Taxes
On October 29, 2014, the Company's Board of Directors approved a proposal to move the Company’s principal executive office from Hong Kong to the United Kingdom ("U.K.") and to become a U.K. tax resident. The Company will remain incorporated in the British Virgin Islands. The Company has achieved tremendous international growth over the past several years and believes that moving its principal executive office to the U.K. will better position it for further expansion in Europe and internationally, and allow it to compete more effectively with other international luxury brands.
MKHL’s subsidiaries are subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S.” information captioned below.
Income before provision for income taxes consisted of the following (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| April 1,
2017 | | April 2,
2016 | | March 28,
2015 |
U.S. | $ | 228.4 |
| | $ | 737.5 |
| | $ | 814.3 |
|
Non-U.S. | 460.2 |
| | 434.8 |
| | 441.5 |
|
Total income before provision for income taxes | $ | 688.6 |
| | $ | 1,172.3 |
| | $ | 1,255.8 |
|
The provision for income taxes was as follows (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| April 1,
2017 | | April 2,
2016 | | March 28,
2015 |
Current | | | | | |
U.S. Federal | $ | 131.2 |
| | $ | 268.0 |
| | $ | 277.0 |
|
U.S. State | 20.4 |
| | 14.3 |
| | 49.7 |
|
Non-U.S. | 45.8 |
| | 54.2 |
| | 41.9 |
|
Total current | 197.4 |
| | 336.5 |
| | 368.6 |
|
Deferred | | | | | |
U.S. Federal | (34.1 | ) | | 0.3 |
| | 5.0 |
|
U.S. State | (5.0 | ) | | 1.0 |
| | 0.3 |
|
Non-U.S. | (21.2 | ) | | (3.2 | ) | | 0.9 |
|
Total deferred | (60.3 | ) | | (1.9 | ) | | 6.2 |
|
Total provision for income taxes | $ | 137.1 |
| | $ | 334.6 |
| | $ | 374.8 |
|
The Company's provision for income taxes for the years ended April 1, 2017, April 2, 2016 and March 28, 2015 was different from the amount computed by applying statutory U.K. or U.S. federal income tax rates to the underlying income from continuing operations before income taxes and equity in net income of affiliates as a result of the following:
|
| | | | | | | | |
| Fiscal Years Ended |
| April 1,
2017 | | April 2,
2016 | | March 28,
2015 |
Provision for income taxes at the U.K. (2017), U.S. (2015-2016) statutory tax rate | 20.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net of federal benefit | 1.3 | % | | 1.2 | % | | 2.4 | % |
Effects of global financing arrangements | (13.7 | )% | | (2.8 | )% | | (2.8 | )% |
Differences in tax effects on foreign income | 11.1 | % | | (5.1 | )% | | (5.4 | )% |
Foreign tax credit | 0.3 | % | | (0.2 | )% | | (0.4 | )% |
Liability for uncertain tax positions | — | % | | — | % | | 0.2 | % |
Effect of changes in valuation allowances on deferred tax assets | 0.5 | % | | (0.2 | )% | | (0.1 | )% |
Other | 0.4 | % | | 0.6 | % | | 0.9 | % |
Effective tax rate | 19.9 | % | | 28.5 | % | | 29.8 | % |
Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):
|
| | | | | | | |
| Fiscal Years Ended |
| April 1,
2017 | | April 2,
2016 |
Deferred tax assets | | | |
Inventories | $ | 9.0 |
| | $ | 10.5 |
|
Payroll related accruals | 2.2 |
| | 2.2 |
|
Deferred rent | 39.5 |
| | 37.1 |
|
Net operating loss carryforwards | 17.7 |
| | 3.4 |
|
Stock compensation | 26.2 |
| | 30.0 |
|
Sales allowances | 10.0 |
| | 13.4 |
|
Other | 14.7 |
| | 12.1 |
|
| 119.3 |
| | 108.7 |
|
Valuation allowance | (7.2 | ) | | (3.4 | ) |
Total deferred tax assets | 112.1 |
| | 105.3 |
|
| | | |
Deferred tax liabilities | | | |
Goodwill and intangibles | (112.3 | ) | | (32.9 | ) |
Depreciation | (2.7 | ) | | (48.0 | ) |
Other | (3.8 | ) | | (3.4 | ) |
Total deferred tax liabilities | (118.8 | ) | | (84.3 | ) |
Net deferred tax assets (liabilities) | $ | (6.7 | ) | | $ | 21.0 |
|
The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is not reasonably assured. Deferred tax valuation allowances increased approximately $4.4 million, $3.3 million and $0.2 million in Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively. As a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations, for which deferred tax valuation allowances had been previously established, the Company released valuation allowances amounting to approximately $0.6 million, $5.6 million and $2.6 million in Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively.
At April 1, 2017, the Company had non-U.S. net operating loss carryforwards of approximately $85.8 million that will begin to expire in 2018.
As of April 1, 2017 and April 2, 2016, the Company has liabilities related to its uncertain tax positions, including accrued interest, of approximately $29.1 million and $18.5 million, respectively, which are included in other long-term liabilities in the Company’s audited consolidated balance sheets.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately$26.5 million, $16.8 million and $19.9 million as of April 1, 2017, April 2, 2016 and March 28, 2015, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2017, Fiscal 2016 and Fiscal 2015, are presented below (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| April 1,
2017 | | April 2,
2016 | | March 28,
2015 |
Unrecognized tax benefits beginning balance | $ | 16.8 |
| | $ | 19.9 |
| | $ | 18.1 |
|
Additions related to prior period tax positions | 1.7 |
| | — |
| | 0.4 |
|
Additions related to current period tax positions | 10.3 |
| | 5.8 |
| | 5.2 |
|
Decreases from prior period positions | (2.3 | ) | | (5.7 | ) | | (3.8 | ) |
Decreases related to audit settlements | — |
| | (3.2 | ) | | — |
|
Unrecognized tax benefits ending balance | $ | 26.5 |
| | $ | 16.8 |
| | $ | 19.9 |
|
The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the provision for income taxes. Interest expense recognized in the consolidated statements of operations and comprehensive income for Fiscal 2017, Fiscal 2016 and Fiscal 2015 was approximately $2.5 million, $1.7 million and $1.3 million, respectively.
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by approximately $0.7 million during the next twelve months. However, the outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate to change materially in the future.
The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended March 30, 2014.
The Company’s policy with respect to its undistributed earnings of the U.S. and non-U.S. subsidiaries is to consider those earnings to be either indefinitely reinvested or able to be repatriated tax-neutral. Undistributed earnings of subsidiaries considered to be either indefinitely reinvested or able to be repatriated tax-neutral amounted to $2.711 billion at April 1, 2017. Determination of the amount of unrecognized deferred U.S. and non-U.S. income tax liability on those earnings which are indefinitely reinvested is not practicable.