NOTE 10: INCOME TAXES
The following table presents a summary of our domestic and foreign income before income taxes:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Domestic |
|
$ |
81 |
|
|
$ |
64 |
|
|
$ |
67 |
|
|
Foreign |
|
|
29 |
|
|
|
87 |
|
|
|
172 |
|
|
Total |
|
$ |
110 |
|
|
$ |
151 |
|
|
$ |
239 |
|
The following table presents a summary of the components of our provision for income taxes:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
93 |
|
|
$ |
38 |
|
|
$ |
48 |
|
|
State |
|
|
1 |
|
|
|
2 |
|
|
|
8 |
|
|
Foreign |
|
|
6 |
|
|
|
11 |
|
|
|
22 |
|
|
Current income tax expense |
|
|
100 |
|
|
|
51 |
|
|
|
78 |
|
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
25 |
|
|
|
(12 |
) |
|
|
(29 |
) |
|
State |
|
|
2 |
|
|
|
(3 |
) |
|
|
(2 |
) |
|
Foreign |
|
|
2 |
|
|
|
(5 |
) |
|
|
(6 |
) |
|
Deferred income tax expense (benefit): |
|
|
29 |
|
|
|
(20 |
) |
|
|
(37 |
) |
|
Provision for income taxes |
|
$ |
129 |
|
|
$ |
31 |
|
|
$ |
41 |
|
The Company reduced its current income tax payable by $27 million, $21 million and $63 million for the years ended December 31, 2017, 2016 and 2015, respectively, for tax deductions attributable to the exercise or settlement of the Company’s stock-based awards.
The significant components of our deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in millions) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
$ |
36 |
|
|
$ |
52 |
|
|
Net operating loss carryforwards |
|
|
56 |
|
|
|
46 |
|
|
Provision for accrued expenses |
|
|
4 |
|
|
|
12 |
|
|
Deferred rent |
|
|
3 |
|
|
|
5 |
|
|
Lease financing obligation |
|
|
22 |
|
|
|
33 |
|
|
Foreign advertising spend |
|
|
13 |
|
|
|
10 |
|
|
Deferred expense related to cost-sharing arrangement |
|
|
26 |
|
|
|
30 |
|
|
Interest carryforward |
|
|
7 |
|
|
|
— |
|
|
Charitable contribution carryforward |
|
|
— |
|
|
|
20 |
|
|
Other |
|
|
7 |
|
|
|
7 |
|
|
Total deferred tax assets |
|
$ |
174 |
|
|
$ |
215 |
|
|
Less: valuation allowance |
|
|
(55 |
) |
|
|
(27 |
) |
|
Net deferred tax assets |
|
$ |
119 |
|
|
$ |
188 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
$ |
(59 |
) |
|
$ |
(83 |
) |
|
Property and equipment |
|
|
(21 |
) |
|
|
(28 |
) |
|
Prepaid expenses |
|
|
(4 |
) |
|
|
(6 |
) |
|
Building - corporate headquarters |
|
|
(20 |
) |
|
|
(31 |
) |
|
Deferred income related to cost-sharing arrangement |
|
|
(13 |
) |
|
|
(10 |
) |
|
Total deferred tax liabilities |
|
$ |
(117 |
) |
|
$ |
(158 |
) |
|
Net deferred tax asset (liability) |
|
$ |
2 |
|
|
$ |
30 |
|
At December 31, 2017, we had federal, state and foreign net operating loss carryforwards (“NOLs”) of approximately $9 million, $41 million and $171 million, respectively. If not utilized, the federal and state NOLs will expire at various times between 2020 and 2037 and the foreign NOLs will expire at various times between 2018 and 2028.
As of December 31, 2017, we had a valuation allowance of approximately of $55 million related to certain NOL carryforwards for which it is more likely than not, the tax benefit will not be realized. This amount represented an overall increase of $28 million over the amount recorded as of December 31, 2016. The increase is primarily related to additional foreign net operating losses. Except for such foreign deferred tax assets, we expect to realize all of our deferred tax assets based on a strong history of earnings in the U.S. and other jurisdictions, as well as future reversals of taxable temporary differences.
A reconciliation of the provision for income taxes to the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Income tax expense at the federal statutory rate of 35% |
|
$ |
38 |
|
|
$ |
53 |
|
|
$ |
84 |
|
|
Foreign rate differential |
|
|
(25 |
) |
|
|
(35 |
) |
|
|
(53 |
) |
|
State income taxes, net of effect of federal tax benefit |
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
Unrecognized tax benefits and related interest |
|
|
12 |
|
|
|
11 |
|
|
|
12 |
|
|
Change in cost-sharing treatment of stock-based compensation |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(13 |
) |
|
Non-deductible transaction costs |
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
Impacts related to the 2017 Tax Act |
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
Research tax credit |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
Stock-based compensation |
|
|
13 |
|
|
|
2 |
|
|
|
2 |
|
|
Change in valuation allowance |
|
|
25 |
|
|
|
9 |
|
|
|
5 |
|
|
Other, net |
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
|
Provision for income taxes |
|
$ |
129 |
|
|
$ |
31 |
|
|
$ |
41 |
|
During 2011, the Singapore Economic Development Board accepted our application to receive a tax incentive under the International Headquarters Award. This incentive provides for a reduced tax rate on qualifying income of 5% as compared to Singapore’s statutory tax rate of 17% and is conditional upon our meeting certain employment and investment thresholds. This agreement has been extended until June 30, 2021 as we have met certain employment and investment thresholds. This benefit resulted in a decrease to our 2017 provision for income tax expense of $1 million.
The 2017 Tax Act was signed into United States tax law on December 22, 2017. The 2017 Tax Act significantly changes the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The 2017 Tax Act also provides for a mandatory one-time tax on the deemed repatriation of accumulative foreign earnings of foreign subsidiaries (the “Transition Tax”), as well as prospective changes beginning in 2018, including additional limitations on executive compensation. Under GAAP, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.
On December 22, 2017, the Securities and Exchange Commission issued SAB 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the 2017 Tax Act.
Our financial results, including an estimate of $67 million of Transition Tax, and $6 million recorded due to a remeasurement of our net deferred tax assets, reflect provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company has not obtained, prepared and analyzed the information necessary to finalize its computations and accounting for the Transition Tax. Since there is ongoing guidance and accounting interpretation expected over the next 12 months, we consider the accounting of the Transition Tax, deferred tax remeasurements, and other items to be provisional due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, limitations on the deductibility of certain executive compensation, an incremental tax (base erosion anti-abuse tax or “BEAT”) on excessive amounts paid to foreign related parties, deductions related to foreign derived intangible income, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or “GILTI”). We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
By virtue of previously filed consolidated income tax returns filed with Expedia, we are currently under an IRS audit for the 2009, 2010, and short-period 2011 tax years, and have various ongoing state income tax audits. We are separately under examination by the IRS for the short-period 2011, 2012 and 2013 tax years and have commenced an employment tax audit with the IRS for the 2013 and 2014 tax years. These audits include questioning of the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. These examinations may lead to proposed or ordinary course adjustments to our taxes. We are no longer subject to tax examinations by tax authorities for years prior to 2009. As of December 31, 2017, no material assessments have resulted, except as noted below regarding our 2009 and 2010 IRS audit with Expedia.
In January 2017, as part of the Company’s IRS audit of Expedia, we received Notices of Proposed Adjustment from the IRS for the 2009 and 2010 tax years. These proposed adjustments are related to certain transfer pricing arrangements with our foreign subsidiaries, and would result in an increase to our worldwide income tax expense in an estimated range of $10 million to $14 million after consideration of competent authority relief, exclusive of interest and penalties. We disagree with the proposed adjustments and we intend to defend our position through applicable administrative and, if necessary, judicial remedies. Our policy is to review and update tax reserves as facts and circumstances change. Based on our interpretation of the regulations and available case law, we believe the position we have taken with regard to transfer pricing with our foreign subsidiaries is sustainable. In addition to the risk of additional tax for 2009 and 2010 transactions, if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we would be subject to significant additional tax liabilities.
In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the IRS. This opinion was submitted as a final decision under Tax Court Rule 155 during December 2015. The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock based compensation from its inter-company cost-sharing arrangement. The IRS appealed the Court decision on February 19, 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in intercompany cost-sharing arrangements. The Company recorded a tax benefit of $5 million and $6 million in its consolidated statements of operations for the years ended December 31, 2017 and 2016, respectively. The Company will continue to monitor this matter and related potential impacts to its consolidated financial statements.
Cumulative undistributed earnings of foreign subsidiaries totaled approximately $882 million as of December 31, 2017. Subsequent to December 31, 2017, on February 2, 2018, TripAdvisor made a one-time repatriation of $325 million of foreign earnings to the United States primarily to repay our remaining outstanding debt under the 2015 Credit Facility. Refer to “Note 20— Subsequent Events” for additional information on this repatriation. TripAdvisor intends to indefinitely reinvest the remaining foreign undistributed earnings of $557 million although we will continue to evaluate the impact of the 2017 Tax Act on our capital deployment within and outside the U.S. Should we distribute, or be treated under certain U.S. tax rules as having distributed, the earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes or tax benefits. The amount of any unrecognized deferred income tax on this temporary difference is not material. The majority of cash on hand is denominated in U.S. dollars.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (excluding interest and penalties) is as follows:
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Balance, beginning of year |
|
$ |
105 |
|
|
$ |
89 |
|
|
$ |
67 |
|
|
Increases to tax positions related to the current year |
|
|
17 |
|
|
|
16 |
|
|
|
15 |
|
|
Increases to tax positions related to the prior year |
|
|
1 |
|
|
|
1 |
|
|
|
7 |
|
|
Reductions due to lapsed statute of limitations |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
Decreases to tax positions related to the prior year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Settlements during current year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance, end of year |
|
$ |
123 |
|
|
$ |
105 |
|
|
$ |
89 |
|
As of December 31, 2017, we had $123 million of unrecognized tax benefits, net of interest, which is classified as long-term and included in other long-term liabilities and deferred income taxes, net on our consolidated balance sheet. The amount of unrecognized tax benefits, if recognized, would reduce income tax expense by $78 million, due to correlative adjustments in other tax jurisdictions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our consolidated statement of operations. As of December 31, 2017 and 2016, total gross interest accrued was $13 million and $9 million, respectively. We do not anticipate any material changes in the next fiscal year.