The Company
’s operations are conducted through various subsidiaries in a number of countries throughout the world. The Company has provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.
Pre-tax loss for the years ended
December
31,
2017,
2016
and
2015
consisted of the following (in thousands):
| | | | | | | | | | |
| | | $ | (87,143 | ) | | $ | (87,234 | ) | | $ | (73,691 | ) |
| Foreign operations | | | (31,601 | ) | | | (28,698 | ) | | | (90,062 | ) |
| Total | | $ | (118,744 | ) | | $ | (115,932 | ) | | $ | (163,753 | ) |
The components of the income tax benefit for the years ended
December
31,
2017,
2016
and
2015
consisted of the following (in thousands):
| | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| | | $ | (5,986 | ) | | $ | (8,646 | ) | | $ | (820 | ) |
| Foreign | | | 1,472 | | | | 1,749 | | | | 1,906 | |
| Total | | $ | (4,514 | ) | | $ | (6,897 | ) | | $ | 1,086 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| | | $ | (9,194 | ) | | $ | (12,169 | ) | | $ | (2,707 | ) |
| Foreign | | | 218 | | | | (1,039 | ) | | | (31,468 | ) |
| Total | | $ | (8,976 | ) | | $ | (13,208 | ) | | $ | (34,175 | ) |
| | | | | | | | | | | | | |
| Total Benefit | | $ | (13,490 | ) | | $ | (20,105 | ) | | $ | (33,089 | ) |
The income tax benefit differs from an amount computed at
Canadian statutory rates as follows for the years ended
December 31, 2017,
2016
and
2015
(in thousands):
| | | | | | | | | | |
Federal tax benefit at statutory rates | | $ | (32,061 | ) | | | 27.0 | % | | $ | (31,302 | ) | | | 27.0 | % | | $ | (44,213 | ) | | | 27.0 | % |
Effect of foreign income tax, net | | | (3,399 | ) | | | 2.9 | % | | | (6,593 | ) | | | 5.7 | % | | | (15,088 | ) | | | 9.2 | % |
Enacted tax rate change – U.S. Tax Reform | | | 9,047 | | | | (7.6 | %) | | | -- | | | | -- | | | | -- | | | | -- | |
Valuation allowance – U.S. Tax Reform | | | (9,047 | ) | | | 7.6 | % | | | -- | | | | -- | | | | -- | | | | -- | |
Valuation allowance – Other | | | 19,130 | | | | (16.1 | %) | | | 15,051 | | | | (13.0 | %) | | | 11,189 | | | | (6.8 | %) |
| Tax effects of restructuring | | | -- | | | | -- | | | | 3,038 | | | | (2.6 | %) | | | 17,600 | | | | (10.8 | %) |
| Deemed income from foreign subsidiaries | | | 334 | | | | (0.3 | %) | | | 1,108 | | | | (1.0 | %) | | | 4,190 | | | | (2.6 | %) |
Enacted tax rate change - Canada | | | 598 | | | | (0.5 | %) | | | 712 | | | | (0.6 | %) | | | 3,332 | | | | (2.0 | %) |
| Goodwill impairment | | | -- | | | | -- | | | | -- | | | | -- | | | | 11,533 | | | | (7.0 | %) |
Tax on future unremitted earnings | | | -- | | | | -- | | | | -- | | | | -- | | | | (25,306 | ) | | | 15.4 | % |
| | | | 1,908 | | | | (1.6 | %) | | | (2,119 | ) | | | 1.8 | % | | | 3,674 | | | | (2.2 | %) |
| | | $ | (13,490 | ) | | | 11.4 | % | | $ | (20,105 | ) | | | 17.3 | % | | $ | (33,089 | ) | | | 20.2 | % |
On
December 22, 2017,
U.S. Tax Reform was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are
not
limited to, a corporate tax rate decrease from
35%
to
21%
effective 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 cumulative foreign earnings as of
December 31, 2017.
In
2015,
due to our redomiciling to Canada, we recognized and repatriated all U.S. cumulative foreign earnings in that year. As of
December 31, 2017,
we had
no
remaining unrepatriated earnings subject to the transition tax.
The tax legislation also includes
two
new U.S. base-erosion provisions beginning in
2018:
(
1
) the global intangible low-taxes income (GILTI) provisions; and (
2
) base-erosion and anti-abuse tax (BEAT) provisions.
The GILTI provisions require us to include, in our U.S. income tax provision, foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary
’s tangible assets. We do
not
expect to be impacted by this tax as we had
no
U.S. foreign subsidiaries as of
December 31, 2017.
The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign companies, and impose a minimum tax if greater than the regular tax. As of
December 31, 2017,
we anticipate the impact to us to be immaterial as there are minimal payments made to our U.S. foreign affiliates.
Beginning in
2018,
as a result of U.S. Tax Reform, under Section
162
(m), our deduction for compensation, including performance-based compensation,
may
be limited in excess of
$1
million paid to anyone who serves as the Chief Executive Officer or Chief Fin
ancial Officer, or who is among the
three
most highly compensated executive officers for any tax year. We are continuing to evaluate our executive compensation packages to determine any impact to
2018
and forward tax years.
On
December 22, 2017,
the Commission 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 in reasonable de
tail to complete the accounting for certain income tax effects of the U.S. Tax Reform. We have calculated an estimate of the impacts of U.S. Tax Reform to our U.S. deferred taxes and recorded these amounts in our total deferred taxes as of
December 31, 2017,
the result of which was a decrease of the U.S. net deferred tax asset of
$9
million which was fully offset by a decrease in the U.S. valuation allowance of
$9
million. This results in
zero
impact to our income tax benefit for the year ended
December 31, 2017.
The ultimate impact
may
differ from these estimates due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that
may
be issued, and actions we
may
take as a result of the U.S. Tax Reform. We expect to finalize our estimate upon filing of our
2017
U.S. corporate income tax return.
Deferred Tax Liabilities and Assets.
The significant items giving rise to the deferred tax assets and liabilities as of
December 31, 2017
and
2016
are as follows (in thousands):
| | | | | | | |
| Deferred tax assets: | | | | | | | | |
| | | $ | 70,920 | | | $ | 49,810 | |
| | | | 5,560 | | | | 6,952 | |
Deductible goodwill and other intangibles | | | 50,758 | | | | 45,262 | |
| | | | 6,854 | | | | 4,773 | |
| | | | 1,424 | | | | 1,776 | |
| | | | 188 | | | | 1,588 | |
| | | | 135,704 | | | | 110,161 | |
| | | | (90,663 | ) | | | (76,157 | ) |
| | | $ | 45,041 | | | $ | 34,004 | |
| Deferred tax liabilities: | | | | | | | | |
| | | $ | (44,141 | ) | | $ | (42,701 | ) |
| | | | (900 | ) | | | (497 | ) |
| | | | (45,041 | ) | | | (43,198 | ) |
Net deferred tax liability | | $ | -- | | | $ | (9,194 | ) |
The following table summarizes net operating loss (NOL) carryforwards at
December
31,
2017
(in thousands):
| | | | | |
| Net operating loss carryforwards: | | | | | |
| | | $ | 121,115 | | Begins to expire in 2035 |
| Australia | | | 85,840 | | Does not expire |
| | | | 32,671 | | Begins to expire in 2036 |
| | | | 5,606 | | Begins to expire in 2020 |
Change in Valuation Allowance.
Realization of our deferred tax assets is dependent upon, among other things, our ability to generate taxable income of the appropriate character in the future.
Changes in
our valuation allowance for the years ended
December 31, 2017
and
2016
are as follows (in thousands):
| | | | | | | | | | | | | | | | |
Balance as of December 31, 201 5 | | $ | (58,906 | ) | | $ | (1,526 | ) | | $ | (54,128 | ) | | $ | (527 | ) | | $ | (115,087 | ) |
| Change in income tax provision | | | -- | | | | (13,580 | ) | | | (1,085 | ) | | | (386 | ) | | | (15,051 | ) |
| Write-off of U.S. foreign tax credits | | | 58,906 | | | | -- | | | | -- | | | | -- | | | | 58,906 | |
| Other change | | | -- | | | | (4,008 | ) | | | (1,174 | ) | | | (72 | ) | | | (5,254 | ) |
| Foreign currency translation | | | -- | | | | 1 | | | | 344 | | | | (16 | ) | | | 329 | |
Balance as of December 31, 201 6 | | | -- | | | | (19,113 | ) | | | (56,043 | ) | | | (1,001 | ) | | | (76,157 | ) |
Change in income tax provision – U.S. Tax Reform | | | -- | | | | 4,574 | | | | 4,473 | | | | -- | | | | 9,047 | |
Change in income tax provision - Other | | | -- | | | | (17,622 | ) | | | (1,508 | ) | | | -- | | | | (19,130 | ) |
| Other change | | | -- | | | | 1,277 | | | | (1,290 | ) | | | 255 | | | | 242 | |
| Foreign currency translation | | | -- | | | | (515 | ) | | | (4,150 | ) | | | -- | | | | (4,665 | ) |
| Balance as of December 31, 2017 | | $ | -- | | | $ | (31,399 | ) | | $ | (58,518 | ) | | $ | (746 | ) | | $ | (90,663 | ) |
Following the repatriation of all
U.S. cumulative foreign earnings in
2015,
a full valuation allowance was placed against excess foreign tax credits totaling
$58.9
million. The excess foreign tax credits were written-off against the valuation allowance in
2016
because of the remote likelihood that the foreign tax credits will be utilized.
In
2017,
the valuation allowance was decreased by
$9
million due to the decrease of the U.S. statutory tax rate from
35%
to
21%
as a result of U.S. Tax Reform.
At the end of
2017,
the valuation allowance increased by
$5.9
million as a result of placing a valuation allowance against the Canadian net deferred tax asset.
Indefinite Reinvestment of Earnings.
At
December 31, 2016
and
2017,
we had
undistributed earnings of foreign subsidiaries subject to income tax in Canada. Due to our redomiciling to Canada in
2015,
we recognized and repatriated all U.S. cumulative foreign earnings in
2015.
Unrecognized Tax Benefits.
We file tax returns in the jurisdictions in which they are required. All of these returns are subject to examination or audit and possible adjustment as a result of assessments by taxing authorities. We believe that we have recorded sufficient tax liabilities and do
not
expect the resolution of any examination or audit of our tax returns to have a material adverse effect on our operating results, financial condition or liquidity.
Our Canadian federal tax returns subsequent to
2010
are subject to audit by the Canada Revenue Agency. Our Australian subsidiary
’s federal income tax returns subsequent to
2013
are open for review by the Australian Taxation Office. Our U.S. subsidiary’s federal tax returns from
2014
are subject to audit by the US Internal Revenue Service.
The total amount of unrecognized tax benefits as of
December 31,
2017,
2016
and
2015
was zero,
and
$0.7
million, respectively. The unrecognized tax benefits, if recognized, would affect the effective tax rate. We accrue interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes. As of
December 31, 2017,
2016
and
2015,
we had accrued zero,
and
$0.3
million, respectively, of interest expense and penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | |
| | | $ | -- | | | $ | 679 | | | $ | 679 | |
| Additions for tax positions of prior years | | | -- | | | | -- | | | | -- | |
| Reductions for tax positions of prior years | | | -- | | | | -- | | | | -- | |
| Reductions for settlements | | | -- | | | | -- | | | | -- | |
| Lapse of the applicable statute of limitations | | | -- | | | | (679 | ) | | | -- | |
| Balance as of December 31 | | $ | -- | | | $ | -- | | | $ | 679 | |
During
2016,
management determined that, based upon the status of current examinations, an uncertain tax liability
of
$0.7
million was reversed.