11. TAXES
The components of income tax expense were as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
Federal tax | $ | — |
| | $ | — |
| | $ | — |
|
State tax | 25 |
| | 18 |
| | 34 |
|
Foreign tax | 165 |
| | (6,561 | ) | | (211 | ) |
Total | 190 |
| | (6,543 | ) | | (177 | ) |
Deferred: | |
| | |
| | |
|
Federal and state tax | — |
| | — |
| | — |
|
Foreign tax provision (benefit) | — |
| | — |
| | 1,569 |
|
Total | — |
| | — |
| | 1,569 |
|
Income tax expense (benefit) | $ | 190 |
| | $ | (6,543 | ) | | $ | 1,392 |
|
U.S. and foreign components of income (loss) before income taxes are presented below (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. income (loss) | $ | (60,964 | ) | | $ | (103,494 | ) | | $ | 109,411 |
|
Foreign income (loss) | (27,920 | ) | | (35,695 | ) | | (35,697 | ) |
Total income (loss) before income taxes | $ | (88,884 | ) | | $ | (139,189 | ) | | $ | 73,714 |
|
As of December 31, 2017, the Company had cumulative U.S. and foreign net operating loss carryforwards for income tax reporting purposes of approximately $1.7 billion and $232.5 million, respectively. As of December 31, 2016, the Company had cumulative U.S. and foreign net operating loss carryforwards for income tax reporting purposes of approximately $1.6 billion and $197.4 million, respectively. The net operating loss carryforwards expire from 2018 through 2037, with less than 1% expiring prior to 2026.
The components of net deferred income tax assets were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Federal and foreign net operating loss and credit carryforwards | $ | 464,288 |
| | $ | 712,799 |
|
Property and equipment and other long-term assets | (45,373 | ) | | (58,379 | ) |
Accruals and reserves | 12,754 |
| | 21,071 |
|
Deferred tax assets before valuation allowance | 431,669 |
| | 675,491 |
|
Valuation allowance | (431,669 | ) | | (675,491 | ) |
Net deferred income tax assets | $ | — |
| | $ | — |
|
The change in the valuation allowance during 2017 of $243.8 million was due to the Company providing valuation allowances against all of the tax benefit generated from its consolidated net losses. Due to the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% (see further discussion below) and a change in our calculation of the state income tax rate, the Company has remeasured all U.S. deferred tax assets resulting in a significant decrease in both the deferred tax asset balance and the associated valuation allowance. Additionally, the change in property and equipment and other long-term assets was driven primarily by depreciation due to the difference between tax and book depreciable lives.
The actual provision for income taxes differs from the statutory U.S. federal income tax rate as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision at U.S. statutory rate of 35% | $ | (31,118 | ) | | $ | (48,722 | ) | | $ | 25,788 |
|
State income taxes, net of federal benefit | (1,804 | ) | | (6,193 | ) | | 6,597 |
|
Change in valuation allowance (excluding impact of foreign exchange rates) | (245,304 | ) | | 36,631 |
| | (39,686 | ) |
Effect of foreign income tax at various rates | 3,739 |
| | 4,844 |
| | 4,739 |
|
Permanent differences | 11,166 |
| | 10,331 |
| | 7,046 |
|
Change in unrecognized tax benefit | — |
| | (6,313 | ) | | 712 |
|
Net change in permanent items due to provision to tax return | (3,565 | ) | | 3,222 |
| | (3,099 | ) |
Remeasurement of U.S. deferred tax assets (Federal and State) | 266,864 |
| | — |
| | — |
|
Other (including amounts related to prior year tax matters) | 212 |
| | (343 | ) | | (705 | ) |
Total | $ | 190 |
| | $ | (6,543 | ) | | $ | 1,392 |
|
Tax Audits
The Company operates in various U.S. and foreign tax jurisdictions. The process of determining its anticipated tax liabilities involves many calculations and estimates which are inherently complex. The Company believes that it has complied in all material respects with its obligations to pay taxes in these jurisdictions. However, its position is subject to review and possible challenge by the taxing authorities of these jurisdictions. If the applicable taxing authorities were to challenge successfully its current tax positions, or if there were changes in the manner in which the Company conducts its activities, the Company could become subject to material unanticipated tax liabilities. It may also become subject to additional tax liabilities as a result of changes in tax laws, which could in certain circumstances have a retroactive effect.
Neither the Company nor any of its subsidiaries is currently under audit by the IRS or by any state jurisdiction in the United States. The Company's corporate U.S. tax returns for 2012 and subsequent years remain subject to examination by tax authorities. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
The Company acquired a tax liability for which the Company has been indemnified by the previous owners. As of December 31, 2017 and 2016, the Company had recorded a tax liability of $1.4 million and $1.1 million, respectively, to the foreign tax authorities with an offsetting tax receivable from the previous owners, which is included in Intangible and Other Assets in the accompanying balance sheets. In addition, an agreement was reached in November 2014 to settle other outstanding refinancing contingencies by utilization of the Brazilian tax amnesty program and the accumulated fiscal losses related to tax periods preceding the date of the agreement. While the Brazilian tax authorities have not given final confirmation of the settlement, the Company does not currently maintain a corresponding liability on its consolidated balance sheet as the Company believes additional liability is remote. The Company may be exposed to liabilities in the future if its subsidiary in Brazil, after making use of all available tax benefits and fiscal losses, incurs additional tax liabilities for which it may not be fully indemnified by the seller, or the seller may fail to perform its indemnification obligations.
In the Company's international tax jurisdictions, numerous tax years remain subject to examination by tax authorities, including tax returns for 2006 and subsequent years in most of the Company's international tax jurisdictions.
During 2016, as a result of the expiration of the statute of limitations associated with the tax position of a foreign subsidiary, the Company removed $4.1 million in unrecognized tax positions and $2.2 million in related interest and penalties from non-current liabilities on its consolidated balance sheet. This adjustment resulted in a corresponding tax benefit in the Company's consolidated statements of operations. The Company classified interest and penalties as a component of income tax expense pursuant to ASC Topic 740 Accounting for Uncertainty in Income Taxes. A rollforward of the Company's unrecognized tax benefits during 2016 is included below (in thousands). There are no unrecognized tax benefits as of December 31, 2017.
|
| | | |
Gross unrecognized tax benefits at January 1, 2016 | $ | 3,830 |
|
Gross increase (decrease) based on tax positions related to current year | 245 |
|
Gross increase (decrease) based on tax positions related to prior years | — |
|
Lapse of applicable statute of limitations | (4,075 | ) |
Gross unrecognized tax benefits at December 31, 2016 | $ | — |
|
In October 2016, the U.S. Department of the Treasury released final and temporary regulations under Section 385 of the U.S. Internal Revenue Code. The final regulations strengthen the tax rules distinguishing between debt and equity specific to related party transactions. The Company has evaluated the impact of these regulations on its current accounting and tax policies and procedures, and has determined that they will not have a material impact on the consolidated financial statements.
On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of the Tax Act. The Tax Act included significant changes to existing tax law substantially effective January 1, 2018, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, changes to the NOL utilization regulations, repeal of alternative minimum tax, a one-time deemed repatriation tax on deferred foreign income (“Transition Tax”), implementation of a territorial tax system, implementation of anti-deferral and anti-base erosion provisions, and provisions to both accelerate and limit certain deductions. The Company has revalued its deferred tax assets and liabilities based on the new corporate tax rate. As the Company’s deferred tax assets have a full valuation allowance, the Company has not recorded any income statement impact as a result of the remeasurement of net deferred tax assets. Accordingly, the tax law changes did not have a material impact to the financial statements of the Company.
As of December 31, 2016, the Company had not provided U.S. income taxes and foreign withholding taxes on approximately $1.8 million of undistributed earnings from certain foreign subsidiaries indefinitely invested outside the U.S. As required by the tax law changes, the Company performed an analysis of all foreign earnings and profits to determine whether the Company is subject to the Transition Tax. Based upon the analysis of all foreign subsidiary earnings, the Company is in a net earnings and profits deficit. Accordingly, the Company is not subject to the Transition Tax.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
Given the significant complexity of the Act, the Company continues to evaluate the impact of the Tax Act and monitor the anticipated additional implementation guidance from the Internal Revenue Service to determine any further implications that the Tax Act may have in future periods. 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 Act. The Company has evaluated the provisions within the Tax Act and has recognized provisional impacts related to the revaluation of its deferred tax assets, deferred tax liabilities and associated valuation allowance, and included the impact in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company expects to complete its analysis within the measurement period provided in SAB 118.