13. Income Taxes

On December 22, 2017, the U.S. enacted tax reform legislation, commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).  The 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.  On December 22, 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.

 

At December 31, 2017, the Company has not finalized the accounting for the Federal and State tax effects of enactment of the Act; however, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. The Company recognized a provisional amount of $14.0 million as a reasonable estimate of the impact of the provisions of the 2017 Tax Act, which is included as a component of income tax expense from continuing operations. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the estimates may also be affected as the Company gains a more thorough understanding of the new tax law as incremental guidance becomes available.

 

Provisional amounts

 

Deferred tax assets and liabilities: The Company remeasured its U.S. deferred tax assets and liabilities based upon the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the 2017 Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to changes in deferred tax amounts.  As the Company continues to analyze the 2017 Tax Act and refine its calculations it could give rise to changes in the assessment of the realizability of certain deferred tax assets, including foreign tax credit carryforwards. The provisional tax expense amount recorded related to the remeasurement of the Company’s deferred tax balances was $10.2 million. 

 

Foreign tax effects: The one-time transition tax is based on the Company’s total unremitted post-1986 earnings and profits (E&P). The Company recorded a provisional increase to income tax expense of $8.6 million for the one-time transition tax liability for its foreign subsidiaries.  This increase included tax on foreign income of $23.8 million, partially offset by a related benefit of foreign tax credits of $15.2 million.  As the Company has sufficient existing tax attributes available to fully offset the transition tax liability there will be no cash tax impact to the Company. The Company has not yet completed its calculation of the total post-1986 E&P for its foreign subsidiaries or the tax pools of the foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P and finalizes the amounts held in cash or other specified assets. 

The Company has determined that its undistributed earnings for most of its foreign subsidiaries are not permanently reinvested.  The change in the tax law impacted the Company’s deferred taxes provided on unremitted earnings.  The Company had previously recorded a $4.8 million deferred tax liability on those unremitted foreign earnings, which were taxed in the current year as part of the transition tax.  The Company does not believe that any additional outside basis differences exist as of December 31, 2017, however, determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax (i.e., basis difference in excess of that subject to the one-time transition tax) is not currently estimable.  The Company has provided for withholding taxes on all unremitted earnings, as required.

 The components of income before income taxes were as follows:

 

Amounts reflected for 2016 and 2015 have been reclassified for consistency of presentation with 2017 amounts.

The following table represents a reconciliation of income taxes at the 35% federal statutory income tax rate to income tax expense as reported:

 

The Company's unrecognized tax benefits represent tax positions for which reserves have been established. The following table represents a reconciliation of the activity related to the unrecognized tax benefits, excluding accrued interest and penalties:

 

As of December 31, 2017,  2016 and 2015, the unrecognized tax benefits of $11.0 million, $11.3 million and $13.1 million, respectively, would affect the Company's future effective tax rate if recognized. The Company does not anticipate a material change in unrecognized tax benefits within the next 12 months.

As of December 31, 2017,  2016 and 2015, the Company had unrecognized tax benefits included in the amounts above of $4.9 million, $5.9 million and $4.2 million, respectively, related to periods prior to the Company's acquisition of Acushnet Company and as such, are indemnified by Beam.

As of December 31, 2017,  2016 and 2015, the Company recognized a liability of $2.7 million, $2.3 million and $1.9 million, respectively for interest and penalties, of which $2.7 million, $1.8 million and $1.6 million is indemnified by Beam.

Prior to the Company's acquisition of Acushnet Company, Acushnet Company or its subsidiaries filed certain combined tax returns with Beam. Those and other subsidiaries' income tax returns are periodically examined by various tax authorities. Beam is responsible for managing United States tax audits related to periods prior to July 29, 2011. Acushnet Company is obligated to support these audits and is responsible for managing all non-U.S. audits.

The Company and certain subsidiaries have tax years that remain open and are subject to examination by tax authorities in the following major taxing jurisdictions: United States for years after July 29, 2011, Canada for years after 2012, Japan for years after 2011, Korea for years after 2016, and the United Kingdom for years after 2015. The Company files income tax returns on a combined, unitary, or stand-alone basis in multiple state and local jurisdictions, which generally have statute of limitations from three to four years. Various states and local income tax returns are currently in the process of examination. These examinations are unlikely to result in any significant changes to the amounts of unrecognized tax benefits on the consolidated balance sheet as of December 31, 2017.  

The Company's income tax expense includes tax expense of $0.2 million, $2.2 million and $3.0 million for the years ended December 31, 2017, 2016 and 2015, respectively, related to the tax obligations indemnified by Beam. There is an offsetting amount included in other (income) expense, net for the related adjustment to the Beam indemnification asset, resulting in no effect on net income.

Income tax expense was as follows:

 

The components of net deferred tax assets (liabilities) were as follows:

 

Under U.S. tax law and regulations, certain changes in the ownership of the Company’s shares can limit the annual utilization of tax attributes (tax loss and tax credit carryforwards) that were generated prior to such ownership changes. The annual limitation could affect the realizability of the Company’s deferred tax assets recorded in the financial statement for its tax credit carryforwards because the carryforward periods have a finite duration. The 2016 Initial Public Offering, and associated share transfers, resulted in significant changes in the composition of the ownership of the Company’s shares. Based on its analysis of the change of ownership tax rules in conjunction with the estimated amount and source of its future earnings and related tax profile, the Company believes its existing tax attributes will be utilized prior to their expiration.

As of December 31, 2017 and 2016, the Company had state net operating loss (“NOL”) carryforwards of $192.0 million and $117.2 million, respectively. These NOL carryforwards expire between 2018 and 2035. As of December 31, 2017 the Company had US Federal net operating loss (“NOL”) carryforwards of $26.4 million which will expire in 2037. As of December 31, 2017 and 2016, the Company had foreign tax credit carryforwards of $72.8 million and $46.0 million, respectively. These foreign tax credits will begin to expire in 2022.

Changes in the valuation allowance for deferred tax assets were as follows:

The changes in the valuation allowance were related to the increase in the U.S. state deferred tax assets and deferred tax assets in the Company’s Hong Kong subsidiary that the Company has determined are not more-likely-than-not realizable. In assessing the realizability of these assets, the Company considered numerous factors including historical profitability, the character and estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which it operates. The utilization of the Company's net U.S. state and Hong Kong deferred tax assets is dependent on future taxable earnings, which cannot be projected with certainty at this time.