
| | 893 |
|
Total deferred tax liability | 172,901 |
| | 265,420 |
|
Net deferred tax liability before valuation allowance | 74,602 |
| | 177,842 |
|
Valuation allowance | 39,054 |
| | 52,021 |
|
Net deferred tax liability | $ | 113,656 |
| | $ | 229,863 |
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A valuation allowance for deferred tax assets is recognized and charged to earnings in the period such determination is made, if it is determined that it is more likely than not that the deferred tax asset will not be realized. If the Company subsequently realized deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. The determination for a valuation allowance is made on a jurisdiction by jurisdiction basis. At December 31, 2017 and 2016, the valuation allowance, relating mainly to net operating losses, capital losses and deferred interest expense in Norway, Brazil, UK and Luxembourg, was $39.1 million and $52.0 million, respectively. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
For tax purposes, the Company utilized the cost recovery method of accounting for its finance receivable income through December 31, 2016. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables balance to zero before taxable income is recognized. The Internal Revenue Service ("IRS") examined the Company's 2005 through 2012 tax returns and asserted that tax revenue recognition using the cost recovery method did not clearly reflect taxable income and therefore issued Notices of Deficiency to the Company for tax years ended December 31, 2005 through 2012 (the "Notices"). In response to the Notices, the Company filed petitions in the U.S. Tax Court (the “Tax Court”) challenging the deficiencies and the Tax Court set the trial to begin on May 15, 2017. On May 10, 2017, the Company reached a settlement with the IRS in regards to the Notices. Under the settlement, both parties agreed that no amounts were due for years 2005 through 2012 and the Tax Court entered decisions to that effect on June 22, 2017. Also, under the settlement, the Company will utilize a new tax accounting method to recognize net finance receivables revenue effective with tax year 2017. Under the new method, a portion of the annual collections amortize principal and the remaining portion is taxable income. The Company will not be required to pay any interest or penalties related to the prior periods. The deferred tax liability related to the difference in timing between the new method and the cost recovery method will be incorporated evenly into the Company’s tax filings over four years.
ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not these positions will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions.
At December 31, 2017, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2013 and subsequent years.
As of December 31, 2017, the cumulative unremitted earnings of the Company's foreign subsidiaries are approximately $23.8 million. The Company intends for predominantly all foreign earnings to be indefinitely reinvested in its foreign operations and, therefore, the recording of deferred tax liabilities for such unremitted earnings is not required. It is impracticable to determine the total amount of unrecognized deferred taxes with respect to these indefinitely reinvested earnings.
The Company's foreign subsidiaries had $3.3 million and $3.7 million of net operating loss carryforwards net of valuation allowances as of December 31, 2017 and 2016, respectively. Most of the net operating losses do not expire under local law and the remaining jurisdictions allow for a 7 to 20 year carryforward period.