Income Taxes
Income Tax Expense and Effective Tax Rate
The following table shows our income tax expense and our effective tax rate for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | |
(in millions) | | 2017 |
| | 2016 |
| | 2015 |
|
Income before income taxes and equity in net income (loss) of unconsolidated entities | | $ | 181.1 |
| | $ | 224.9 |
| | $ | 193.7 |
|
Equity in net income (loss) of unconsolidated entities | | (1.3 | ) | | (0.2 | ) | | 1.8 |
|
Net income attributable to the noncontrolling interest | | — |
| | — |
| | (0.2 | ) |
Total | | $ | 179.8 |
| | $ | 224.7 |
| | $ | 195.3 |
|
Income tax expense | | $ | 42.9 |
| | $ | 63.7 |
| | $ | 62.7 |
|
Effective tax rate | | 23.9 | % | | 28.3 | % | | 32.1 | % |
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Reform Act"). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, changing to a territorial tax system and imposing a transitional tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have recognized the provisional tax impacts related to the changes under the Tax Reform Act and have included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions that we have made, additional regulatory guidance that may be issued, and actions that we may take as a result of the Tax Reform Act. The accounting is expected to be complete when our 2017 U.S. corporate income tax return is filed in 2018.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $14.7 million tax benefit in our Consolidated Statement of Income for the year ended December 31, 2017.
With respect to the transitional tax related to the change to a territorial system, the Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits ("E&P") through the year ended December 31, 2017. We had an estimated $183.7 million of undistributed foreign E&P subject to the deemed mandatory repatriation. After the utilization of corresponding tax credits, we have recorded a provisional tax charge of $7.5 million on the deemed mandatory repatriation of earnings of our foreign subsidiaries payable over 8 years. We have also recorded a provisional reduction of a deferred tax liability of $6.4 million previously recorded for our foreign equity method investments. The transitional tax charge of $7.5 million offset by the reduction of the $6.4 million deferred tax liability results in a net tax expense of $1.1 million on the deemed mandatory repatriation of earnings of our foreign affiliates.
We are continuing to assess our indefinite reinvestment assertion as a result of the Tax Reform Act. We have recorded a provisional estimate of deferred taxes in the amount of $3.0 million for foreign withholding taxes that would be due upon remittance of dividends from certain of our foreign affiliates. We are still evaluating whether to change our overall indefinite reinvestment assertion in light of the Tax Reform Act and consider our conclusion to be incomplete under SAB 118. Accordingly, we consider that most of our remaining foreign outside basis differences to be indefinitely reinvested. Accordingly, we have not recorded deferred taxes on those outside basis differences. As part of our continuing evaluation, we will need to gather additional information to compute outside basis differences for our foreign affiliates in order to assess whether any new deferred taxes should be recorded. We will also need to account for any prospective interpretive guidance issued on the Tax Reform Act as part of our evaluation. If we subsequently change our assertion during the measurement period allowed under SAB 118, we will account for a change in assertion as part of our accounting for the Tax Reform Act.
The Tax Reform Act also establishes other provisions that may affect our 2018 results, including but not limited to, the creation of a new minimum tax called the base erosion anti-abuse tax (BEAT); a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as currently taxes certain income from foreign operations (Global Intangible Low-Tax Income, or "GILTI"); a new limitation on deductible interest expense; the repeal of the domestic manufacturing deduction; and limitations on the deductibility of certain employee compensation.
The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. We are still evaluating the BEAT provisions which are applicable after December 31, 2017.
While the Tax Reform Act generally eliminates U.S. federal income tax on dividends from foreign subsidiaries going forward, certain income earned by certain subsidiaries may be included in our U.S. taxable income under the new GILTI inclusion rules (as a result of U.S. expense allocation rules). Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Reform Act and the application of U.S. GAAP. Under U.S. GAAP, we are allowed to make an accounting policy election and either treat taxes due from GILTI as a current-period expense when they are incurred or factor such amounts into our measurement of deferred taxes. Our selection of an accounting policy with respect to the new GILTI rules will depend in part on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI, and if so, what the impact is expected to be. We have not yet computed a reasonable estimate of the effect of this provision, and therefore, we have not made a policy decision regarding whether to record deferred taxes related to GILTI nor have we made any adjustments related to GILTI tax in our year-end financial statements.
The following table reconciles our income tax expense at the U.S. federal income tax rate of 35% to income tax expense as recorded:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | | | 2016 | | | | 2015 | | |
(in millions, except percentages) | | Amount |
| | % |
| | Amount |
| | % |
| | Amount |
| | % |
|
Income tax expense at U.S. federal rate | | $ | 63.0 |
| | 35.0 | % | | $ | 78.6 |
| | 35.0 | % | | $ | 68.4 |
| | 35.0 | % |
State income taxes, net of federal income tax benefit | | 3.0 |
| | 1.7 |
| | 4.5 |
| | 2.0 |
| | 6.6 |
| | 3.4 |
|
Change in U.S. tax rate | | (14.7 | ) | | (8.2 | ) | | — |
| | — |
| | — |
| | — |
|
Deemed mandatory repatriation | | 7.5 |
| | 4.2 |
| | — |
| | — |
| | — |
| | — |
|
Reduction of deferred tax liabilities for foreign equity method investments | | (6.4 | ) | | (3.6 | ) | | — |
| | — |
| | — |
| | — |
|
Withholding tax - repatriation | | 3.0 |
| | 1.7 |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation activity | | 0.3 |
| | 0.2 |
| | (0.6 | ) | | (0.3 | ) | | 0.4 |
| | 0.2 |
|
Equity in net income of unconsolidated subsidiaries (including holding gains upon acquisition) | | 1.2 |
| | 0.7 |
| | (12.1 | ) | | (5.4 | ) | | — |
| | — |
|
Book gain over tax gain on sale of HelloWallet | | (6.8 | ) | | (3.8 | ) | | — |
| | — |
| | — |
| | — |
|
Net change in valuation allowance related to non-U.S. deferred tax assets, primarily net operating losses | | 0.1 |
| | 0.1 |
| | (0.1 | ) | | — |
| | (2.0 | ) | | (1.0 | ) |
Difference between U.S. federal statutory and foreign tax rates | | (5.2 | ) | | (2.9 | ) | | (5.3 | ) | | (2.4 | ) | | (4.4 | ) | | (2.3 | ) |
Change in unrecognized tax benefits | | 1.2 |
| | 0.7 |
| | 2.6 |
| | 1.2 |
| | (1.4 | ) | | (0.7 | ) |
Credits and incentives | | (3.7 | ) | | (2.1 | ) | | (3.7 | ) | | (1.6 | ) | | (5.1 | ) | | (2.6 | ) |
Other - net | | 0.4 |
| | 0.2 |
| | (0.2 | ) | | (0.1 | ) | | 0.2 |
| | 0.1 |
|
Total income tax expense | | $ | 42.9 |
| | 23.9 | % | | $ | 63.7 |
| | 28.3 | % | | $ | 62.7 |
| | 32.1 | % |
Income tax expense consists of the following:
|
| | | | | | | | | | | | |
| | Year ended December 31 |
(in millions) | | 2017 |
| | 2016 |
| | 2015 |
|
Current tax expense: | | | | | | |
U.S. | | | | | | |
Federal | | $ | 40.3 |
| | $ | 42.8 |
| | $ | 42.8 |
|
State | | 6.6 |
| | 6.5 |
| | 8.3 |
|
Non-U.S. | | 9.9 |
| | 9.7 |
| | 8.7 |
|
Current tax expense | | 56.8 |
| | 59.0 |
| | 59.8 |
|
Deferred tax expense (benefit): | | | | | | |
U.S. | | | | | | |
Federal | | (10.9 | ) | | 5.1 |
| | 4.3 |
|
State | | (1.9 | ) | | 0.4 |
| | 1.8 |
|
Non-U.S. | | (1.1 | ) | | (0.8 | ) | | (3.2 | ) |
Deferred tax expense, net | | (13.9 | ) | | 4.7 |
| | 2.9 |
|
Income tax expense | | $ | 42.9 |
| | $ | 63.7 |
| | $ | 62.7 |
|
The following table provides our income before income taxes and equity in net income (loss) of unconsolidated entities, generated by our U.S. and non-U.S. operations:
|
| | | | | | | | | | | | |
| | Year ended December 31 |
(in millions) | | 2017 |
| | 2016 |
| | 2015 |
|
U.S. | | $ | 143.5 |
| | $ | 186.5 |
| | $ | 160.6 |
|
Non-U.S. | | 37.6 |
| | 38.4 |
| | 33.1 |
|
Income before income taxes and equity in net income (loss) of unconsolidated entities | | $ | 181.1 |
| | $ | 224.9 |
| | $ | 193.7 |
|
Deferred Tax Assets and Liabilities
We recognize deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and their tax basis. The tax effects of the temporary differences that give rise to the deferred income tax assets and liabilities are as follows:
|
| | | | | | | | |
| | As of December 31 | | |
(in millions) | | 2017 |
| | 2016 |
|
Deferred tax assets: | | | | |
Stock-based compensation expense | | $ | 3.7 |
| | $ | 2.6 |
|
Accrued liabilities | | 14.2 |
| | 19.0 |
|
Deferred revenue | | 3.5 |
| | 5.1 |
|
Net operating loss carryforwards - U.S. federal and state | | 1.9 |
| | 12.9 |
|
Net operating loss carryforwards - Non-U.S. | | 3.1 |
| | 3.0 |
|
Credits and incentive carryforwards | | 0.3 |
| | 0.6 |
|
Deferred royalty revenue | | 0.2 |
| | 0.3 |
|
Allowance for doubtful accounts | | 1.1 |
| | 1.2 |
|
Deferred rent | | 6.2 |
| | 10.3 |
|
Other | | 0.3 |
| | — |
|
Total deferred tax assets | | 34.5 |
| | 55.0 |
|
| | | | |
Deferred tax liabilities: | | | | |
Acquired intangible assets | | (18.6 | ) | | (34.3 | ) |
Property, equipment, and capitalized software | | (24.6 | ) | | (37.6 | ) |
Unrealized exchange gains, net | | (0.6 | ) | | (0.1 | ) |
Prepaid expenses | | (3.9 | ) | | (5.3 | ) |
Investments in unconsolidated entities | | (5.4 | ) | | (14.0 | ) |
Withholding tax - foreign dividends | | (3.0 | ) | | — |
|
Other | | — |
| | (0.3 | ) |
Total deferred tax liabilities | | (56.1 | ) | | (91.6 | ) |
Net deferred tax liability before valuation allowance | | (21.6 | ) | | (36.6 | ) |
Valuation allowance | | (2.0 | ) | | (1.6 | ) |
Deferred tax liability, net | | $ | (23.6 | ) | | $ | (38.2 | ) |
The deferred tax assets and liabilities are presented in our Consolidated Balance Sheets as follows:
|
| | | | | | | | |
| | As of December 31 | | |
(in millions) | | 2017 |
| | 2016 |
|
Deferred tax liability, net | | $ | (23.6 | ) | | $ | (38.2 | ) |
The following table summarizes our U.S. net operating loss (NOL) carryforwards:
|
| | | | | | | | | | |
| | As of December 31 | | | |
(in millions) | | | 2017 | | | 2016 |
| | | Expiration Dates | | | Expiration Dates |
U.S. federal NOLs subject to expiration dates | | $ | 9.1 |
| 2023-2036 | | $ | 36.9 |
| 2023-2036 |
The net decrease in the U.S. federal NOL carryforwards as of December 31, 2017 compared with 2016 primarily reflects the utilization of U.S. federal NOLs. We have not recorded a valuation allowance against the U.S. federal NOLs of $9.1 million because we expect the benefit of the U.S. federal NOLs to be fully utilized before expiration.
The following table summarizes our NOL carryforwards for our non-U.S. operations:
|
| | | | | | | | |
| | As of December 31 | | |
(in millions) | | 2017 |
| | 2016 |
|
Non-U.S. NOLs subject to expiration dates from 2019 through 2037 | | $ | 5.7 |
| | $ | 3.8 |
|
Non-U.S. NOLs with no expiration date | | 9.1 |
| | 10.8 |
|
Total | | $ | 14.8 |
| | $ | 14.6 |
|
| | | | |
Non-U.S. NOLs not subject to valuation allowances | | $ | 5.4 |
| | $ | 6.8 |
|
The change in non-U.S. NOL carryforwards as of December 31, 2017 compared with 2016 primarily reflects the use of NOL carryforwards offset by NOLs generated.
In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have recorded a valuation allowance against all but approximately $5.4 million of the non-U.S. NOLs, reflecting the likelihood that the benefit of these NOLs will not be realized.
Uncertain Tax Positions
We conduct business globally and as a result, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. In the normal course of business, we are subject to examination by tax authorities throughout the world. The open tax years for our U.S. Federal tax returns and most state tax returns include the years 2008 to the present.
We are currently under audit by federal, state and local tax authorities in the United States as well as tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these U.S. federal, state, local, and non-U.S. audits will conclude in 2018. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.
As of December 31, 2017, our Consolidated Balance Sheet included a current liability of $8.7 million and a non-current liability of $7.0 million for unrecognized tax benefits. As of December 31, 2016, our Consolidated Balance Sheet included a current liability of $8.9 million and a non-current liability of $5.4 million for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.
The table below reconciles the beginning and ending amount of the gross unrecognized tax benefits as follows:
|
| | | | | | | | |
(in millions) | | 2017 |
| | 2016 |
|
Gross unrecognized tax benefits - beginning of the year | | $ | 18.4 |
| | $ | 14.5 |
|
Increases as a result of tax positions taken during a prior-year period | | 1.4 |
| | 2.2 |
|
Decreases as a result of tax positions taken during a prior-year period | | (0.4 | ) | | (0.1 | ) |
Increases as a result of tax positions taken during the current period | | 1.9 |
| | 2.4 |
|
Decreases relating to settlements with tax authorities | | — |
| | — |
|
Reductions as a result of lapse of the applicable statute of limitations | | (2.6 | ) | | (0.6 | ) |
Gross unrecognized tax benefits - end of the year | | $ | 18.7 |
| | $ | 18.4 |
|
In 2017, we recorded a net increase of $2.9 million of gross unrecognized tax benefits before settlements and lapses of statutes of limitations, of which $2.9 million increased our income tax expense by $3.1 million. In addition, we reduced our unrecognized tax benefits by $2.6 million for settlements and lapses of statutes of limitations, of which $2.6 million decreased our income tax expense by $2.2 million.
As of December 31, 2017, we had $18.7 million of gross unrecognized tax benefits, of which $15.0 million, if recognized, would reduce our effective income tax rate and decrease our income tax expense by $14.4 million.
We record interest and penalties related to uncertain tax positions as part of our income tax expense. The following table summarizes our gross liability for interest and penalties:
|
| | | | | | | | |
| | As of December 31 | | |
(in millions) | | 2017 |
| | 2016 |
|
Liabilities for interest and penalties | | $ | 1.7 |
| | $ | 1.6 |
|
We recorded the increase in the liabilities for penalties and interest, net of any tax benefits, to income tax expense in our Consolidated Statement of Income in 2017.