INCOME TAXES
Income from continuing operations before income taxes and equity income for U.S. and non-U.S. operations are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
U.S. (loss) income | $ | (32 | ) | | $ | 150 |
| | $ | 281 |
|
Non-U.S. income | 1,287 |
| | 850 |
| | 716 |
|
Income from continuing operations before income taxes and equity income | $ | 1,255 |
| | $ | 1,000 |
| | $ | 997 |
|
The provision (benefit) for income taxes from continuing operations is comprised of:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current income tax expense (benefit): | | | | | |
U.S. federal | $ | 37 |
| | $ | 47 |
| | $ | (17 | ) |
Non-U.S. | 214 |
| | 238 |
| | 185 |
|
U.S. state and local | (2 | ) | | 3 |
| | (1 | ) |
Total current | 249 |
| | 288 |
| | 167 |
|
Deferred income tax (benefit) expense, net: | | | | | |
U.S. federal | (15 | ) | | (88 | ) | | (1 | ) |
Non-U.S. | (12 | ) | | (33 | ) | | (5 | ) |
U.S. state and local | 1 |
| | — |
| | — |
|
Total deferred | (26 | ) | | (121 | ) | | (6 | ) |
Total income tax provision | $ | 223 |
| | $ | 167 |
| | $ | 161 |
|
Cash paid or withheld for income taxes was $275 million, $253 million and $231 million for the years ended December 31, 2017, 2016 and 2015, respectively.
For purposes of comparability and consistency, the Company uses the notional U.S. federal income tax rate when presenting the Company’s reconciliation of the income tax provision. The Company is a U.K. resident taxpayer, and as such is not generally subject to U.K. tax on remitted foreign earnings. As a result, the Company does not anticipate foreign earnings would be subject to a 35% tax rate upon repatriation to the U.K., as is the case when U.S. based companies repatriate earnings to the U.S. A reconciliation of the provision for income taxes compared with the amounts at the notional U.S. federal statutory rate was:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Notional U.S. federal income taxes at statutory rate | $ | 439 |
| | $ | 350 |
| | $ | 349 |
|
Income taxed at other rates | (260 | ) | | (86 | ) | | (120 | ) |
Change in valuation allowance | (6 | ) | | (17 | ) | | 15 |
|
Other change in tax reserves | 25 |
| | 76 |
| | 6 |
|
Withholding taxes | 64 |
| | 44 |
| | 50 |
|
Tax credits | (32 | ) | | (196 | ) | | (133 | ) |
Change in tax law | (6 | ) | | (1 | ) | | 11 |
|
Other adjustments | (1 | ) | | (3 | ) | | (17 | ) |
Total income tax expense | $ | 223 |
| | $ | 167 |
| | $ | 161 |
|
Effective tax rate | 18 | % | | 17 | % | | 16 | % |
The Company’s tax rate is affected by the fact that its parent entity is a U.K. resident taxpayer, the tax rates in the U.K. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance. Included in the non-U.S. income taxed at other rates are tax incentives obtained in various non-U.S. countries, primarily the High and New Technology Enterprise ("HNTE") status in China, a Free Trade Zone exemption in Honduras and the Special Economic Zone exemption in Turkey, totaled $45 million in 2017, $45 million in 2016, and $46 million in 2015, as well as tax benefit for income earned, and no tax benefit for losses incurred, in jurisdictions where a valuation allowance has been recorded. The Company currently benefits from tax holidays in various non-U.S. jurisdictions with expiration dates from 2017 through 2026. The income tax benefits attributable to these tax holidays are approximately $7 million ($0.03 per share) in 2017, $10 million ($0.04 per share) in 2016 and $14 million ($0.05 per share) in 2015.
The effective tax rate in the year ended December 31, 2017 was impacted by increased tax expense of approximately $50 million due to the enactment of the Tax Cuts and Jobs Act (the "Tax Legislation") in the United States on December 22, 2017, partially offset by favorable geographic income mix as compared to 2016, primarily due to changes in the underlying business operations. The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. This impact was primarily the result of increased tax expense due to the one-time deemed repatriation tax and a reduction of our foreign tax credit, partially offset by the favorable impact of the reduced tax rate on the Company’s net deferred tax liabilities. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Tax Legislation for which measurement could be reasonably estimated. Although the Company continues to analyze certain aspects of the Tax Legislation and refine its assessment, the ultimate impact of the Tax Legislation may differ from these estimates due to its continued analysis or further regulatory guidance that may be issued as a result of the Tax Legislation. Pursuant to SAB 118, adjustments to the provisional amounts recorded by the Company 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.
The Company incurred certain intra-entity gains and related tax impacts in connection with transactions comprising the Separation. During the fourth quarter of 2017, the Company finalized its plan and entered into several transactions to separate these businesses into stand-alone legal and operational structures. As these transactions occurred between related subsidiaries that were consolidated at the time the transactions occurred, the gains were deferred within the consolidated financial statements in accordance with ASC 810. The tax impacts of the gains, which totaled approximately $64 million, were recognized upon the distribution of the related assets to Delphi Technologies and recorded as a reduction to Shareholders' Equity during the year ended December 31, 2017.
The effective tax rate in the year ended December 31, 2016 was impacted by favorable geographic income mix in 2016 as compared to 2015, primarily due to changes in the underlying operations of the business, as well as $17 million for releases of valuation allowances as a result of the Company's determination that it was more likely than not that certain deferred tax assets would be realized. These benefits were offset by $76 million of reserve adjustments recorded for uncertain tax positions, which included reserves for ongoing audits in foreign jurisdictions, as well as for changes in estimates based on relevant new or additional evidence obtained related to certain of the Company's tax positions, including tax authority administrative pronouncements and court decisions. These reserve adjustments resulted in foreign tax credit benefits of approximately $18 million. Additionally, following a change in U.S. tax regulation during 2016, the Company recorded a tax credit benefit of approximately $16 million during the year ended December 31, 2016.
As described above, certain of the Company's Chinese subsidiaries benefit from a reduced corporate income tax rate as a result of their HNTE status. Aptiv submitted applications for new 6-year HNTE grants for certain of these subsidiaries and received the relevant regulatory approvals during 2016, which entitled these entities to use the reduced HNTE income tax rate retroactive to the expiration date of the prior grants. As a result, there was no change in the tax status of these entities as compared to the year ended December 31, 2016.
The effective tax rate in the year ended December 31, 2015 was impacted by increased tax expense of $15 million resulting from changes in judgment related to deferred tax asset valuation allowances, as well as the enactment of the UK Finance (No. 2) Act 2015 (the “UK 2015 Finance Act”) on November 18, 2015, which provides for a reduction of the corporate income tax rate from 20% to 19% effective April 1, 2017, with a further reduction to 18% effective April 1, 2020. The income tax accounting effect, including any retroactive effect, of a tax law change is accounted for in the period of enactment, which in this case was the fourth quarter of 2015. As a result, the effective tax rate was impacted by an increased tax expense of approximately $2 million for the year ended December 31, 2015 due to the resultant impact on the net deferred tax asset balances. Additionally, the effective tax rate in the year ended December 31, 2015 was impacted by unfavorable geographic income mix in 2015 as compared to 2014, primarily due to changes in the underlying operations of the business, offset by tax planning initiatives and the resulting favorable impact on foreign tax credits.
Deferred Income Taxes
The Company accounts for income taxes and the related accounts under the liability method. Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Significant components of the deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Deferred tax assets: | | | |
Pension | $ | 94 |
| | $ | 79 |
|
Employee benefits | 12 |
| | 26 |
|
Net operating loss carryforwards | 976 |
| | 1,362 |
|
Warranty and other liabilities | 88 |
| | 93 |
|
Other | 210 |
| | 236 |
|
Total gross deferred tax assets | 1,380 |
| | 1,796 |
|
Less: valuation allowances | (1,008 | ) | | (1,399 | ) |
Total deferred tax assets (1) | $ | 372 |
| | $ | 397 |
|
Deferred tax liabilities: | | | |
Fixed assets | $ | 33 |
| | $ | 21 |
|
Tax on unremitted profits of certain foreign subsidiaries | 69 |
| | 73 |
|
Intangibles | 307 |
| | 316 |
|
Total gross deferred tax liabilities | 409 |
| | 410 |
|
Net deferred tax liabilities | $ | (37 | ) | | $ | (13 | ) |
| |
(1) | Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities. |
Deferred tax liabilities and assets are classified as long-term in the consolidated balance sheet. Net deferred tax assets and liabilities are included in the consolidated balance sheets as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Long-term assets | $ | 185 |
| | $ | 130 |
|
Long-term liabilities | (222 | ) | | (143 | ) |
Total deferred tax liability | $ | (37 | ) | | $ | (13 | ) |
The net deferred tax liability of $37 million as of December 31, 2017 are primarily comprised of deferred tax liabilities in Japan and Singapore offset by deferred tax asset amounts primarily in the U.K., U.S., Mexico and China.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2017, the Company has gross deferred tax assets of approximately $965 million for non-U.S. net operating loss (“NOL”) carryforwards with recorded valuation allowances of $850 million. These NOL’s are available to offset future taxable income and realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The NOL’s primarily relate to U.K., Luxembourg and Germany. The NOL carryforwards have expiration dates ranging from one year to an indefinite period. The NOL carryforwards available for use on tax returns are $976 million as of December 31, 2017.
Deferred tax assets include $108 million and $99 million of tax credit carryforwards with recorded valuation allowances of $49 million and $35 million at December 31, 2017 and 2016, respectively. These tax credit carryforwards expire in 2018 through 2025.
Cumulative Undistributed Foreign Earnings
No income taxes have been provided on indefinitely reinvested earnings of certain foreign subsidiaries at December 31, 2017.
Withholding taxes of $69 million have been accrued on undistributed earnings that are not indefinitely reinvested and are primarily related to China, South Korea, Honduras, and Morocco. There are no other material liabilities for income taxes on the undistributed earnings of foreign subsidiaries, as the Company has concluded that such earnings are either indefinitely reinvested or should not give rise to additional income tax liabilities as a result of the distribution of such earnings.
Uncertain Tax Positions
The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's tax returns that do not meet these recognition and measurement standards.
A reconciliation of the gross change in the unrecognized tax benefits balance, excluding interest and penalties is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Balance at beginning of year | $ | 180 |
| | $ | 43 |
| | $ | 57 |
|
Additions related to current year | 51 |
| | 94 |
| | 9 |
|
Additions related to prior years | 40 |
| | 67 |
| | — |
|
Reductions related to prior years | (31 | ) | | (15 | ) | | (20 | ) |
Reductions due to expirations of statute of limitations | (15 | ) | | (8 | ) | | — |
|
Settlements | (1 | ) | | (1 | ) | | (3 | ) |
Balance at end of year | $ | 224 |
| | $ | 180 |
| | $ | 43 |
|
A portion of the Company's unrecognized tax benefits would, if recognized, reduce its effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of these tax benefits would reduce the Company’s effective tax rate only through a reduction of accrued interest and penalties. As of December 31, 2017 and 2016, the amounts of unrecognized tax benefit that would reduce the Company’s effective tax rate were $159 million and $121 million, respectively. In addition, $85 million and $74 million for 2017 and 2016, respectively, would be offset by the write-off of a related deferred tax asset, if recognized.
The Company recognizes interest and penalties relating to unrecognized tax benefits as part of income tax expense. Total accrued liabilities for interest and penalties were $21 million and $15 million at December 31, 2017 and 2016, respectively. Total interest and penalties recognized as part of income tax expense was a $5 million expense, a $5 million expense and a $2 million benefit for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. Taxing jurisdictions significant to Aptiv include China, Luxembourg, Germany, Mexico, the U.S. and the U.K. Open tax years related to these taxing jurisdictions remain subject to examination and could result in additional tax liabilities. In general, the Company's affiliates are no longer subject to income tax examinations by foreign tax authorities for years before 2001. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could impact the Company’s unrecognized tax benefits.