(18) Income Taxes

 

On December 22, 2017, House of Representatives 1 (“H.R. 1”), originally known as the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted and signed into legislation.  Under U.S. GAAP, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. As a result of this legislation, in the three months ended December 31, 2017, the Company provisionally recognized one-time net tax benefits totaling $11.6 million. This amount included an estimated one-time tax benefit of $19.4 million due to the re-measurement of the Company’s net deferred tax liabilities, primarily related to the change in the U.S. federal corporate income tax rate from 35% to 21%. Partially offsetting this non-cash book tax benefit, the Company recognized an estimated one-time tax expense of $7.8 million on its accumulated undistributed foreign earnings pertaining to foreign operations under the U.S. business, which the Company will elect to pay over an eight-year period. As of December 31, 2017, the Company had not completed its accounting for the tax effects of the U.S. Tax Reform, due to additional anticipated guidance from standard-setting bodies and the need to obtain additional information to complete calculations. These net tax benefits represent the Company’s current reasonable estimate of the U.S. Tax Reform impact, and in accordance with SEC Staff Accounting bulletin No. 118, the Company will adjust the provisional estimates within the measurement period when the amounts are determined.

 

As a result of the Redomicile Transaction, completed on July 1, 2016, the location of incorporation of the parent company of the Cardtronics group was changed from Delaware to the U.K. As a Delaware company, the statutory corporate tax rate was 35%, and after the redomicile to the U.K., the Cardtronics parent company statutory tax rate was 20% for the Company’s calendar reporting year 2016 and 19.25% for 2017. For additional information related to the Redomicile Transaction, see Note 1. Basis of Presentation and Summary of Significant Accounting Policies - (a) Description of Business.

 

The Company’s income before income taxes consisted of the following:

 

 

The Company’s income tax (benefit) expense based on income before income taxes consisted of the following:

 

 

Income tax (benefit) expense differs from amounts computed by applying the statutory tax rate to income before income taxes as follows:

 

 

The net income tax benefit is attributable to a combination of 1) the U.S. Tax Reform benefit of $11.6 million, 2) the excess tax benefit related to share-based compensation, and 3) the mix of earnings across jurisdictions, and is partially offset by the establishment of a valuation allowance related to Australian deferred tax assets of $6.4 million. In addition, the goodwill impairment recognized during the period ended September 30, 2017, was not deductible for income tax purposes, and as a result there was no tax benefit recognized from the impairment. For additional information, see Item 8. Financial Statements and Supplementary data, Note 1. Basis of Presentation and Summary of Significant accounting – (l) Intangible Assets Other Than Goodwill and (m) Goodwill.

 

The Company’s net deferred tax assets and liabilities (by segment) consisted of the following:

 

 

 

The Company’s tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities consisted of the following:

 

 

The Company assesses the need for any deferred tax asset valuation allowances at the end of each reporting period. The determination of whether a valuation allowance for deferred tax assets is needed is subject to considerable judgment and requires an evaluation of all available positive and negative evidence. Based on the assessment at December 31, 2017, and the weight of all evidence, the Company concluded that maintaining valuation allowances on deferred tax assets in Australia, Mexico, and other new markets is appropriate, as the Company currently believes that it is more likely than not that the related deferred tax assets will not be realized.

 

The deferred tax expenses and benefits associated with the Company’s net unrealized gains and losses on derivative instruments and foreign currency translation adjustments have been reflected within the Accumulated other comprehensive loss, net balance in the accompanying Consolidated Balance Sheets.

 

As of December 31, 2017, the Company had approximately $7.3 million in U.S. federal net operating loss carryforwards that will begin expiring in 2021, approximately $26.7 million in Canadian net operating loss carryforwards that will begin expiring in 2031, and approximately $8.9 million in net operating loss carryforwards in Mexico that are subject to expiration based on a 10 year loss carryforward limitation. The deferred tax benefits associated with such carryforwards in Mexico, to the extent they are not offset by deferred tax liabilities, have been fully reserved for through a valuation allowance.

 

The Company currently believes that the unremitted earnings of certain of its foreign subsidiaries will be indefinitely reinvested in the corresponding country of origin. Accordingly, no deferred taxes have been provided for on the differences between the Company’s book basis and underlying tax basis in those subsidiaries, except as was mandated by U.S. Tax Reform.

 

The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. With few exceptions, the Company is not subject to income tax examination by tax authorities for years before 2012. The Company recorded $1.2 million of uncertain tax benefits in conjunction with the acquisition of DCPayments as of December 31, 2017. It is reasonably possible that the total amount of this unrecognized benefit may change within the next twelve months as a result of the resolution of income tax examinations and the lapse of the applicable statute of limitations. At this time, it is not possible to estimate the range of change due to the uncertainty of potential outcomes. If the tax position is resolved, the total amount of unrecognized tax benefits would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. The amount of interest and penalties recognized in 2017 is immaterial.