Entity information:
13. INCOME TAXES
U.S. Tax Reform Impact
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into U.S. law. Some of the key tax provisions include the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, the limitation on the deductibility of interest expense, the immediate expensing of qualified business assets, the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, the changes to the deductibility of executive compensation and a provision referred to as global intangible low-taxed income (“GILTI”) that imposes a new tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. ASC 740, “Income Taxes” (“ASC 740”), requires us to recognize the effect of the tax law changes in the period of enactment. Also on December 22, 2017, SAB 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 Tax Act. Pursuant to the guidance we recognized the provisional effects of the enactment of the Tax Act for which measurement could be reasonably estimated. We continue to monitor certain aspects of the Tax Act and may refine our assessment as a result of any further related regulatory guidance that may be issued by the U.S. Treasury. Pursuant to SAB 118, adjustments to the provisional amounts recorded as of December 31, 2017 that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined.
As a result of the Tax Act, we have revalued our U.S. federal deferred tax assets and liabilities to the new tax rate. However, we are still awaiting further related regulatory guidance from the U.S. Treasury on certain aspects of the Tax Act which could potentially affect the measurement of these balances. We recorded a provisional amount of $1.1 of income tax benefit for the remeasurement of the U.S. federal deferred tax liabilities associated with indefinite-lived intangible assets. We recorded a provisional amount of $86.8 to reduce our net U.S. federal deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance. The Company will be significantly impacted by the limitation on the tax deductibility of interest expense in the future, however, we expect to utilize our net operating losses to offset this impact, in effect, converting net operating loss deferred tax assets into interest limitation deferred tax assets still subject to a full valuation allowance. We do not expect to be subject to any transition tax from our foreign operations, and therefore have not recognized any provisional amount for the transition tax at December 31, 2017. Our accounting policy will be to record GILTI as a period cost if and when incurred. We will continue to assess the impact of the recently enacted tax law on our business and our consolidated financial statements.
Belgian Tax Reform Impact
The Belgian government enacted in December 2017 a significant tax reform law. The new tax legislation contains several key tax provisions including the reduction of the corporate income tax rate from the current 33.99% to 29.58% in 2018 and 2019 and 25% from 2020. Additionally, the use of net operating losses which could previously offset 100% of taxable income is now limited to offset only 70% of taxable income and will result in the Company having to pay current tax. The remeasured deferred taxes due to the change in the tax rate resulted in $13.4 deferred tax expense in the current year.
The (loss) income before income taxes was as follows:
 
 
For the years ended December 31,
 
 
2017
 
2016
 
2015
U.S.
 
$
(244.8
)
 
$
(145.3
)
 
$
(126.2
)
International
 
70.8

 
113.0

 
31.2

Loss from continuing operations before income taxes
 
(174.0
)
 
(32.3
)
 
(95.0
)
Income (loss) from discontinued operations before income taxes
 
4.5

 
(3.3
)
 
203.3

Total (loss) income before income taxes
 
$
(169.5
)
 
$
(35.6
)
 
$
108.3


The provision for (benefit from) income taxes, which reflects the application of the intraperiod tax allocation requirements of ASC 740-20, “Intraperiod Tax Allocation”, was as follows:
 
 
For the years ended December 31,
 
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
     Federal
 
$
(1.9
)
 
$
(0.1
)
 
$
—

     State
 
—

 
0.3

 
0.1

     International
 
10.7

 
18.3

 
21.5

 
 
8.8

 
18.5

 
21.6

Deferred:
 
 
 
 
 
 
     Federal
 
(1.6
)
 
0.2

 
(39.3
)
     State
 
0.1

 
0.1

 
(2.4
)
     International
 
33.1

 
21.2

 
(2.6
)
 
 
31.6

 
21.5

 
(44.3
)
Provision for (benefit from) income taxes of continuing operations
 
40.4

 
40.0

 
(22.7
)
Provision for income taxes of discontinued operations
 
0.7

 
—

 
82.2

Total provision for (benefit from) income taxes
 
$
41.1

 
$
40.0

 
$
59.5


The income tax expense (benefit) of continuing operations, computed by applying the federal statutory tax rate to the loss from continuing operations before income taxes, differed from the provision for (benefit from) income taxes of continuing operations as follows:
 
 
For the years ended December 31,
 
 
2017
 
2016
 
2015
Income tax benefit at the federal statutory rate
 
$
(60.9
)
 
$
(11.3
)
 
$
(33.2
)
Foreign income tax rate differential and permanent differences, net
 
(2.5
)
 
(3.0
)
 
39.2

State income taxes, net
 
(9.9
)
 
(2.8
)
 
(0.4
)
Permanent differences, net
 
2.4

 
0.8

 
—

Tax on deemed dividend of foreign earnings, net of foreign tax credit
 
10.5

 
28.5

 
6.0

Change in uncertain tax position
 
1.2

 
0.2

 
0.1

Effect of statutory rate changes
 
99.1

 
—

 
—

Change in valuation allowance - excluding rate change
 
86.2

 
28.8

 
(34.3
)
Change in valuation allowance - rate change
 
(86.8
)
 
—

 
—

Other, net
 
1.1

 
(1.2
)
 
(0.1
)
Provision for (benefit from) income taxes of continuing operations
 
$
40.4

 
$
40.0

 
$
(22.7
)

The favorable foreign income tax rate differential in 2017 resulted primarily from the mix of income and tax rates in non-U.S. tax jurisdictions. The favorable foreign income tax rate differential in 2016 resulted primarily from notional interest deductions of certain foreign entities and the mix of income and tax rates in non-U.S. tax jurisdictions. The unfavorable foreign income tax rate differential in 2015 resulted primarily from the elimination of deferred tax assets resulting from the merger of two entities.
The unfavorable effect of rate changes of $99.1 is comprised of a $85.7 unfavorable effect resulting from the remeasurement of U.S. federal net deferred assets due to the reduction to the federal income tax rate from 35% to 21% enacted by the Tax Act and a $13.4 unfavorable effect resulting from the remeasurement of net deferred tax assets in non-U.S. jurisdictions due to reductions in the corporate income tax rates in those non-U.S. jurisdictions. The favorable effect of the change in valuation allowance - rate change of $86.8 results from the remeasurement of U.S. federal valuation allowances established against the U.S. federal net deferred assets due to the reduction to the federal income tax rate. The net effect of rate changes is an unfavorable $12.3, of which a favorable $1.1 relates to the U.S. federal and an unfavorable $13.4 relates to non-U.S. jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax liabilities and assets are as follows:
 
 
December 31,
 
 
2017
 
2016
Deferred Tax Liabilities
 
 
 
 
     Property, plant and equipment and intangible assets
 
$
84.5

 
$
60.8

     Undistributed foreign earnings
 
1.3

 
11.1

     Other
 
15.4

 
7.0

Total deferred tax liabilities
 
101.2

 
78.9

Deferred Tax Assets
 
 
 
 
     Net operating loss carryforwards
 
274.6

 
235.0

     Property, plant and equipment and intangible assets
 
44.5

 
57.0

     Deferred revenue
 
5.9

 
7.9

     Accrued pension benefits
 
33.5

 
38.4

     Accrued liabilities
 
20.8

 
23.6

     Other
 
46.2

 
47.4

 
 
425.5

 
409.3

Valuation allowance
 
(257.6
)
 
(244.9
)
Total deferred tax assets
 
167.9

 
164.4

Net deferred tax assets
 
$
66.7

 
$
85.5


At December 31, 2017 and 2016, we had valuation allowances recorded against deferred tax assets of continuing operations of $257.6 and $244.9, respectively, to reduce certain deferred tax assets to amounts that are more likely than not to be realized. Of the total December 31, 2017 and 2016 valuation allowances, $83.9 and $72.7, respectively, relate primarily to net operating losses in non-U.S. tax jurisdictions, $141.0 and $154.5, respectively, relate primarily to the U.S. federal effects of net operating losses and amortization and $32.7 and $17.7, respectively, relate primarily to the state effects of net operating losses and amortization. The net increase in the valuation allowance is primarily attributable to increases in the tax net operating losses in U.S. and non-U.S. jurisdictions that have valuation allowances against their net deferred tax assets. In the U.S., the increase is partially offset by the remeasurement of the U.S. federal net deferred tax assets with valuation allowances against them as a result of the reduction to the federal income tax rate. We will maintain valuation allowances against our net deferred tax assets in the U.S. and other applicable jurisdictions until objective positive evidence exists to reduce or eliminate the valuation allowance.
The following table summarizes the change in the valuation allowances:
 
 
For the years ended December 31,
 
 
2017
 
2016
 
2015
Balance at beginning of the period
 
$
244.9

 
$
218.5

 
$
271.8

Additions (reversals) recorded in the provision for (benefit from) income taxes - excluding rate change
 
86.2

 
30.3

 
(40.6
)
Reversals recorded in the provision for (benefit from) income taxes - rate change
 
(86.8
)
 
—

 
—

Accumulated other comprehensive (loss) income
 
0.6

 
(0.5
)
 
(2.9
)
Currency translation
 
5.3

 
(3.4
)
 
(9.8
)
Retained earnings
 
7.4

 
—

 
—

Balance at end of the period
 
$
257.6

 
$
244.9

 
$
218.5


At December 31, 2017, we had approximately $405.4 of unused net operating loss carryforwards associated with non-U.S. tax jurisdictions, of which $213.0 can be carried forward indefinitely. The non-U.S. net operating loss carryforwards will begin to expire in 2018. In addition, we had $50.0 of unused capital loss carryforwards associated with non-U.S. tax jurisdictions, which can be carried forward indefinitely but can only be offset against capital gains. At December 31, 2017, the U.S. federal net operating loss carryforward was $636.0. The tax benefits associated with state net operating loss carryforwards at December 31, 2017 were $25.9.
At December 31, 2017 we had no undistributed earnings to the U.S. in our non-U.S. investments. There were undistributed earnings of $25.7 between two non-U.S. investments, for which a deferred tax liability of $1.3 was recorded in anticipation of a distribution in 2018.
Aleris Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions.
The following table summarizes the change in uncertain tax positions, all of which are recorded in continuing operations:
 
 
For the years ended December 31,
 
 
2017
 
2016
 
2015
Balance at beginning of the period
 
$
2.5

 
$
2.4

 
$
2.7

Additions for tax positions of prior years
 
1.3

 
0.1

 
—

Reductions for tax positions of prior years
 
(0.2
)
 
—

 
(0.3
)
Additions for tax positions of current year
 
0.6

 
—

 
—

Balance at end of period
 
$
4.2

 
$
2.5

 
$
2.4


$3.1 of the gross unrecognized tax benefits, if recognized, would affect the annual effective tax rate.
We recognize interest and penalties related to uncertain tax positions within “Provision for (benefit from) income taxes” in the Consolidated Statements of Operations. Interest of $0.8 and $0.4 was accrued on the uncertain tax positions as of December 31, 2017 and 2016, respectively. Total interest of $0.2, $0.2 and $0.1 was recognized as part of the provision for (benefit from) income taxes for the years ended December 31, 2017, 2016 and 2015, respectively. Accrued penalties are not significant.
The 2009 through 2016 tax years remain open to examination. During the fourth quarter of 2013, a non-U.S. taxing jurisdiction commenced an examination of our tax returns for tax years ended December 31, 2012, 2011, 2010 and 2009 that is anticipated to be completed within six months of the reporting date.
During the second quarter of 2017, another non-U.S. taxing jurisdiction commenced an examination of our tax return for tax year ended December 31, 2015 that is anticipated to be completed within six months of the reporting date.