11. Income Taxes
Income before provision for income taxes and equity income is comprised of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Domestic | $ | 77.2 |
| | $ | 40.7 |
| | $ | 45.5 |
|
Foreign | 8.2 |
| | 8.7 |
| | 5.9 |
|
Total | $ | 85.4 |
| | $ | 49.4 |
| | $ | 51.4 |
|
The provision for income taxes is summarized as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Current tax provision | | | | | |
U.S. federal | $ | 11.2 |
| | $ | 8.0 |
| | $ | 18.8 |
|
State and local | 1.8 |
| | 1.2 |
| | 2.5 |
|
Foreign | 2.9 |
| | 2.8 |
| | 1.9 |
|
Total current | 15.9 |
| | 12.0 |
| | 23.2 |
|
Deferred tax provision | | | | | |
U.S. federal | 16.7 |
| | 4.0 |
| | (5.9 | ) |
State and local | 1.6 |
| | 0.8 |
| | (1.0 | ) |
Foreign | (0.3 | ) | | (0.2 | ) | | (0.4 | ) |
Total deferred | 18.0 |
| | 4.6 |
| | (7.3 | ) |
Total provision | $ | 33.9 |
| | $ | 16.6 |
| | $ | 15.9 |
|
The effective income tax rate differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to pretax results primarily as a result of the following:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory provision rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Permanent differences and other items | | | | | |
State tax provision | 2.6 | % | | 2.4 | % | | 2.0 | % |
Section 199 manufacturing credit | (2.6 | )% | | (2.0 | )% | | (3.8 | )% |
Incremental tax effects of foreign earnings | (0.4 | )% | | (0.2 | )% | | (0.8 | )% |
Valuation allowance | — | % | | (2.0 | )% | | (1.3 | )% |
Stock compensation | (3.2 | )% | | — | % | | — | % |
Tax reform adjustment | 8.6 | % | | — | % | | — | % |
Other | (0.3 | )% | | 0.4 | % | | (0.2 | )% |
Effective income tax rate | 39.7 | % | | 33.6 | % | | 30.9 | % |
Deferred tax assets and liabilities are comprised of the following:
|
| | | | | | | |
| As of December 31, |
(in millions) | 2017 | | 2016 |
Deferred tax assets | | | |
Inventory | $ | 27.9 |
| | $ | 47.0 |
|
Accruals and other reserves | — |
| | 7.1 |
|
Accounts receivable | 1.4 |
| | 0.6 |
|
UNICAP adjustment | 1.9 |
| | 1.6 |
|
Derivative contracts | 0.3 |
| | 0.1 |
|
Other | 5.0 |
| | 5.4 |
|
Valuation allowance | (0.6 | ) | | — |
|
Total deferred tax assets, net of valuation allowance | $ | 35.9 |
| | $ | 61.8 |
|
Deferred tax liabilities | | | |
Fixed assets and intangibles | $ | 16.8 |
| | $ | 20.5 |
|
Accruals and other reserves | 0.2 |
| | — |
|
Investments in foreign entities | 1.3 |
| | 7.1 |
|
Financing fees | 1.5 |
| | 0.1 |
|
Total deferred tax liabilities | 19.8 |
| | 27.7 |
|
Net deferred tax asset | $ | 16.1 |
| | $ | 34.1 |
|
At December 31, 2017 and 2016, our deferred tax assets include $16.5 million and $24.0 million, respectively, related to the impact of the purchase price allocations to LIFO inventories for tax purposes on the bargain purchase gain on the original asset acquisition from Olin Corporation on November 19, 2007.
At December 31, 2017, we had a foreign tax credit carryforward of $1.4 million which can be utilized through 2026.
Deferred tax assets are recorded for the estimated future benefit of foreign tax credits and other temporary differences to the extent we believe these assets will be realized. A valuation allowance is recorded when we cannot reach the conclusion that it is more likely than not that the deferred tax assets will be realized. Based on this evaluation, in 2016, we released the $1.0 million valuation allowance on foreign tax credits that existed at December 31, 2015. In 2017, we established a valuation allowance against our foreign tax credits of $0.6 million.
Prior to the 2017 Tax Act, we recorded deferred income taxes of $7.1 million on all historical earnings of our non-U.S. subsidiaries. The transition tax under the 2017 Tax Act resulted in a reduction of the excess amount for financial reporting over the tax basis in our foreign subsidiaries. Deferred taxes have been recorded for foreign withholding and U.S. state income taxes on $25.1 million of earnings of foreign consolidated subsidiaries expected to be repatriated, which represents our entire balance of earnings included in our transition tax. We consider any excess of the amount for financial reporting over the tax basis of our investment in our foreign subsidiaries to be indefinitely reinvested. At this time, the determination of deferred tax liabilities on this amount is not practicable.
Uncertain Tax Positions
We are subject to income taxation in several jurisdictions around the world. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, we believe we have adequately reserved for any potential tax exposures at December 31, 2017. Our U.S. federal returns for the period ended December 31, 2014 and all subsequent periods remain open for audit. The majority of state returns for the period ended December 31, 2013 and all subsequent periods remain open for audit.
At both December 31, 2017 and 2016, we had $25.2 million of unrecognized tax benefits, of which $8.5 million would impact the effective tax rate, if recognized. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the accompanying consolidated statements of operations. There was $2.1 million of accrued interest and penalties as of December 31, 2017. There was no accrued interest and penalties as of December 31, 2016. Our liability for uncertain tax positions, including accrued interest and penalties, of $27.3 million and $25.2 million at December 31, 2017 and 2016, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.
A reconciliation of the summary of activity of our uncertain tax positions is summarized as follows:
|
| | | |
(in millions) | |
Balance at January 1, 2016 | $ | 25.1 |
|
Additions for tax positions related to prior years | 0.1 |
|
Reductions for tax positions related to prior years | — |
|
Reductions due to tax settlements | — |
|
Reductions due to tax statute of limitations | — |
|
Balance at December 31, 2016 | $ | 25.2 |
|
Additions for tax positions related to prior years | — |
|
Reductions for tax positions related to prior years | — |
|
Reductions due to tax settlements | — |
|
Reductions due to tax statute of limitations | — |
|
Balance at December 31, 2017 | $ | 25.2 |
|
2017 Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years and (2) bonus depreciation that will allow for full expensing of qualified property.
The 2017 Tax Act also establishes new tax laws that will affect 2018, including, but not limited to:
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• | reduction of the U.S. federal corporate tax rate; |
| |
• | elimination of the corporate alternative minimum tax (AMT); |
| |
• | the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; |
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• | a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; |
| |
• | a new provision designed to tax global, intangible, low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); |
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• | a new limitation on the deductibility of interest expense; |
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• | the repeal of the domestic manufacturing activity deduction (the “Section 199 Manufacturing Credit”); |
| |
• | limitations on the deductibility of executive compensation; |
| |
• | limitations on the use of FTCs to reduce the U.S. income tax liability; and |
| |
• | limitations on net operating losses (NOLs) generated after December 31, 2017, to 80% of taxable income. |
The following items make up the tax reform expense as shown in the effective tax rate table for 2017 and the basis point (bps) increase or decrease impact each had to our effective tax rate in 2017:
| |
• | 110 bps increase related to a one-time transition tax (net of foreign tax credits utilized) on our unremitted foreign earnings; |
| |
• | 450 bps decrease related to the write-off of deferred tax liabilities related to the difference between the investment in our foreign subsidiaries on a book versus tax basis; |
| |
• | 1,120 bps increase related to the remeasurement of all other deferred tax assets and liabilities based on the expected decrease in federal tax rate from the current 35% to the 21% rate; |
| |
• | 70 bps increase related to establishing a valuation allowance on our remaining foreign tax credits given our expected decrease in the ability to use these credits in the future; and |
| |
• | 10 bps increase related to an expected decrease in the deductibility of certain compensation expenses arising from the tax reform. |
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting relating to the 2017 Tax Act under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Other than the item noted below, we were able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the transition tax, the remeasurement of deferred taxes, our reassessment of permanently reinvested earnings, excessive compensation, uncertain tax positions and valuation allowances. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, treasury analysis, state tax conformity to federal tax changes and the impact of prospective tax related to the GILTI provisions.
At December 31, 2017, we were not able to reasonably estimate and, therefore, have not recorded deferred taxes for the GILTI provisions. We have not yet determined our policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future years, or in the period in which that tax was incurred.