Note 9. Income Taxes
U.S. Income Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (v) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (vi) creating the base erosion anti-abuse tax, a new minimum tax; (vii) creating a new limitation on deductible interest expense; (viii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; and, (ix) creating the global intangibles low-tax income (GILTI) inclusions.
The Company’s accounting for the following elements of the Tax Act is incomplete; however, management was able to make reasonable estimates of certain effects and, therefore, recorded the provisional adjustments set forth below.
Reduction of U.S. Federal Corporate Tax Rate
The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of the Company’s U.S. deferred tax assets and liabilities, it has recorded a provisional tax benefit of $68, with a corresponding net adjustment to deferred tax benefit. While the Company is able to make a reasonable estimate of the impact of the reduction in its corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the Company’s calculation of deemed repatriation of deferred foreign earnings and profits (E&P) and the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax
The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current E&P of certain of the Company’s foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $322, which was partially offset by $202 of foreign tax credits, on $2,400 of historic unremitted foreign E&P. The Company continues to gather additional information to more-precisely compute the amount of the Transition Tax. The Company continues to believe that its foreign earnings are permanently reinvested; however, as the Company continues to evaluate the impacts of the Tax Act, the Company may change this assertion in a future period.
Valuation Allowance
During the fourth quarter of 2017, the Company released $33 of valuation allowance related to its foreign tax credits that were utilized against the provisional amount of Transition Tax recorded in income tax expense. The Company continues to assess whether its valuation allowance analyses are affected by various aspects of the Tax Act, for example, as it relates to the deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits, the immediate full-expensing of certain capital expenditures, and interest expense limitations. Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.
Global Intangibles Low-tax Income
The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s net CFC-tested income over the net deemed tangible income return, which is currently defined as the excess of (i) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over, (ii) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, the Company continues to evaluate this provision of the Tax Act and the application of Topic 740.
Under GAAP, the Company is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (i.e., the period cost method), or (ii) factoring such amounts into the Company’s measurement of its deferred taxes (i.e., the deferred method). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations, but also its intent and ability to modify its structure and/or its business, management is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its consolidated financial statements, and has not made a policy decision regarding whether to record deferred taxes on GILTI.
Income Taxes
The following table sets forth the components of the Company’s provision for (benefit from) income taxes for the years ended December 31, 2017, 2016, and 2015.
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal (1) |
|
$ |
(8 |
) |
|
$ |
— |
|
|
$ |
37 |
|
|
U.S. state and local (1) |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
International |
|
|
89 |
|
|
|
93 |
|
|
|
62 |
|
|
Total current tax expense |
|
|
82 |
|
|
|
93 |
|
|
|
100 |
|
|
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
60 |
|
|
|
(101 |
) |
|
|
(187 |
) |
|
U.S. state and local |
|
|
6 |
|
|
|
(17 |
) |
|
|
(14 |
) |
|
International |
|
|
17 |
|
|
|
7 |
|
|
|
3 |
|
|
Total deferred tax expense (benefit) |
|
|
83 |
|
|
|
(111 |
) |
|
|
(198 |
) |
|
Total provision for (benefit from) income taxes |
|
$ |
165 |
|
|
$ |
(18 |
) |
|
$ |
(98 |
) |
|
|
(1) |
Amounts for the year ended December 31, 2015 were recorded pursuant to the Separation-related tax matters agreement. |
The following table sets forth the components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016.
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Environmental and other reserves |
|
$ |
89 |
|
|
$ |
150 |
|
|
Litigation reserves |
|
|
14 |
|
|
|
149 |
|
|
Stock-based compensation and accrued employee benefits |
|
|
26 |
|
|
|
35 |
|
|
Other assets and other accrued liabilities |
|
|
8 |
|
|
|
27 |
|
|
Tax loss carryforwards |
|
|
27 |
|
|
|
45 |
|
|
Foreign tax credit carryforwards |
|
|
17 |
|
|
|
50 |
|
|
Total deferred tax assets |
|
|
181 |
|
|
|
456 |
|
|
Less: Valuation allowance |
|
|
(17 |
) |
|
|
(50 |
) |
|
Total deferred tax assets, net |
|
|
164 |
|
|
|
406 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Pension and other liabilities |
|
|
(55 |
) |
|
|
(16 |
) |
|
Property, plant, and equipment |
|
|
(274 |
) |
|
|
(441 |
) |
|
Inventories and other assets |
|
|
(4 |
) |
|
|
(40 |
) |
|
Total deferred tax liabilities |
|
|
(333 |
) |
|
|
(497 |
) |
|
Deferred tax liability, net |
|
$ |
(169 |
) |
|
$ |
(91 |
) |
The following table sets forth an analysis of the Company’s effective tax rate for the years ended December 31, 2017, 2016, and 2015.
|
|
|
Year Ended December 31, |
|
|||||||||||||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
||||||
|
Statutory U.S. federal income tax rate |
|
$ |
319 |
|
|
|
35.0 |
% |
|
$ |
(4 |
) |
|
|
35.0 |
% |
|
$ |
(66 |
) |
|
|
35.0 |
% |
|
State income taxes, net of federal benefit (1) |
|
|
7 |
|
|
|
0.7 |
% |
|
|
(16 |
) |
|
|
150.4 |
% |
|
|
(10 |
) |
|
|
5.1 |
% |
|
Lower effective tax rate on international operations, net |
|
|
(149 |
) |
|
|
(16.3 |
)% |
|
|
(61 |
) |
|
|
552.5 |
% |
|
|
(23 |
) |
|
|
12.0 |
% |
|
Depletion |
|
|
(8 |
) |
|
|
(0.9 |
)% |
|
|
(6 |
) |
|
|
51.2 |
% |
|
|
(6 |
) |
|
|
3.4 |
% |
|
Goodwill |
|
|
— |
|
|
|
— |
% |
|
|
5 |
|
|
|
(47.9 |
)% |
|
|
6 |
|
|
|
(3.2 |
)% |
|
Exchange losses (gains) |
|
|
5 |
|
|
|
0.6 |
% |
|
|
4 |
|
|
|
(39.1 |
)% |
|
|
(1 |
) |
|
|
0.5 |
% |
|
Provision to return and other adjustments |
|
|
6 |
|
|
|
0.6 |
% |
|
|
6 |
|
|
|
(57.9 |
)% |
|
|
— |
|
|
|
— |
% |
|
Permanent items |
|
|
9 |
|
|
|
1.0 |
% |
|
|
3 |
|
|
|
(27.3 |
)% |
|
|
1 |
|
|
|
(0.5 |
)% |
|
Valuation allowance (2) |
|
|
(33 |
) |
|
|
(3.6 |
)% |
|
|
50 |
|
|
|
(451.6 |
)% |
|
|
— |
|
|
|
— |
% |
|
Net impact of U.S. tax reform |
|
|
39 |
|
|
|
4.3 |
% |
|
|
— |
|
|
|
(— |
)% |
|
|
— |
|
|
|
— |
% |
|
Stock-based compensation (1) |
|
|
(20 |
) |
|
|
(2.2 |
)% |
|
|
— |
|
|
|
(— |
)% |
|
|
— |
|
|
|
— |
% |
|
Other, net |
|
|
(10 |
) |
|
|
(1.2 |
)% |
|
|
1 |
|
|
|
(1.7 |
)% |
|
|
1 |
|
|
|
(0.2 |
)% |
|
Total effective tax rate |
|
$ |
165 |
|
|
|
18.1 |
% |
|
$ |
(18 |
) |
|
|
163.6 |
% |
|
$ |
(98 |
) |
|
|
52.1 |
% |
|
|
(1) |
Total windfall benefits on stock-based compensation amounted to $22 for the year ended December 31, 2017, which is inclusive of $20 in federal income tax benefit and $2 in state income tax benefit. |
|
|
(2) |
Release of the valuation allowance during 2015 was related to a tax loss carryforward incurred prior to July 1, 2015 that is attributable to DuPont’s tax periods pursuant to the tax matters agreement and did not impact the effective tax rate as the adjustment was recorded in DuPont’s net investment in the consolidated statements of stockholders’ equity for the year ended December 31, 2015. |
The following table sets forth the Company’s income (loss) before income taxes for its U.S. and international operations for the years ended December 31, 2017, 2016, and 2015.
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. operations (including exports) |
|
$ |
(306 |
) |
|
$ |
(481 |
) |
|
$ |
(492 |
) |
|
International operations |
|
|
1,218 |
|
|
|
470 |
|
|
|
304 |
|
|
Total income (loss) before income taxes |
|
$ |
912 |
|
|
$ |
(11 |
) |
|
$ |
(188 |
) |
For the year ended December 31, 2017, the Company released $33 of valuation allowance on its foreign tax credits. The valuation allowance release represents the amount of foreign tax credit carryforward that was used to offset the provisional Transition Tax recorded in the period.
Under the tax laws of various jurisdictions in which the Company operates, deductions or credits that cannot be fully utilized for tax purposes during the current year may be carried forward or back, subject to statutory limitations, to reduce taxable income or taxes payable in the future or prior years. At December 31, 2017, the U.S federal and state tax losses are $24, which substantially expire between 2035 and 2037. The Company also has U.S. foreign tax credit carryforwards of $17, which expire in 2026 and are fully offset by a valuation allowance. Lastly, the Company has foreign net operating losses of $1, which substantially expire between 2025 and 2026.
The Company has maintained a valuation allowance of $17 on its remaining foreign tax credit carryforward. The amount of the foreign tax credits that are considered realizable could be adjusted in the future as the Company continues to evaluate the impact of U.S. tax reform on its ability to utilize these credits.
Each year, Chemours and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and non-U.S. jurisdictions.
The following table sets forth the Company’s significant jurisdictions’ tax returns that are subject to examination by their respective taxing authorities for the open years listed.
|
Jurisdiction |
|
Open Years |
|
|
|
China |
|
|
2011 through 2017 |
|
|
Mexico |
|
|
2012 through 2017 |
|
|
Netherlands |
|
|
2014 through 2017 |
|
|
Taiwan |
|
|
2014 through 2017 |
|
|
U.S. |
|
|
2015 through 2017 |
|
Positions challenged by the taxing authorities may be settled or appealed by Chemours and/or DuPont in accordance with the tax matters agreement. As a result, income tax uncertainties are recognized in the Company’s consolidated financial statements in accordance with accounting for income taxes, when applicable. During 2017, the Company received approval from the Internal Revenue Service for an accounting method change; therefore, $6 of unrecognized tax benefits were released. Chemours is not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected in the consolidated balance sheets at December 31, 2017.
Prior to the Separation, Chemours was included in DuPont’s consolidated income tax returns, and Chemours’ income taxes for those periods are computed and reported herein under the separate return method. Use of the separate return method may result in differences when the sum of the amounts allocated to stand-alone tax provisions are compared with amounts presented in the consolidated financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein for these periods. Certain tax attributes that were reflected in DuPont’s consolidated financial statements, such as net operating loss carryforwards, may or may not exist at the stand-alone Chemours level. As it is assumed that all amounts due to DuPont prior to the Separation were settled on December 31 of each year, Chemours’ consolidated financial statements do not reflect any amounts due to DuPont for income tax-related matters.
The following table sets forth the change in the Company’s unrecognized tax benefit for the years ended December 31, 2017, 2016, and 2015.
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1, |
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
39 |
|
|
Gross amounts of decreases in unrecognized tax benefits as a result of adjustments to tax provisions taken during the prior period |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
— |
|
|
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken during the current period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Reduction to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations (1) |
|
|
— |
|
|
|
— |
|
|
|
(32 |
) |
|
Balance at December 31, |
|
$ |
— |
|
|
$ |
6 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized tax benefits, if recognized, that would impact the effective tax rate |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Total amount of interest and penalties recognized in the consolidated statements of operations (1) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Total amount of interest and penalties recognized in the consolidated balance sheets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1) |
Reduction to the unrecognized tax benefits represents DuPont’s responsibilities for uncertain income tax positions recorded prior to July 1, 2015 pursuant to the tax matters agreement. The reduction was recorded in DuPont’s net investment in the consolidated statements of stockholders’ equity for the year ended December 31, 2015. |
The following table sets forth a rollforward of the Company’s deferred tax asset valuation allowance for the years ended December 31, 2017, 2016, and 2015.
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1, |
|
$ |
50 |
|
|
$ |
— |
|
|
$ |
36 |
|
|
Net charges to income tax expense |
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
Release of valuation allowance (1) |
|
|
(33 |
) |
|
|
— |
|
|
|
(36 |
) |
|
Balance at December 31, |
|
$ |
17 |
|
|
$ |
50 |
|
|
$ |
— |
|
|
|
(1) |
The valuation allowance released during 2015 was related to tax loss carryforwards incurred prior to July 1, 2015, which were attributable to DuPont’s tax periods pursuant to the tax matters agreement. The adjustment was recorded in DuPont’s net investment in the consolidated statements of stockholders’ equity for the year ended December 31, 2015. |