Income (losses) before income taxes consisted of the following: |
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 149,344 |
| | $ | 32,622 |
| | $ | 203,692 |
|
Foreign | 29,351 |
| | 54,479 |
| | (18,784 | ) |
Total | $ | 178,695 |
| | $ | 87,101 |
| | $ | 184,908 |
|
Income taxes from continuing operations consisted of the following for the years ended December 31: |
| | | | | | | | | | | | | | | |
| United States | | State
and Local | | Foreign | | Total |
2017 | | | | | | | |
Current | $ | 2,253 |
| | $ | 3,687 |
| | $ | 14,473 |
| | $ | 20,413 |
|
Deferred | $ | (11,234 | ) | | $ | 13,280 |
| | $ | (2,934 | ) | | (888 | ) |
Income taxes | | | | | | | $ | 19,525 |
|
2016 | | | | | | | |
Current | $ | (1,232 | ) | | $ | 3,033 |
| | $ | 8,325 |
| | $ | 10,126 |
|
Deferred | $ | 21,565 |
| | $ | (5,106 | ) | | $ | 3,040 |
| | 19,499 |
|
Income taxes | | | | | | | $ | 29,625 |
|
2015 | | | | | | | |
Current | $ | 22,570 |
| | $ | 4,288 |
| | $ | 9,173 |
| | $ | 36,031 |
|
Deferred | $ | 37,553 |
| | $ | 5,631 |
| | $ | (3,919 | ) | | 39,265 |
|
Income taxes | | | | | | | $ | 75,296 |
|
2017 Tax Act
On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% 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 foreign earnings. The Company has estimated the provision for income taxes in accordance with the 2017 Tax Act and guidance available as of the date of this filing and as a result has recorded a provisional amount of one-time income tax benefit of $60,636 in the fourth quarter of 2017, the period in which the legislation was enacted.
The one-time income tax benefit includes:
| |
• | a tax benefit of $62,488 related to the remeasurement of certain deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future; |
| |
• | as discussed in Note 15, Tax Receivable Agreement, for the year ended December 31, 2017, the amount due under our tax receivable agreement decreased primarily as a result of the decline in the federal corporate income tax rate, resulting in the Company recognizing non-taxable income of $15,259. The favorable tax effect of this permanent difference was $5,726; |
| |
• | an income tax expense of $9,098 related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings; and |
| |
• | the reversal of net deferred tax liabilities of $1,520 related to the cumulative undistributed earnings. |
The 2017 Tax Act also changes the taxation of foreign earnings, and companies generally will not be subject to United States federal income taxes upon the receipt of dividends from foreign subsidiaries and will not be permitted foreign tax credits related to such dividends. However, the 2017 Tax Act creates a new requirement to tax certain foreign earnings relating to GILTI. Based on the recent FASB guidance, the Company can elect an accounting policy choice of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or factoring such amounts into the Company’s measurement of its deferred taxes. Because of the complexity of the new GILTI tax rules, and anticipated guidance from the U.S. Treasury, we will continue to evaluate this provision of the 2017 Tax Act. Therefore, we have not recorded any deferred taxes related to GILTI and have not elected an accounting policy for GILTI at this time.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $58,675 and $25,824 at December 31, 2017 and 2016, respectively. These earnings are considered to be indefinitely reinvested. Beginning in 2018, except for GILTI, the Company will no longer record United States federal income tax on its share of the income of its foreign subsidiaries, nor will it record a benefit for foreign tax credits related to that income. Accordingly, the Company reversed net deferred tax liabilities related to its cumulative undistributed foreign earnings and deferred tax assets for related foreign tax credits, resulting in a corresponding net tax benefit in 2017. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to withholding taxes payable, where applicable, to foreign countries, but would have no further federal income tax liability.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued 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 2017 Tax Act. Accordingly, any subsequent adjustments to the amount of one-time benefit of $60,636 will be recorded to current income tax provision during the measurement period which is not expected to extend beyond one year from the enactment date. The effects of other provisions of the 2017 Tax Act are not expected to have a material impact on our consolidated financial statements.
The reconciliation between the income tax computed by applying the U.S. federal statutory rate and the reported effective tax rate on income from continuing operations is as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes (net of federal income tax benefit) | 2.0 |
| | 1.1 |
| | 2.5 |
|
Foreign income tax rate differential | (0.6 | ) | | (4.4 | ) | | 1.4 |
|
Revaluation of deferred tax assets for foreign and state tax rate changes, net | 0.4 |
| | (0.9 | ) | | 0.7 |
|
Research and development credit | — |
| | (0.5 | ) | | 0.2 |
|
Release of tax reserves | — |
| | (4.9 | ) | | — |
|
Withholding taxes | 0.2 |
| | 0.3 |
| | — |
|
2017 Tax Act | (33.9 | ) | | — |
| | — |
|
Domestic production exclusions | — |
| | — |
| | (1.8 | ) |
Change in valuation allowance | 5.8 |
| | 2.3 |
| | 1.6 |
|
Nondeductible expenses | 0.9 |
| | 3.4 |
| | 0.3 |
|
Incremental tax benefit from share-based compensation awards | (0.9 | ) | | — |
| | — |
|
Other | 2.0 |
| | 2.6 |
| | 0.8 |
|
Effective tax rate | 10.9 | % | | 34.0 | % | | 40.7 | % |
Our effective tax rate was 10.9 percent for 2017 as compared to 34.0 percent for 2016. The decline in our tax rate is primarily due the reduction of our net deferred tax liabilities resulting from the change in federal corporate income tax rate to 21 percent from 35 percent effective January 1, 2018 as part of the 2017 Tax Act, partly offset by the increase in valuation allowance.
Our effective tax rate was 34.0 percent for 2016 as compared to 40.7 percent for 2015. The change in our tax rate reflects a shift in jurisdictional profitability between 2015 and 2016. Increased profits in 2016 within tax jurisdictions with tax rates lower than the United States resulted in a reduction to our effective tax rate. Our 2016 tax rate reflects the release of certain historical foreign reserve positions in Australia, primarily driven by a lapse of statute, as well as a reduction in our domestic production activities deduction as a result of lower taxable income in the United States.
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and the deferred tax liabilities are presented below: |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred assets related to: | | | |
Reserve for credit losses | $ | 6,562 |
| | $ | 7,122 |
|
Tax credit carryforwards | 1,283 |
| | 5,178 |
|
Stock-based compensation, net | 9,858 |
| | 12,729 |
|
Net operating loss carry forwards | 54,700 |
| | 56,501 |
|
Accruals | 7,355 |
| | 18,985 |
|
Deferred financing costs | — |
| | 5,420 |
|
Other | — |
| | 164 |
|
Total | 79,758 |
| | 106,099 |
|
Deferred tax liabilities related to: | | | |
Other liabilities | 2,060 |
| | 643 |
|
Deferred financing costs | 7,219 |
| | — |
|
Property, equipment and capitalized software | 22,315 |
| | 32,759 |
|
Intangibles | 141,908 |
| | 118,695 |
|
Investment in partnership | — |
| | 94,354 |
|
Total | 173,502 |
| | 246,451 |
|
Valuation allowance | 17,787 |
| | 5,620 |
|
Deferred income taxes, net | $ | (111,531 | ) | | $ | (145,972 | ) |
Net deferred tax (liabilities) assets by jurisdiction are as follows: |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
United States | $ | (116,229 | ) | | $ | (148,389 | ) |
Australia | (945 | ) | | (2,020 | ) |
United Kingdom | 7,315 |
| | 6,474 |
|
New Zealand | 188 |
| | 183 |
|
The Netherlands | 249 |
| | 206 |
|
Brazil | (1,073 | ) | | (2,497 | ) |
Canada | (1,036 | ) | | 71 |
|
Deferred income taxes, net | $ | (111,531 | ) | | $ | (145,972 | ) |
The 2017 decrease in our net deferred tax liabilities resulted from the change in federal corporate income tax rate to 21 percent from 35 percent effective January 1, 2018 as part of 2017 Tax Act, partly offset by current year activity. The Company also recorded $34,462 as a reduction to net deferred tax liabilities related to the finalization of purchase price accounting of the EFS acquisition.
At December 31, 2017, the Company changed the tax structure of EFS to convert the limited liability company from a partnership to an entity disregarded as separate from its owners for federal tax purposes. Accordingly, investment in partnership deferred tax liability was allocated to the deferred tax liabilities and assets related to the underlying assets, primarily intangibles. The Company had approximately $294,318 of post apportionment state, $112,688 of federal and $77,622 of foreign net operating loss carry forwards at December 31, 2017 and approximately $211,010 of post apportionment state, $103,739 of federal and $54,062 of foreign net operating loss carry forwards at December 31, 2016. The U.S. losses expire at various times through 2037. Foreign losses in Brazil and the UK have indefinite carry forward periods.
At December 31, 2017, the Company maintained valuation allowances for the following items: (i) acquired and certain net operating losses in the UK (ii) Evolution1’s equity investment in its minority-owned subsidiaries, (iii) state tax credits, and (iv) certain net operating losses and estimated non-deductible expenses. In each case, the Company has determined it is not likely that the benefits will be utilized. No other valuation allowances have been established for any other deferred tax assets as the Company believes it is more likely than not that its deferred tax assets will be utilized within the carry forward periods. During 2017 and 2016, the Company recorded tax expense of $12,167 and $2,000, respectively, for net increases to the valuation allowance. The substantial majority of the 2017 increase in valuation allowance was related to the state net operating losses for our parent company’s separate state filings.
At December 31, 2017, the Company had $4,859 of unrecognized tax benefits, net of federal income tax benefit, of which $3,944, if fully recognized, would decrease our effective tax rate. No significant changes to the existing unrecognized tax benefits are expected within the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company recorded tax expense of $12 and $263 for interest and penalties related to uncertain tax positions for the years ended December 31, 2017 and December 21, 2015, respectively while a tax benefit of $2,251 was recorded for the year ended December 21, 2016. As of December 31, 2017 and 2016, the Company had no material amounts accrued for interest and penalties related to unrecognized tax benefits.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits excluding interest and penalties is as follows: |
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 4,960 |
| | $ | 4,776 |
| | $ | 4,856 |
|
Increases related to prior year tax positions | 1,332 |
| | 4,960 |
| | 431 |
|
Decreases related to prior year tax positions, due to foreign currency exchange | — |
| | — |
| | (511 | ) |
Decreases related to prior year tax positions | — |
| | (431 | ) | | — |
|
Settlements | (1,255 | ) | | — |
| | — |
|
Lapse of statute | — |
| | (4,345 | ) | | — |
|
Ending balance | $ | 5,037 |
| | $ | 4,960 |
| | $ | 4,776 |
|
The Company’s primary tax jurisdictions are the United States, Australia and the United Kingdom. The Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions, where required. In the normal course of business, the Company is no longer subject to income tax examination after the Internal Revenue Service statute of limitations of three years. The Internal Revenue Service is currently in the process of examining the Company’s US federal income tax returns for 2010 through 2015. The Company is currently appealing adjustments proposed by the Internal Revenue Service in connection with the ongoing audits. The Company is also subject to an ongoing examination in New Zealand by Inland Revenue for calendar tax years 2013, 2014 and 2015, but no adjustments have been proposed, and the Company believes its position does not warrant a reserve.