MITEL NETWORKS CORP

23. INCOME TAXES

Details of income taxes are as follows:


	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
Income (loss) from continuing operations before income taxes:
Canadian	$	16.7		$	88.9		$	176.2
Foreign		(85.3	)		(55.2	)		(166.6	)

	$	(68.6	)	$	33.7		$	9.6

Current income tax recovery (expense):
Canadian	$	0.1		$	(0.1	)	$	(1.1	)
Foreign		(6.3	)		(15.6	)		(14.5	)

	$	(6.2	)	$	(15.7	)	$	(15.6	)

Deferred income tax recovery (expense):
Canadian	$	(2.6	)	$	(14.2	)	$	(3.5	)
Foreign		29.1			31.2			16.0

	$	26.5		$	17.0		$	12.5

The income tax recovery (expense) reported differs from the amount computed by applying the Canadian rates to the income (loss) before income taxes. The reasons for these differences and their tax effects are as follows:


	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
Expected tax rate		26.5	%		26.5	%		26.5	%

Expected tax recovery (expense)	$	18.2		$	(8.9	)	$	(2.5	)
Foreign tax rate differences		9.0			2.1			4.4
Net change in valuation allowance on deferred tax assets		(9.5	)		3.2			2.5
Permanent differences		6.0			(5.2	)		(2.7	)
Revaluation of U.S. tax due to U.S. tax reform		2.9			—			—
Tax credits and other adjustments		(6.3	)		10.1			(4.8	)

Income tax recovery (expense)	$	20.3		$	1.3		$	(3.1	)

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into legislation. The Act includes a broad range of legislative changes including a reduction of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, limitations on the deductibility of interest and 100% expensing of qualified property. As a result of the Act being enacted during 2017, the Company is required to revalue its U.S. deferred tax assets and liabilities based on the new 21% tax rate. The Company has recognized $2.9 of income tax recovery in 2017 as a result of the revaluation of its US deferred income tax assets and deferred income tax liabilities.

As discussed above, the Company has provisionally revalued all of its U.S. deferred tax assets and liabilities based on the rates that they are expected to reverse at in the future, which is generally 21% for U.S. federal tax purposes. The December 31, 2017 balances of deferred tax assets and deferred tax liabilities that have been revalued are $88.7 and $95.4, respectively. The Company is still analyzing certain aspects of the Act, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Further adjustments, if any, will be recorded by the Company during the measurement period in 2018.

The tax effect of components of the deferred tax assets and liabilities are as follows:


	December 31, 2017			December 31, 2016
Assets (liabilities):
Net operating loss and credit carryforwards	$	177.4		$	101.3
Capital loss carryforwards		42.3			69.0
Allowance for doubtful accounts		2.7			1.9
Inventories		3.3			3.5
Restructuring and other provisions		9.7			18.0
Pension liability		20.5			25.8
Revenue recognition		17.1			21.9
Intangibles		(75.1	)		15.8
Long-term debt and other		0.4			—
Lease obligations		13.5			13.7
Property and equipment		(0.7	)		0.6

Total gross deferred tax assets net of total deferred tax liabilities		211.1			271.5

Valuation allowance		(97.1	)		(96.3	)

Net deferred tax assets	$	114.0		$	175.2

The Company updates its assessment of the realizability of its deferred tax assets at each reporting period. At December 31, 2017, as a result of uncertainty regarding the future utilization of certain deferred tax assets, there is a valuation allowance of $97.1 against deferred tax assets primarily in the United Kingdom and United States (December 31, 2016 — $96.3). Future changes in estimates of taxable income could result in a significant change to the valuation allowance.

For the years ended December 31, 2017, 2016 and 2015, there were no significant changes to the assessment of the realizability of the Company’s deferred tax assets.

The Company had the following tax-effected loss carryforwards and tax credits:


	December 31, 2017
Year of Expiry	Tax Losses		Tax Credits
2018	$	5.1	$	0.9
2019		5.7		1.1
2020		0.4		1.2
2021-2034		76.5		71.7
Indefinite		3.3		53.8

Total	$	91.0	$	128.7

These tax loss carryforwards primarily relate to operations in the U.S. and France. Tax credit carryforwards primarily relate to operations in the U.S. and Canada. The U.S. has an annual restriction on the utilization of tax-effected loss carryforwards and tax credits of $26.7.

The Company operates in multiple jurisdictions throughout the world and its returns are subject to ongoing examinations by certain taxing authorities in those jurisdictions. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provisions for income taxes. The Company believes that it has adequately provided for tax adjustments that are probable as a result of any ongoing or future examinations.

The Company has undistributed earnings of its foreign subsidiaries which are considered to be indefinitely reinvested and accordingly no provision for income taxes has been provided. The determination of the amount of unrecognized deferred income tax liability for undistributed earnings is not practicable. If circumstances change and it becomes apparent that some or all of the undistributed earnings of the Company’s foreign subsidiaries will be remitted to a parent company, the Company will record a tax liability.

Uncertain Tax Positions

The following table reconciles the activity related to the Company’s unrecognized tax benefits, which are included in other non-current liabilities in the consolidated balance sheets:


	Year Ended December 31, 2017			Year Ended December 31, 2016
Opening balance	$	21.2		$	19.0
Increase related to current year tax positions		10.1			4.8
Increase due to acquisitions		7.2			—
Reductions due to lapse in statute of limitations		(1.2	)		(1.4	)
Settlements		(0.4	)		(1.3	)
Other, including effect of foreign exchange		1.0			0.1

Closing balance⁽¹⁾	$	37.9		$	21.2

(1)	At December 31, 2017 and 2016, $20.5 and $9.5, respectively of the closing unrecognized tax benefits are recorded net against deferred tax assets.

The amount of unrecognized tax benefits at December 31, 2017 that would affect the effective tax rate, if recognized, was $11.6 (December 31, 2016 — $11.7).

The Company recognizes any interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2017, in addition to the unrecognized tax benefits above, the Company has a balance of $3.9 (December 31, 2016 — $3.1) for the potential payment of interest and penalties. For the year ended December 31, 2017, the Company expensed $1.2 (years ended December 31, 2016 and 2015 — $0.8 and $0.7, respectively) for the potential payment of interest and penalties.

The Company routinely engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions throughout the year. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. The Company estimates that the unrecognized tax benefits inclusive of interest at December 31, 2017 are expected to be reduced by approximately $1.4 in the next 12 months.

The Company or its subsidiaries file income tax returns in a significant number of countries. These tax returns are subject to examination by local taxing authorities. The following summarizes the open years by major jurisdiction: Canada — 2011 to 2017 and for specific types of transactions from 2011 to 2012; the U.S. — 2014 to 2017; Germany — 2014 to 2017; France — 2014 to 2017; Sweden — 2011 to 2017; Switzerland — 2012 to 2017; and the U.K. — 2011 to 2017.

At December 31, 2017, the Company is presently under audit in France for the 2011 tax year, Canada for the 2011 through 2015 tax years and in the U.S. for 2013 and 2016. The resolution of tax matters in these jurisdictions is not expected to be material to the Consolidated Financial Statements. During the year, the Company settled a tax audit in Italy, which did not have a material impact on the Consolidated Financial Statements.