18. Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act is comprehensive legislation that includes provisions that lower the federal corporate income tax rate from 35% to 21% beginning in 2018 and impose a one-time transition tax on undistributed foreign earnings. ASC 740 “Income Taxes” generally requires the effects of the tax law change to be recorded in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin No. 118 to address situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the tax impacts related to the transition tax on undistributed foreign earnings and the impact to deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional interpretive regulatory guidance that may be issued. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
The components of income before income taxes and equity in earnings (losses) of unconsolidated affiliates are as follows (in millions):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
(495 |
) |
|
$ |
(85 |
) |
|
$ |
68 |
|
|
Foreign |
|
|
826 |
|
|
|
564 |
|
|
|
471 |
|
|
|
|
$ |
331 |
|
|
$ |
479 |
|
|
$ |
539 |
|
The components of income tax expense attributable to continuing operations are as follows (in millions):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state |
|
$ |
(3 |
) |
|
$ |
64 |
|
|
$ |
51 |
|
|
Foreign |
|
|
222 |
|
|
|
129 |
|
|
|
109 |
|
|
|
|
|
219 |
|
|
|
193 |
|
|
|
160 |
|
|
Deferred (benefit) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state |
|
|
(1,165 |
) |
|
|
166 |
|
|
|
5 |
|
|
Foreign |
|
|
(41 |
) |
|
|
(14 |
) |
|
|
(6 |
) |
|
|
|
|
(1,206 |
) |
|
|
152 |
|
|
|
(1 |
) |
|
|
|
$ |
(987 |
) |
|
$ |
345 |
|
|
$ |
159 |
|
As a result of the Tax Act, the Company recorded a provisional deferred tax benefit of $977 million related to the revaluation of deferred taxes at the newly enacted 21% rate and reversal of the deferred tax liability on undistributed earnings net of the newly enacted transition tax.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The differences between the Company’s consolidated income tax expense attributable to continuing operations and the expense computed at the 35% United States statutory income tax rate were as follows (in millions):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income tax expense at statutory rate |
|
$ |
116 |
|
|
$ |
167 |
|
|
$ |
189 |
|
|
State and local income taxes, net of federal effect |
|
|
(13 |
) |
|
|
— |
|
|
|
2 |
|
|
Research and development |
|
|
(9 |
) |
|
|
(11 |
) |
|
|
(13 |
) |
|
Foreign nontaxable interest income |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
(9 |
) |
|
United States taxes recorded on foreign earnings |
|
|
6 |
|
|
|
252 |
|
|
|
38 |
|
|
Tax contingencies |
|
|
17 |
|
|
|
2 |
|
|
|
(8 |
) |
|
Foreign rate differential |
|
|
(95 |
) |
|
|
(60 |
) |
|
|
(49 |
) |
|
Equity compensation |
|
|
(19 |
) |
|
|
— |
|
|
|
— |
|
|
Provisional Tax Act impact |
|
|
(977 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
(6 |
) |
|
|
3 |
|
|
|
9 |
|
|
|
|
$ |
(987 |
) |
|
$ |
345 |
|
|
$ |
159 |
|
In 2016, due to the Merger, the Company reevaluated its indefinite reinvestment assertion based on the need for cash in the United States, including funding the Repurchase Program and potential acquisitions. Accordingly, the Company changed its assertion with respect to $2,801 million of foreign earnings, including $1,865 million of IMS Health’s previously undistributed historical foreign earnings. Deferred income taxes of $625 million were recorded in 2016 related to non-indefinitely reinvested foreign earnings. Of that amount, $373 million was recorded through purchase accounting related to IMS Health’s historical foreign earnings and the remainder of $252 million was recorded through deferred income tax expense.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $3,134 million at December 31, 2017. With the enactment of the Tax Act, the Company does not consider any of its foreign earnings as indefinitely reinvested. The Company has recorded a provisional estimate of the deferred income tax liability for the transition tax, net of foreign tax credits, of $186 million as of December 31, 2017.
The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below (in millions):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss and capital loss carryforwards |
|
$ |
278 |
|
|
$ |
242 |
|
|
Tax credit carryforwards |
|
|
170 |
|
|
|
267 |
|
|
Accrued expenses and unearned income |
|
|
46 |
|
|
|
75 |
|
|
Employee benefits |
|
|
189 |
|
|
|
273 |
|
|
Other |
|
|
82 |
|
|
|
32 |
|
|
|
|
|
765 |
|
|
|
889 |
|
|
Valuation allowance for deferred income tax assets |
|
|
(200 |
) |
|
|
(153 |
) |
|
Total deferred income tax assets |
|
|
565 |
|
|
|
736 |
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Undistributed foreign earnings |
|
|
(21 |
) |
|
|
(590 |
) |
|
Amortization and depreciation |
|
|
(1,334 |
) |
|
|
(2,026 |
) |
|
Other |
|
|
(30 |
) |
|
|
(164 |
) |
|
Total deferred income tax liabilities |
|
|
(1,385 |
) |
|
|
(2,780 |
) |
|
Net deferred income tax liabilities |
|
$ |
(820 |
) |
|
$ |
(2,044 |
) |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Due to the U.S. income tax rate decreasing from 35% to 21% per the Tax Act, the Company recorded a provisional reduction to its net deferred tax liabilities of $606 million, which includes a $753 million reduction to deferred tax liabilities that related to intangible amortization that was recorded through purchase accounting upon the Merger. In response to the Tax Act, the Company also reversed most of its deferred tax liability related to undistributed foreign earnings
The Company had federal, state and local, and foreign tax loss carryforwards and tax credits, the tax effect of which was $469 million as of December 31, 2017. Of this amount, $34 million has an indefinite carryforward period, and the remaining $435 million expires at various times beginning in 2018. Some of these losses are subject to limitations under the Internal Revenue Code, however, management expects all losses to be utilized during the carryforward periods.
In 2017, the Company increased its valuation allowance by $47 million to $200 million at December 31, 2017 from $153 million at December 31, 2016. The valuation allowance increase is primarily related to an increase in the value of the U.S. state net operating losses as a result of the U.S. federal tax rate decreasing with the Tax Act.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in millions):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1 |
|
$ |
64 |
|
|
$ |
30 |
|
|
$ |
41 |
|
|
IMS Health balance as of Merger |
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
Additions based on tax positions related to the current year |
|
|
11 |
|
|
|
3 |
|
|
|
2 |
|
|
Additions for income tax positions of prior years |
|
|
13 |
|
|
|
7 |
|
|
|
9 |
|
|
Impact of changes in exchange rates |
|
|
4 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
Settlements with tax authorities |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
Reductions for income tax positions of prior years |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
Reductions due to the lapse of the applicable statute of limitations |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
(19 |
) |
|
Balance at December 31 |
|
$ |
82 |
|
|
$ |
64 |
|
|
$ |
30 |
|
As of December 31, 2017, the Company had total gross unrecognized income tax benefits of $82 million associated with over 100 jurisdictions in which the Company conducts business that, if recognized, would reduce the Company’s effective income tax rate.
The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of income. In 2017, 2016 and 2015, the amount of interest and penalties recorded as an addition/(reduction) to income tax expense in the accompanying consolidated statements of income was $3 million, $2 million and ($2) million, respectively. As of December 31, 2017 and 2016, the Company had accrued approximately $18 million and $11 million, respectively, of interest and penalties.
The Company believes that it is reasonably possible that a decrease of up to $10 million in gross unrecognized income tax benefits for federal, state and foreign exposure items may be necessary within the next 12 months due to lapse of statutes of limitations or uncertain tax positions being effectively settled. The Company believes that it is reasonably possible that a decrease of up to $1 million in gross unrecognized income tax benefits for foreign items may be necessary within the next 12 months due to payments. For the remaining uncertain income tax positions, it is difficult at this time to estimate the timing of the resolution.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the tax years that remain open for examination by tax authorities in the most significant jurisdictions in which the Company operates:
|
United States |
|
2014-2016 |
|
India |
|
2006-2017 |
|
Japan |
|
2012-2016 |
|
United Kingdom |
|
2016 |
|
Switzerland |
|
2013-2016 |
In certain of the jurisdictions noted above, the Company operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that tax years are technically not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.
Due to the geographic breadth of the Company’s operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes that may be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of income tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, the Company will record additional income tax expense or income tax benefit in the period in which such resolution occurs.
The Company had a tax holiday for Quintiles East Asia Pte. Ltd. in Singapore through June 2015. The income tax benefit of this holiday was approximately $2 million in 2015. The tax holiday increased earnings per share by approximately $0.02 in 2015.