|
(7) |
Income Taxes |
The Company’s consolidated income tax expense/(benefit) was computed on a modified separate return basis pursuant to the intercompany tax allocation agreement with the Parent and consisted of the following:
|
|
Current |
|
|
Deferred |
|
|
Total |
|
|||
|
|
(U.S. dollars in millions) |
|
|||||||||
|
Year ended March 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
(265 |
) |
|
$ |
596 |
|
|
$ |
331 |
|
|
State and local |
|
(18 |
) |
|
|
72 |
|
|
|
54 |
|
|
Foreign |
|
32 |
|
|
|
20 |
|
|
|
52 |
|
|
Total |
$ |
(251 |
) |
|
$ |
688 |
|
|
$ |
437 |
|
|
Year ended March 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
(428 |
) |
|
$ |
861 |
|
|
$ |
433 |
|
|
State and local |
|
(15 |
) |
|
|
88 |
|
|
|
73 |
|
|
Foreign |
|
22 |
|
|
|
20 |
|
|
|
42 |
|
|
Total |
$ |
(421 |
) |
|
$ |
969 |
|
|
$ |
548 |
|
|
Year ended March 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
14 |
|
|
$ |
485 |
|
|
$ |
499 |
|
|
State and local |
|
12 |
|
|
|
11 |
|
|
|
23 |
|
|
Foreign |
|
21 |
|
|
|
17 |
|
|
|
38 |
|
|
Total |
$ |
47 |
|
|
$ |
513 |
|
|
$ |
560 |
|
The allocation of federal tax expense between current and deferred tax expense for the fiscal years ended March 31, 2017, 2016 and 2015, reflect the statutory extensions of federal bonus depreciation due to the Protecting Americans from Tax Hikes Act of 2015, which was signed into law on December 18, 2015 extending 50 percent bonus depreciation through 2017 before phasing down to 40 percent in 2018, and 30 percent in 2019 and the Tax Increase Prevention Act of 2014, which was signed into law on December 19, 2014.
Income tax expense differs from the “expected” income taxes by applying the statutory federal corporate rate of 35% to income before income taxes as follows:
|
|
Years ended March 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
(U.S. dollars in millions) |
|
|||||||||
|
Computed “expected” income taxes |
$ |
416 |
|
|
$ |
510 |
|
|
$ |
543 |
|
|
Foreign tax rate differential |
|
(17 |
) |
|
|
(13 |
) |
|
|
(12 |
) |
|
Effect of foreign dividends and foreign tax credit |
|
4 |
|
|
|
3 |
|
|
|
— |
|
|
State and local income taxes, net of federal income tax benefit |
|
40 |
|
|
|
47 |
|
|
|
58 |
|
|
Change in valuation allowance |
|
(5 |
) |
|
|
5 |
|
|
|
— |
|
|
Change in estimated state tax rate, net of federal income tax benefit |
|
(8 |
) |
|
|
21 |
|
|
|
(27 |
) |
|
Change in unrecognized tax benefit |
|
— |
|
|
|
(6 |
) |
|
|
(3 |
) |
|
Effect of state tax law changes |
|
10 |
|
|
|
(16 |
) |
|
|
(4 |
) |
|
Other |
|
(3 |
) |
|
|
(3 |
) |
|
|
5 |
|
|
Income tax expense |
$ |
437 |
|
|
$ |
548 |
|
|
$ |
560 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(U.S. dollars in millions) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
State income tax |
$ |
294 |
|
|
$ |
275 |
|
|
Receivable valuation |
|
90 |
|
|
|
69 |
|
|
Accrued postretirement |
|
21 |
|
|
|
20 |
|
|
State loss carryforwards |
|
60 |
|
|
|
60 |
|
|
Other assets |
|
69 |
|
|
|
70 |
|
|
Total gross deferred tax assets |
|
534 |
|
|
|
494 |
|
|
Less valuation allowance |
|
— |
|
|
|
5 |
|
|
Net deferred tax assets |
|
534 |
|
|
|
489 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
HCFI leases |
|
274 |
|
|
|
257 |
|
|
AHFC leases |
|
8,949 |
|
|
|
8,174 |
|
|
Derivatives |
|
24 |
|
|
|
100 |
|
|
Securitizations |
|
9 |
|
|
|
8 |
|
|
Other |
|
70 |
|
|
|
59 |
|
|
Total gross deferred tax liabilities |
|
9,326 |
|
|
|
8,598 |
|
|
Net deferred tax liabilities |
$ |
8,792 |
|
|
$ |
8,109 |
|
The effect of translating HCFI’s net deferred tax liabilities to U.S. dollars upon consolidation resulted in decreases of $5 million, $5 million and $32 million during the fiscal years ended March 31, 2017, 2016 and 2015, respectively. The translation adjustments have been recognized as a component of other comprehensive income.
Exception to Recognition of Deferred Tax Liabilities
Foreign undistributed earnings are generally subject to U.S. taxation when repatriated and when subject to U.S. taxation may generally be offset by foreign tax credits. To date, the Company has not provided for federal income taxes on its share of the undistributed earnings of its foreign subsidiary, HCFI, that are intended to be indefinitely reinvested outside the United States. At March 31, 2017, 2016 and 2015, $759 million, $704 million and $651 million, respectively, of accumulated undistributed earnings of HCFI were deemed to be so reinvested. If the undistributed earnings as of March 31, 2017 were to be distributed, the tax liability associated with these indefinitely reinvested earnings would be $180 million.
State Loss Carryforwards
Included in the Company’s deferred tax assets are net operating loss (NOL) carryforwards with tax benefits resulting from operating losses incurred in various states in which the Company files tax returns in the amounts of $60 million, $60 million and $56 million at March 31, 2017, 2016 and 2015, respectively. Based on the statutes of each of the applicable states, these NOL carryforwards expire at various times through March 31, 2037.
Valuation Allowance
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences and carryforward deferred tax assets become deductible or utilized. The Company considers sources of income, including the reversal of deferred tax liabilities, projected future taxable income, and tax planning considerations in making this assessment. Based upon these factors, during the fiscal year ended March 31, 2017, the Company released a valuation allowance of $5 million for state NOL carryforwards. The Company believes that it is more likely than not that the deferred tax assets of $534 million recognized as of March 31, 2017 will be realized.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
Years ended March 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
(U.S. dollars in millions) |
|
|||||||||
|
Balance, beginning of year |
$ |
16 |
|
|
$ |
21 |
|
|
$ |
25 |
|
|
Additions for current year tax positions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
Additions for prior year tax positions |
|
5 |
|
|
|
— |
|
|
|
4 |
|
|
Reductions for prior year tax positions |
|
— |
|
|
|
(10 |
) |
|
|
(6 |
) |
|
Settlements |
|
— |
|
|
|
5 |
|
|
|
(2 |
) |
|
Reductions related to a lapse in the statute of limitations |
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign currency translation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance, end of year |
$ |
21 |
|
|
$ |
16 |
|
|
$ |
21 |
|
Included in the balance of unrecognized tax benefits at March 31, 2017, 2016 and 2015 are $21 million, $15 million and $18 million, respectively, the recognition of which would affect the Company’s effective tax rate in future periods. Although it is reasonably possible that the total amounts of unrecognized tax benefits could change within the next twelve months, the Company does not believe such change would be significant. As a result of the above unrecognized tax benefits and various favorable uncertain positions, the Company has recorded a net liability for uncertain tax positions of $14 million as of both March 31, 2017 and 2016 (Note 12).
The Company recognizes income tax-related interest income, interest expense and penalties as a component of income tax expense. During the fiscal year ended March 31, 2017 and 2016, the Company recognized interest expense in an amount less than $1 million for each year, and during fiscal years ended March 31, 2015, recognized interest income of $1 million as a component of income tax expense. As a result of settlements during the fiscal year ended March 31, 2016 and 2015, the Company received less than $1 million and paid $1 million, respectively. There were no settlements during the fiscal year ended March 31, 2017. As of both March 31, 2017 and 2016, the Company’s consolidated balance sheets reflect accrued interest payable of $3 million.
As of March 31, 2017, the Company is subject to examination by U.S. federal and state tax jurisdictions for returns filed for the taxable years ended March 31, 2008 through 2016 with the exception of one state which is subject to examination for returns filed for taxable years ended March 31, 2001 through 2016. The Company’s Canadian subsidiary, HCFI, is subject to examination for returns filed for the taxable years ended March 31, 2010 through 2016 federally, and returns filed for the taxable years ended March 31, 2009 through 2016 provincially. The Company believes appropriate provision has been made for all outstanding issues for all open years.