8.  Income Taxes

 

The Company is being taxed at the U.S. corporate level as a C-Corporation and has provided U.S. Federal, State and foreign income taxes.

 

Significant components of income tax expense for the fiscal years ended are as follows:

 

 

U.S. income from continuing operations before income taxes was $313 million, $168 million, and $99 million for fiscal 2017, 2016, and 2015, respectively.  Non-U.S. income from continuing operations before income taxes was $136 million, $140 million, and $23 million for fiscal 2017, 2016, and 2015, respectively.

 

The reconciliation between U.S. Federal income taxes at the statutory rate and the Company’s benefit for income taxes on continuing operations for fiscal year end is follows:

 

 

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.  The components of the net deferred income tax liability as of fiscal year end are as follows:

 

 

After Internal Revenue Code Section 382 (“Section 382”) limitations, the Company has $425 million of U.S. federal net operating loss carryforwards as of fiscal 2017, which will be available to offset future taxable income.  As of fiscal year end 2017, the Company had state and foreign net operating loss carryforwards of $1,299 million and $349 million, respectively, which will be available to offset future taxable income.  If not used, the federal net operating loss carryforwards will expire in future years beginning 2024 through 2035.  AMT credit carryforwards totaling $11 million are available to the Company indefinitely to reduce future years’ federal income taxes.  The state net operating loss carryforwards will expire in future years beginning in 2018 through 2036.  The foreign net operating loss carryforwards will expire in future years beginning in 2018 while a portion remains available indefinitely.  The Company has $10 million and $8 million of federal and state Research and Development tax credits, respectively, that will expire in future years beginning 2027 through 2037. In addition, the Company has $9 million of other state tax credits that will expire in future years beginning in 2018 through 2020.

 

In connection with the initial public offering, the Company entered into an income tax receivable agreement that provides for the payment to pre-initial public offering stockholders, option holders and holders of our stock appreciation rights, 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income tax that are actually realized (or are deemed to be realized in the case of a change of control) as a result of the utilization of our and our subsidiaries’ net operating losses attributable to periods prior to the initial public offering.  Based on the Company's assumptions using various items, including valuation analysis and current tax law, the Company recorded an obligation of $313 million which was recognized as a reduction of Paid-in capital on the Consolidated Balance Sheets.  The Company made payments of $111 million, $57 million, and $39 million in fiscal years 2017, 2016, and 2015, respectively.  The balance at the end of fiscal 2017 was $69 million, and the Company expects to make an income tax receivable payment of $35 million in December 2017.

 

The Company believes that it will not generate sufficient future taxable income to realize the tax benefits in certain foreign jurisdictions related to the deferred tax assets.  The Company also has certain state net operating losses that may expire before they are fully utilized.  Therefore, the Company has provided a full valuation allowance against certain of its foreign deferred tax assets and a valuation allowance against certain of its state deferred tax assets included within the deferred tax assets.

 

The change in ownership of Avintiv created limitations under Sec. 382 of the Internal Revenue Code on annual usage of Avintiv's net operating loss carryforwards.  All of the Company’s Federal net operating loss carryforwards should be available for use within the next 16 years and are not expected to expire unutilized.  Prior to the Company's acquisition of Avintiv, Avintiv was subject to certain ownership changes that resulted in the effective loss of certain NOLs.  The NOLs effectively lost have been excluded from the opening balance sheet of Avintiv.  As part of the effective tax rate calculation, if we determine that a deferred tax asset arising from temporary differences is not likely to be utilized, we will establish a valuation allowance against that asset to record it at its expected realizable value.  The Company has not provided a valuation allowance on its federal net operating loss carryforwards in the U.S. because it has determined that future reversals of its temporary taxable differences will occur in the same periods and are of the same nature as the temporary differences giving rise to the deferred tax assets.  Our valuation allowance against deferred tax assets was $93 million and $82 million as of fiscal year end 2017 and 2016, respectively, related to the foreign and U.S. state operations.  The Company paid cash taxes of $41 million, $43 million, and $9 million in fiscal 2017, 2016, and 2015, respectively.

Uncertain Tax Positions

 

We adopted the provisions of the Income Taxes standard of the Codification.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with guidance provide by FASB and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Our policy to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes did not change.

 

The following table summarizes the activity related to our gross unrecognized tax benefits for fiscal year end:

 

 

As of fiscal year end 2017, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $55 million and we had $20 million accrued for payment of interest and penalties related to our uncertain tax positions.  Our penalties and interest related to uncertain tax positions are included in income tax expense.

 

We and our subsidiaries are routinely examined by various taxing authorities. Although we file U.S. federal, U.S. state, and foreign tax returns, our major tax jurisdiction is the U.S. The IRS has completed an examination of our 2003, 2010 and 2011 tax years. Our 2004 – 2009, and 2012 – 2016 tax years remain subject to examination by the IRS.  Avintiv's pre-acquisition U.S. federal tax returns for the years 2004 – 2015 remain subject to examination by the IRS.  Companhia Providência Indústria e Comércio (“Providência”) was subject to certain tax claims at the time Providência was acquired by Avintiv and have been accounted for in the financial statements as a deferred purchase price liability.  There are various other on-going audits in various other jurisdictions that are not material to our financial statements.

 

As of the end of fiscal 2017, we had unremitted earnings from foreign subsidiaries that are permanently reinvested for continued use in foreign operations, accordingly, no provision for U.S. federal or state income taxes has been provided thereon.  If distributed, those earnings would result in additional income tax expense at approximately the U.S. statutory rate.  Determination of the amount of unrecognized deferred US income tax liability is not practicable due to the complexities associated with its hypothetical calculation.