CNH INDUSTRIAL CAPITAL LLC

NOTE 9: INCOME TAXES

The income and expenses of the Company and certain of its domestic subsidiaries are included in the consolidated income tax return of CNH Industrial U.S. Holdings, Inc., a wholly-owned subsidiary of CNHI. CNH Industrial U.S. Holdings, Inc. is the new parent of Case New Holland Inc., who remains the parent of CNH Industrial America. The Company’s Canadian subsidiaries file separate income tax returns, as do certain domestic subsidiaries. The Company and certain of its domestic subsidiaries are LLCs and, as a result, incur no income tax liability on a stand‑alone basis for tax purposes. However, for financial reporting, all tax accounts have been disclosed and the income tax expense is reflective for all of the companies included in the consolidated financial statements.

The sources of income before taxes for the years ended December 31, 2017, 2016, and 2015 are as follows, with foreign defined as any income earned outside the United States:


	2017		2016		2015
Domestic	$	121,729	$	193,765	$	248,156
Foreign		81,712		88,051		78,684
Income before taxes	$	203,441	$	281,816	$	326,840

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 is as follows:


	2017		2016		2015
Current income tax expense (benefit):
Domestic	$	16,151	$	38,845	$	11,246
Foreign		17,711		17,692		19,877
Total current income tax expense		33,862		56,537		31,123
Deferred income tax expense (benefit):
Domestic		(83,647)		33,798		76,969
Foreign		2,737		3,969		1,149
Total deferred income tax expense		(80,910)		37,767		78,118
Total tax provision	$	(47,048)	$	94,304	$	109,241

A reconciliation of CNH’s statutory and effective income tax rate for the years ended December 31, 2017, 2016, and 2015 is as follows:


	2017		2016		2015
Tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State taxes	5.9		4.7		4.0
Foreign taxes	(8.5)		(5.2)		(4.8)
Tax credits and incentives	(0.6)		(0.6)		(0.5)
Tax rate and legislative changes	(54.5)		—		—
Other	(0.4)		(0.4)		(0.3)
Total tax provision effective rate	(23.1)	%	33.5	%	33.4	%

The components of the Company’s net deferred tax liability as of December 31, 2017 and 2016 are as follows:


	2017		2016
Deferred tax assets:
Pension, postretirement and post-employment benefits	$	1,986	$	3,111
Marketing and sales incentive programs		39,836		60,364
Allowance for credit losses		18,539		30,606
Other accrued liabilities		471		3,641
Tax loss and tax credit carry forwards		1,892		712
Total deferred tax assets	$	62,724	$	98,434
Deferred tax liability:
Equipment on operating lease	$	268,129	$	396,070
Deferred tax liability, net (1)	$	(205,405)	$	(297,636)

(1)

In the accompanying consolidated balance sheets, the US net deferred tax position in 2017 and 2016 is included in “Accounts payable and other accrued liabilities” while the Canadian net deferred tax position in 2017 and 2016 is included in “Other assets”.

Deferred taxes are provided to reflect timing differences between the financial and tax basis of assets and liabilities and tax carryforwards using currently enacted tax rates and laws. Management believes it is more likely than not the benefit of the deferred tax assets will be realized.

A reconciliation of the gross amounts of tax contingencies at the beginning and end of the year is as follows:


	2017		2016		2015
Balance, beginning of year	$	—	$	—	$	8
Additions based on tax positions related to the current year		—		—		—
Reductions for tax positions of prior years		—		—		—
Settlements		—		—		(8)
Balance, end of year	$	—	$	—	$	—

The total amount of unrecognized tax benefits that, if recognized, would affect the annual effective income tax rate is $0.

The Company recognizes interest and penalties accrued related to tax contingencies in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $0, $0 and $0, respectively, in interest and penalties. The Company had approximately $0, $0 and $0 for the expected future payment of interest and penalties accrued at December 31, 2017, 2016 and 2015, respectively.

The Company has open tax years from 2012 to 2017. The Company does not believe the resolution of any outstanding tax examinations will have a material adverse effect on the Company’s financial position or its results of operations. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “U.S. Tax Act”) which included, among other things, a reduction in the corporate tax rate from 35% to 21% and a tax on deemed repatriation of the undistributed earnings of foreign subsidiaries. As a result, the Company recorded an estimated net tax benefit of $111,000 that related to a tax benefit for the revaluation of its net deferred tax liability, which was offset by a tax charge on the deemed repatriation. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the U.S. Tax Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

At December 31, 2017, there are no outside basis differences in subsidiaries outside the U.S.