Income Taxes
On December 22, 2017 the U.S. enacted the Tax Cuts and Jobs Act. The new law, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws. The primary impact on the Company’s 2017 financial results was associated with the effect of reducing the US corporate income tax rate from 35% to 21% starting in 2018, and imposing a one-time mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries. As a result, the Company has recorded a net benefit of $415 million during the fourth quarter of 2017, which is included in (benefit)/provision for income taxes from continuing operations in the Consolidated Statements of Income. Other provisions of the law are not effective until January 1, 2018, include, but are not limited to creating a territorial tax system which generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, eliminating or limiting the deduction of certain expenses, and requiring a minimum tax on earnings generated by foreign subsidiaries.
As of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the law; however, the Company has made a reasonable estimate and recorded (i) a net income tax benefit of $471 million resulting from the remeasurement of the Company’s net deferred income tax and uncertain tax liabilities based on the new reduced U.S. corporate income tax rate, (ii) an income tax provision of $42 million associated with the one-time deemed repatriation tax on the Company's undistributed historic earnings of foreign subsidiaries, and (iii) an income tax provision of $14 million from the establishment of a valuation allowance for the impact of the law on certain tax attributes. In other cases, the Company has not been able to make a reasonable estimate and continue to account for those items based on its existing accounting under GAAP and the provisions of the tax laws that were in effect prior to enactment. One such case is the Company’s intent regarding whether to continue to assert indefinite reinvestment on a part or all of the foreign undistributed earnings, as discussed further below.
The Company is still analyzing the new tax law and refining its calculations, which could potentially impact the measurement of its income tax balances. Once the Company finalizes its analysis and certain additional tax calculations and tax positions, which are subject to complex tax rules and interpretation when it files its 2017 U.S. tax return, it will be able to conclude on any further adjustments to be recorded on these provisional amounts. Any such change will be reported as a component of income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.
The income tax provision consists of the following for the year ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | 112 |
| | $ | 161 |
| | $ | 182 |
|
State | 19 |
| | 22 |
| | 31 |
|
Foreign | 44 |
| | 36 |
| | 32 |
|
| 175 |
| | 219 |
| | 245 |
|
Deferred | | | | | |
Federal | (399 | ) | | 80 |
| | 34 |
|
State | (3 | ) | | 16 |
| | 8 |
|
Foreign | (2 | ) | | (2 | ) | | (2 | ) |
| (404 | ) | | 94 |
| | 40 |
|
Provision/(benefit) for income taxes | $ | (229 | ) | | $ | 313 |
| | $ | 285 |
|
Pre-tax income for domestic and foreign operations consisted of the following for the year ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 594 |
| | $ | 755 |
| | $ | 747 |
|
Foreign | (4 | ) | | 103 |
| | 90 |
|
Pre-tax income | $ | 590 |
| | $ | 858 |
| | $ | 837 |
|
Deferred income tax assets and liabilities, as of December 31, are comprised of the following:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Net operating loss carryforward | $ | 57 |
| | $ | 48 |
|
Foreign tax credit carryforward | 73 |
| | 84 |
|
Tax basis differences in assets of foreign subsidiaries | 13 |
| | 27 |
|
Accrued liabilities and deferred income | 126 |
| | 175 |
|
Provision for doubtful accounts and loan loss reserves for vacation ownership contract receivables | 215 |
| | 303 |
|
Other comprehensive income | 58 |
| | 117 |
|
Other | 15 |
| | 15 |
|
Valuation allowance (*) | (44 | ) | | (35 | ) |
Deferred income tax assets | 513 |
| | 734 |
|
| | | |
Deferred income tax liabilities: | | | |
Depreciation and amortization | 423 |
| | 685 |
|
Installment sales of vacation ownership interests | 737 |
| | 1,038 |
|
Estimated VOI recoveries | 69 |
| | 97 |
|
Other comprehensive income | 38 |
| | 20 |
|
Other | 8 |
| | 32 |
|
Deferred income tax liabilities | 1,275 |
| | 1,872 |
|
Net deferred income tax liabilities | $ | 762 |
| | $ | 1,138 |
|
| | | |
Reported in: | | | |
Other non-current assets | $ | 28 |
| | $ | 29 |
|
Deferred income taxes | 790 |
| | 1,167 |
|
Net deferred income tax liabilities | $ | 762 |
| | $ | 1,138 |
|
| |
(*) | The valuation allowance of $44 million at December 31, 2017 relates to foreign tax credits, net operating loss carryforwards and certain deferred tax assets of $14 million, $26 million and $4 million, respectively. The valuation allowance of $35 million at December 31, 2016 relates to foreign tax credits, net operating loss carryforwards and certain deferred tax assets of $11 million, $22 million and $2 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized. |
As of December 31, 2017, the Company’s net operating loss carryforwards primarily relate to state net operating losses which are due to expire at various dates, but no later than 2037. As of December 31, 2017, the Company had $73 million of foreign tax credits. The foreign tax credits primarily expire in 2025.
As a result of the enactment of the new law, the Company recorded a $42 million charge relating to the one-time mandatory tax on previously deferred earnings of its foreign subsidiaries. After considering the impact of available foreign tax credits, the resulting cash tax payable is not significant. Although the one-time mandatory tax has removed U.S. federal taxes on distributions to the United States, the Company continues to evaluate the expected manner of recovery to determine whether or not to continue to assert indefinite reinvestment on a part or all of the foreign undistributed earnings of $793 million. This requires the Company to re-evaluate the existing short and long-term capital allocation policies in light of the law and calculate the incremental tax cost in addition to the one-time mandatory tax, (e.g. foreign withholding, state income taxes, and additional U.S. tax on currency transaction gains or losses) of repatriating cash to the United States. While the provisional tax expense for the year ended December 31, 2017 is based upon an assumption that foreign undistributed earnings are indefinitely reinvested, the Company’s plan may change upon the completion of long-term capital allocation plans in light of the law and completion of the calculation of the incremental tax effects on the repatriation of foreign undistributed earnings. In the event the Company determines not to continue to assert the permanent reinvestment of part or all of foreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes.
The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows for the year ended December 31:
|
| | | | | |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0% | | 35.0% | | 35.0% |
State and local income taxes, net of federal tax benefits | 1.7 | | 2.4 | | 3.1 |
Taxes on foreign operations at rates different than U.S. federal statutory rates | (0.6) | | (1.3) | | (0.5) |
Taxes on foreign income, net of tax credits | (1.1) | | (1.8) | | (0.6) |
Valuation allowance | (1.3) | | 0.7 | | (3.0) |
Other | (1.1) | | 1.5 | | 0.1 |
Effect of impairment charges | 3.4 | | — | | — |
Impact of U.S. tax reform | (70.3) | | — | | — |
Realized foreign currency losses | (4.5) | | — | | — |
| (38.8)% | | 36.5% | | 34.1% |
The Company’s effective tax rate in 2017 was a benefit of 38.8% primarily due to the $415 million net tax benefit from the impact of the enactment of the U.S. Tax Cuts and Jobs Act.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 38 |
| | $ | 33 |
| | $ | 34 |
|
Increases related to tax positions taken during a prior period | 4 |
| | 1 |
| | 5 |
|
Increases related to tax positions taken during the current period | 7 |
| | 8 |
| | 6 |
|
Decreases related to settlements with taxing authorities | (2 | ) | | — |
| | (2 | ) |
Decreases as a result of a lapse of the applicable statute of limitations | (3 | ) | | (2 | ) | | (9 | ) |
Decreases related to tax positions taken during a prior period | (3 | ) | | (2 | ) | | (1 | ) |
Ending balance | $ | 41 |
| | $ | 38 |
| | $ | 33 |
|
The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $41 million, $38 million and $33 million as of December 31, 2017, 2016 and 2015, respectively. The Company recorded both accrued interest and penalties related to unrecognized tax benefits as a component of provision for income taxes on the Consolidated Statements of Income. The Company also accrued potential penalties and interest related to these unrecognized tax benefits of $5 million during 2017 and $3 million during both 2016 and 2015. The Company had a liability for potential penalties of $6 million, $5 million and $4 million as of December 31, 2017, 2016 and 2015, respectively and potential interest of $8 million, $6 million and $5 million as of December 31, 2017, 2016 and 2015, respectively. Such liabilities are reported as a component of accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2014 through 2017 tax years generally remain subject to examination by federal tax authorities. The 2009 through 2017 tax years generally remain subject to examination by many state tax authorities. In significant foreign jurisdictions, the 2010 through 2017 tax years generally remain subject to examination by their respective tax authorities. The statute of limitations is scheduled to expire within 12 months of the reporting date in certain taxing jurisdictions, and the Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $5 million to $8 million.
The Company made cash income tax payments, net of refunds, of $233 million, $185 million and $234 million during 2017, 2016 and 2015, respectively. In addition, the Company made cash income tax payments, net of refunds, of $12 million, $11 million and $5 million during 2017, 2016 and 2015, respectively related to discontinued operations. Such payments exclude income tax related payments made to or refunded by former Parent.