Income Taxes
Income before provision for income taxes by taxing jurisdiction was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (41,635 | ) | | $ | (32,511 | ) | | $ | (27,788 | ) |
Foreign | 145,570 |
| | 91,975 |
| | 132,739 |
|
| $ | 103,935 |
| | $ | 59,464 |
| | $ | 104,951 |
|
The net income tax provision recognized in the Consolidated Statement of Operations for the years ended December 31, 2017, 2016 and 2015 was related to foreign tax jurisdictions.
The Company’s effective income tax rate can be affected by many factors, including but not limited to, changes in the mix of earnings in tax jurisdictions with differing statutory rates, changes in corporate structure, changes in the valuation of deferred tax assets and liabilities, the result of audit examinations of previously filed tax returns and changes in tax laws and rates. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The Company and/or one or more of its subsidiaries file income tax returns in the U.S., Germany and Canada. Currently, the Company does not anticipate that the expiration of the statute of limitations or the completion of audits in the next fiscal year will result in liabilities for uncertain income tax positions that are materially different than the amounts accrued or disclosed as at December 31, 2017. However, this could change as tax years are examined by taxing authorities, the timing of which are uncertain at this time. The German tax authorities have completed examinations up to and including the 2013 tax year for all but one German entity. For this entity the German tax authorities have completed examinations up to and including the 2007 tax year. The Company is generally not subject to U.S. or Canadian income tax examinations for tax years before 2014 and 2013, respectively. The Company believes that it has adequately provided for any reasonable foreseeable outcomes related to its tax audits and that any settlement will not have a material adverse effect on its consolidated results.
The liability in the Consolidated Balance Sheet related to unrecognized tax benefits was $nil as at December 31, 2017 (2016 – $nil). The Company recognizes interest and penalties related to unrecognized tax benefits in provision for income taxes in the Consolidated Statement of Operations. During the year ended December 31, 2017, the Company recognized $nil in interest and penalties (2016 – $nil; 2015 – $nil).
Differences between the U.S. Federal Statutory and the Company’s effective rates are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. Federal statutory rate | 35% | | 35% | | 35% |
| | | | | |
U.S. Federal statutory rate on income before provision for income taxes | $ | (36,377 | ) | | $ | (20,812 | ) | | $ | (36,972 | ) |
Tax differential on foreign income | 10,398 |
| | 5,822 |
| | 9,330 |
|
Effect of foreign earnings | (3,584 | ) | | (13,850 | ) | | (5,290 | ) |
Change in undistributed earnings | 13,297 |
| | (13,297 | ) | | — |
|
Change in tax rate | (26,627 | ) | | — |
| | — |
|
Valuation allowance | 5,750 |
| | 9,188 |
| | (2,765 | ) |
Tax benefit of partnership structure | 4,937 |
| | 4,933 |
| | 5,217 |
|
Non-taxable foreign subsidies | 2,735 |
| | 2,118 |
| | 2,281 |
|
True-up of prior year taxes | (3,685 | ) | | (980 | ) | | 5,073 |
|
Foreign exchange on valuation allowance | 1,953 |
| | 632 |
| | (5,005 | ) |
Foreign exchange on settlement of debt | 1,342 |
| | 3,150 |
| | — |
|
Other | (3,591 | ) | | (1,425 | ) | | (1,318 | ) |
| $ | (33,452 | ) | | $ | (24,521 | ) | | $ | (29,449 | ) |
| | | | | |
Comprised of: | | | | | |
Current income tax provision | $ | (11,396 | ) | | $ | (7,712 | ) | | $ | (11,934 | ) |
Deferred income tax provision | (22,056 | ) | | (16,809 | ) | | (17,515 | ) |
| $ | (33,452 | ) | | $ | (24,521 | ) | | $ | (29,449 | ) |
Deferred income tax assets and liabilities are composed of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
German tax loss carryforwards | $ | 52,415 |
| | $ | 65,582 |
|
U.S. tax loss carryforwards and credits | 47,028 |
| | 62,202 |
|
Canadian tax loss carryforwards | 5,672 |
| | 2,033 |
|
Basis difference between income tax and financial reporting with respect to operating pulp mills | (73,665 | ) | | (56,723 | ) |
Undistributed earnings of foreign subsidiary | — |
| | (13,297 | ) |
Long-term debt | (7,655 | ) | | (5,996 | ) |
Payable and accrued expenses | 4,167 |
| | 3,102 |
|
Deferred pension liability | 6,122 |
| | 6,877 |
|
Capital leases | 5,879 |
| | 5,640 |
|
Research and development expense pool | 3,170 |
| | 2,904 |
|
Other | 1,971 |
| | 2,791 |
|
| 45,104 |
| | 75,115 |
|
Valuation allowance | (75,689 | ) | | (81,439 | ) |
Net deferred income tax liability | $ | (30,585 | ) | | $ | (6,324 | ) |
| | | |
Comprised of: | | | |
Deferred income tax asset | $ | 1,376 |
| | $ | 10,990 |
|
Deferred income tax liability | (31,961 | ) | | (17,314 | ) |
Net deferred income tax liability | $ | (30,585 | ) | | $ | (6,324 | ) |
The following table details the scheduled expiration dates of the Company’s net operating loss, interest and income tax credit carryforwards as at December 31, 2017:
|
| | | | | |
| Amount | | Expiration Date |
Germany | | | |
Net operating loss | $ | 176,300 |
| | Indefinite |
Interest | $ | 99,800 |
| | Indefinite |
U.S. | | | |
Net operating loss | $ | 190,000 |
| | 2025 – 2037 |
Income tax credits | $ | 7,100 |
| | 2020 – 2027 |
Canada | | | |
Net operating loss | $ | 21,000 |
| | 2029 – 2036 |
Scientific research and experimental development tax credits | $ | 4,300 |
| | 2030 – 2036 |
At each reporting period, the Company assesses whether it is more likely than not that the deferred tax assets will be realized, based on the review of all available positive and negative evidence, including future reversals of existing taxable temporary differences, estimates of future taxable income, past operating results and prudent and feasible tax planning strategies. The carrying value of the Company's deferred tax assets reflects its expected ability to generate sufficient future taxable income in certain tax jurisdictions to utilize these deferred income tax benefits. Significant judgment is required when evaluating this positive and negative evidence.
The following table summarizes the changes in valuation allowances related to net deferred tax assets:
|
| | | | | | | |
| 2017 | | 2016 |
Balance as at January 1 | $ | 81,439 |
| | $ | 90,627 |
|
Additions (reversals) | | | |
U.S. | (3,060 | ) | | (16,043 | ) |
Canada | (4,643 | ) | | 6,223 |
|
The impact of changes in foreign exchange rates | 1,953 |
| | 632 |
|
Balance as at December 31 | $ | 75,689 |
| | $ | 81,439 |
|
As at December 31, 2017, the Company has fully recognized all deferred tax assets for its German entities and has a full valuation allowance against the deferred tax assets for its U.S. and Canadian entities.
The Company has not recognized a tax liability on the undistributed earnings of foreign subsidiaries as at December 31, 2017 because these earnings are expected to be permanently reinvested outside the U.S. or repatriated without incurring a tax liability. As at December 31, 2017, the cumulative amount of undistributed earnings upon which U.S. income taxes have not been provided was approximately $443,000.
The Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the 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 transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as at December 31, 2017. The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
As a result of the reduction of the corporate tax rate, the Company revalued its U.S. net deferred tax asset balance, excluding after tax credits, as at December 31, 2017. Based on this revaluation, the net deferred tax asset was reduced by $27,445 and the Company recorded an offsetting reduction to the valuation allowance as the Company has a full valuation allowance against its U.S. deferred tax assets.
The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $3,584 based on cumulative foreign earnings of $23,116. The Company has loss carryforwards which will be used to offset the tax.