P. Income Taxes
Provision for income taxes. The components of income (loss) before income taxes were as follows:
| 2017 | 2016 | 2015 | ||||||||||
|
Domestic |
$ | (712 | ) | $ | (688 | ) | $ | (1,053 | ) | |||
|
Foreign |
1,871 | 526 | 716 | |||||||||
| $ | 1,159 | $ | (162 | ) | $ | (337 | ) | |||||
Provision for income taxes consisted of the following:
| 2017 | 2016 | 2015 | ||||||||||
|
Current: |
||||||||||||
|
Federal* |
$ | 3 | $ | 9 | $ | 3 | ||||||
|
Foreign |
421 | 221 | 313 | |||||||||
|
State and local |
- | - | - | |||||||||
| 424 | 230 | 316 | ||||||||||
|
Deferred: |
||||||||||||
|
Federal* |
24 | - | (85 | ) | ||||||||
|
Foreign |
152 | (46 | ) | 171 | ||||||||
|
State and local |
- | - | - | |||||||||
| 176 | (46 | ) | 86 | |||||||||
|
Total |
$ | 600 | $ | 184 | $ | 402 | ||||||
| * | Includes U.S. income taxes related to foreign income |
A reconciliation of the U.S. federal statutory rate to Alcoa Corporation’s effective tax rate was as follows (the effective tax rate was a provision on income in 2017 and a provision on a loss in 2016 and 2015):
| 2017 | 2016 | 2015 | ||||||||||
|
U.S. federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Changes in valuation allowances |
25.8 | (1.9 | ) | (62.6 | ) | |||||||
|
Taxes on foreign operations—rate differential |
(10.8 | ) | 44.3 | 14.2 | ||||||||
|
Impact of U.S. Tax Cuts and Jobs Act of 2017 |
1.9 | - | - | |||||||||
|
Noncontrolling interest |
1.4 | (7.3 | ) | (8.5 | ) | |||||||
|
Other taxes related to foreign operations |
1.3 | (19.5 | ) | (20.9 | ) | |||||||
|
Tax holidays(1) |
0.4 | 11.2 | 6.2 | |||||||||
|
Losses and credits with no tax benefit(2) |
(0.2 | ) | (163.2 | ) | (82.0 | ) | ||||||
|
Statutory tax rate and law changes |
0.1 | (0.6 | ) | (0.3 | ) | |||||||
|
Nondeductible costs related to the Separation Transaction |
- | (9.6 | ) | - | ||||||||
|
Impact of capitalization of intercompany debt |
- | - | 3.3 | |||||||||
|
Other |
(3.1 | ) | (2.0 | ) | (3.7 | ) | ||||||
|
Effective tax rate |
51.8 | % | (113.6 | )% | (119.3 | )% | ||||||
| (1) |
As of December 31, 2017, the income of certain operations of several of the Company’s subsidiaries in Brazil are taxed at a lower rate as a result of approved tax holidays. The difference between the respective holiday rates and the statutory rates resulted in a benefit of $20, or $0.11 per diluted share, in 2017. The majority of these tax holidays expire at the end of 2022 and one tax holiday expires at the end of 2026 (see below). In 2017, this line item also includes a charge of $26 for the remeasurement of certain deferred tax assets at the holiday rate (see below). |
| (2) |
In 2016 and 2015, hypothetical net operating losses and tax credits determined on a separate return basis for which it is more likely than not that a tax benefit will not be realized. The related deferred tax asset and offsetting valuation allowance have been adjusted to Parent Company net investment and, as such, are not reflected in subsequent deferred tax and valuation allowance tables. |
In mid-2017, AWAB received approval for a tax holiday related to the operation of the Juruti (Brazil) bauxite mine. This tax holiday is effective as of January 1, 2017 (retroactively) and decreases AWAB’s tax rate on income generated by the Juruti mine from 34% to 15.25%, which will result in future cash tax savings over a 10-year period. As a result of this income tax rate change, AWAB’s existing deferred tax assets that are expected to reverse during the holiday period were remeasured at the lower tax rate. This remeasurement resulted in both a decrease to AWAB’s deferred tax assets and a discrete income tax charge of $26 ($15 after noncontrolling interest).
Deferred income taxes. The components of deferred tax assets and liabilities based on the underlying attribute without regard to jurisdiction were as follows:
| 2017 | 2016 | |||||||||||||||
| December 31, |
Deferred tax assets |
Deferred tax liabilities |
Deferred tax assets |
Deferred tax liabilities |
||||||||||||
|
Tax loss carryforwards |
$ | 1,185 | $ | - | $ | 1,064 | $ | - | ||||||||
|
Employee benefits |
949 | - | 1,240 | - | ||||||||||||
|
Derivatives and hedging activities |
287 | 70 | - | 124 | ||||||||||||
|
Loss provisions |
246 | - | 313 | - | ||||||||||||
|
Tax credit carryforwards |
193 | - | 23 | - | ||||||||||||
|
Depreciation |
141 | 432 | 187 | 499 | ||||||||||||
|
Deferred income/expense |
11 | 109 | 28 | 136 | ||||||||||||
|
Other |
100 | 57 | 233 | 125 | ||||||||||||
| 3,112 | 668 | 3,088 | 884 | |||||||||||||
|
Valuation allowance |
(1,927 | ) | - | (1,755 | ) | - | ||||||||||
| $ | 1,185 | $ | 668 | $ | 1,333 | $ | 884 | |||||||||
The following table details the expiration periods of the deferred tax assets presented above:
| December 31, 2017 |
Expires within 10 years |
Expires within 11-20 years |
No expiration* |
Other* | Total | |||||||||||||||
|
Tax loss carryforwards |
$ | 330 | $ | 250 | $ | 605 | $ | - | $ | 1,185 | ||||||||||
|
Tax credit carryforwards |
193 | - | - | - | 193 | |||||||||||||||
|
Other |
- | - | 297 | 1,437 | 1,734 | |||||||||||||||
|
Valuation allowance |
(523 | ) | (152 | ) | (315 | ) | (937 | ) | (1,927 | ) | ||||||||||
| $ | - | $ | 98 | $ | 587 | $ | 500 | $ | 1,185 | |||||||||||
| * | Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. |
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences and taxable temporary differences that reverse within the carryforward period. The composition of Alcoa Corporation’s net deferred tax asset by jurisdiction as of December 31, 2017 was as follows:
| Domestic | Foreign | Total | ||||||||||
|
Deferred tax assets |
$ | 1,164 | $ | 1,948 | $ | 3,112 | ||||||
|
Valuation allowance |
(1,050 | ) | (877 | ) | (1,927 | ) | ||||||
|
Deferred tax liabilities |
(108 | ) | (560 | ) | (668 | ) | ||||||
| $ | 6 | $ | 511 | $ | 517 | |||||||
The Company has several income tax filers in various foreign countries. The $511 net deferred tax asset included under the “Foreign” column in the table above was comprised of the following (by income tax filer): a $252 net deferred tax asset for Alumínio in Brazil; a $153 net deferred tax asset for AWAB in Brazil; a $112 deferred tax asset for Alúmina Española, S.A. (“Española” and collectively with Alumínio and AWAB, the “Foreign Filers”) in Spain; and a combined $6 net deferred tax liability for several other foreign income tax filers.
The future realization of the net deferred tax asset for each of the Foreign Filers was based on projections of the respective future taxable income (defined as the sum of pretax income, other comprehensive income, and permanent tax differences), exclusive of reversing temporary differences and carryforwards. The realization of the net deferred tax assets of the Foreign Filers is not dependent on any tax planning strategies. The Foreign Filers each generated taxable income in the three-year cumulative period ending December 31, 2017. Management has also forecasted taxable income for each of the Foreign Filers in 2018 and for the foreseeable future. This forecast is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels; and key inputs and raw materials, such as bauxite, caustic soda, alumina, calcined petroleum coke, liquid pitch, energy (fuel oil, natural gas, electricity), labor, and transportation costs. These are the same assumptions used by management to develop a financial and operating plan, which is used to run the Company and measure performance against actual results.
The majority of the Foreign Filers’ net deferred tax assets relate to tax loss carryforwards. The Foreign Filers do not have a history of tax loss carryforwards expiring unused. Additionally, tax loss carryforwards have an infinite life under the respective income tax codes in Brazil and Spain. That said, utilization of an existing tax loss carryforward is limited to 30% and 25% of taxable income in a particular year in Brazil and Spain, respectively.
Accordingly, management concluded that the net deferred tax assets of the Foreign Filers will more likely than not be realized in future periods, resulting in no need for a partial or full valuation allowance as of December 31, 2017.
The following table details the changes in the valuation allowance:
| December 31, | 2017 | 2016 | 2015 | |||||||||
|
Balance at beginning of year |
$ | (1,755 | ) | $ | (712 | ) | $ | (486 | ) | |||
|
Establishment of new allowances(1) |
(94 | ) | - | (141 | ) | |||||||
|
Net change to existing allowances(2) |
(33 | ) | (1,056 | ) | (148 | ) | ||||||
|
U.S. state tax apportionment and tax rate changes |
- | - | 30 | |||||||||
|
Foreign currency translation |
(45 | ) | 13 | 33 | ||||||||
|
Balance at end of year |
$ | (1,927 | ) | $ | (1,755 | ) | $ | (712 | ) | |||
| (1) |
This line item reflects valuation allowances initially established as a result of a change in management’s judgment regarding the realizability of deferred tax assets. |
| (2) |
This line item reflects movements in previously established valuation allowances, which increase or decrease as the related deferred tax assets increase or decrease. Such movements occur as a result of remeasurement due to a tax rate change and changes in the underlying attributes of the deferred tax assets, including expiration of the attribute and reversal of the temporary difference that gave rise to the deferred tax asset. |
In 2017, Alcoa Corporation established a valuation allowance of $94 related to the remaining deferred tax assets in Iceland (see below). This amount was comprised of a $60 discrete income charge recognized in the Provision for income taxes on the accompanying Consolidated Statement of Operations and a $34 charge to Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheet. These deferred tax assets relate to tax loss carryforwards, which have an expiration period ranging from 2017 to 2026, and deferred losses associated with derivative and hedging activities. After weighing all available positive and negative evidence, management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax benefit of these deferred tax assets. This conclusion was based on existing cumulative losses and a short expiration period. Such losses were generated as a result of intercompany interest expense under the Company’s global treasury and cash management system and the realization of deferred losses associated with an LME-linked embedded derivative in a power contract (see Note O). Such interest expense is expected to continue and additional deferred losses associated with the embedded derivative will be realized in future years. As a result, management estimates that there will not be sufficient taxable income available to utilize the operating losses during the expiration period. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.
In 2015, Alcoa Corporation recognized a $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Suriname and Iceland. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname. These deferred tax assets relate to tax loss carryforwards and employee benefits have an expiration period ranging from 2016 to 2022. The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets in Iceland, which were related to tax loss carryforwards that have an expiration period ranging from 2017 to 2019. After weighing all available positive and negative evidence, management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax benefit of these deferred tax assets. This conclusion was mainly driven by a decline in the outlook of the former Primary Metals business (refers to the smelting and casting operations included in what is currently the Aluminum segment), combined with prior year cumulative losses and a short expiration period. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.
Undistributed net earnings. The cumulative amount of Alcoa Corporation’s foreign undistributed net earnings deemed to be permanently reinvested was approximately $940 as of December 31, 2017. This amount relates to foreign undistributed net earnings generated prior to the Separation Date, as well as approximately $150 of certain earnings generated during 2017. Alcoa Corporation has several commitments and obligations related to the Company’s operations in various foreign jurisdictions; therefore, management has no plans to distribute such earnings in the foreseeable future. The Company continuously evaluates its local and global cash needs for future business operations and anticipated debt facilities, which may influence future repatriation decisions. As described below (see U.S. Tax Cuts and Jobs Act of 2017), beginning on January 1, 2018, dividends received from foreign subsidiaries will no longer be subject to U.S. federal income tax; however, there is a mandatory one-time deemed repatriation of existing foreign undistributed net earnings during 2017 subject to either an 8% or 15.5% tax rate as appropriate. Based on a preliminary analysis, management has estimated that the Company has sufficient U.S. tax losses and foreign tax credits to apply against such tax, resulting in no impact to Alcoa Corporation’s Consolidated Financial Statements. Accordingly, with the exception of potential foreign currency exchange rate differences, the earnings described above will not be subject to residual U.S. income tax if repatriated in the future.
Unrecognized tax benefits. Alcoa Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign and U.S. state jurisdictions. With few exceptions, the Company is not subject to income tax examinations by tax authorities for years prior to 2013. For U.S. federal income tax purposes, most of the Company’s U.S. operations were included in the income tax filings of ParentCo’s U.S. consolidated tax group prior to the Separation Date. Since that time, the Company’s U.S. consolidated tax group, comprised of the referenced U.S. operations, has filed a two-month U.S. federal income tax return, which has not been examined by the Internal Revenue Service. The U.S. federal income tax filings of ParentCo’s U.S. consolidated tax group have been examined for all prior years through the Separation Date. Foreign jurisdiction tax authorities are in the process of examining income tax returns of several of the Company’s subsidiaries for various tax years between and including 2006 through 2015. For U.S. state income tax purposes, Alcoa Corporation and its subsidiaries remain subject to income tax examinations for the 2013 tax year and forward (as of December 31, 2017, there are no active examinations).
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
| December 31, | 2017 | 2016 | 2015 | |||||||||
|
Balance at beginning of year |
$ | 23 | $ | 22 | $ | 25 | ||||||
|
Additions for tax positions of the current year |
1 | 3 | 2 | |||||||||
|
Additions for tax positions of prior years |
- | 1 | 1 | |||||||||
|
Reductions for tax positions of prior years |
(5 | ) | (2 | ) | - | |||||||
|
Settlements with tax authorities |
(6 | ) | (2 | ) | (2 | ) | ||||||
|
Expiration of the statute of limitations |
(3 | ) | - | - | ||||||||
|
Foreign currency translation |
- | 1 | (4 | ) | ||||||||
|
Balance at end of year |
$ | 10 | $ | 23 | $ | 22 | ||||||
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2017, 2016, and 2015 would be 1%, 10%, and 4%, respectively, of pretax book income (loss). Alcoa Corporation does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2018 (see Tax (Spain) in Note R for a matter for which no reserve has been recognized).
It is Alcoa Corporation’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2017, 2016, and 2015, Alcoa Corporation recognized $1, $1, and $7, respectively, in interest and penalties. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Alcoa Corporation also recognized interest income of $6, $2, and $1 in 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, the amount accrued for the payment of interest and penalties was $2 and $6, respectively.
U.S. Tax Cuts and Jobs Act of 2017. On December 22, 2017, U.S. tax legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was enacted. For corporations, the TCJA amends existing U.S. Internal Revenue Code by reducing the corporate income tax rate and modifying several business deduction and international tax provisions. Specifically, the corporate income tax rate was reduced to 21% from 35%. Other significant changes, in general, include the following, among others: (i) a mandatory one-time deemed repatriation of accumulated foreign earnings (see Undistributed net earnings above) at either an 8% or 15.5% tax rate; (ii) dividends received from foreign subsidiaries can be deducted in full regardless of ownership interest (previously such dividends were fully taxable), however, a foreign withholding tax on any foreign earnings not asserted as indefinitely reinvested as of December 31, 2017 must be accrued; (iii) a 10.5% tax (effective in 2018) on a new category of income, referred to as global intangible low tax income, related to earnings taxed at a low rate of foreign entities without a significant fixed asset base; (iv) a 5% to 10% tax (effective in 2018) on base erosion payments (deductible cross-border payments to related parties) that exceed 3% of a company’s deductible expenses; and (v) net operating losses have an unlimited carryforward period (previously 20 years) and no carryback period (previously 2 years), but deductions for such losses are limited to 80% of taxable income (previously 100% of taxable income) beginning with the 2018 tax year.
As a result of the close proximity of the enactment date of the TCJA in relation to the Company’s calendar year-end, management elected January 17, 2018 as a cut-off date for purposes of recognizing any impacts from the TCJA in Alcoa Corporation’s 2017 Consolidated Financial Statements. This date coincided with the Company’s public release of its preliminary financial results for the fourth quarter and year ended December 31, 2017. Accordingly, the Company’s preliminary analysis of the provisions of the TCJA resulted in a charge of $22, which was reflected in the Provision for income taxes on the accompanying Statement of Consolidated Operations for 2017, as described below. The Company expects to finalize its analyses of the TCJA provisions in 2018.
The $22 charge relates specifically to management’s reasonable estimate of the corporate income tax rate change, which resulted in the remeasurement of the Company’s deferred income tax accounts. On a gross basis, the Company reduced its deferred tax assets, valuation allowance, and deferred tax liabilities by $506, $433, and $51, respectively.
Management also completed a preliminary analysis of the remaining provisions of the TCJA, including those specifically described above, in order to make a reasonable estimate as of the cut-off date, which resulted in no additional impact to the Company’s 2017 Consolidated Financial Statements. Specifically, the reasonable estimate for the TCJA provisions described above was based on the following: for (i), (ii), and (iii), the Company’s existing tax profile, which includes significant current U.S. tax losses that would be applied against such taxable income, as well as significant foreign tax credits that can be applied against these taxes; for (iv) management estimates that the Company will be under the 3% threshold; and for (v) the Company’s deferred income tax assets related to U.S. net operating losses are fully reserved as of December 31, 2017.
The Company’s preliminary analyses and provisional estimates of the financial statement impacts of the TCJA were completed in accordance with guidance issued by the SEC under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.