Entity information:

• Entity registrant name: Domtar CORP
• CIK: 0001381531
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1381531/000156459018002964/0001564590-18-002964-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1381531/000156459018002964/ufs-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1381531/000156459018002964/ufs-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001381531
• Generator: Donnelley Financial Solutions
• Total assets: 5,212,000,000
• Income tax expense (benefit): -125,000,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2017

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 10.

 

INCOME TAXES

The Company’s (loss) earnings before income taxes by taxing jurisdiction were:

 

 

Provisions for income taxes include the following:

 

 

The Company’s provision for income taxes differs from the amounts computed by applying the statutory income tax rate of 35% to (loss) earnings before income taxes due to the following:

 

 

During 2017, the Company recorded a goodwill impairment of $578 million with minimal tax benefit which impacted the effective tax rate by $200 million. The effective tax rate for 2017 was also significantly impacted by the Company’s foreign operations being taxed at lower statutory tax rates and by the Company recording $24 million of current tax credits, mainly research and experimentation credits.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”) was signed into law. The U.S. Tax Reform significantly changes U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time deemed repatriation tax on accumulated foreign earnings. As a result of the corporate tax rate reduction, the Company revalued its ending net deferred tax liabilities, and recognized a provisional tax benefit of $186 million in the Company’s Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) for the year ended December 31, 2017. This, combined with a $2 million tax benefit from other changes in law in certain U.S. states earlier in the year, had a significant impact on the effective tax rate for 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. SAB 118 provides guidance which allows companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the U.S. Tax Reform. The U.S. Tax Reform provides for a mandatory one-time deemed repatriation tax on the Company’s undistributed foreign earnings and profits. The Company has recorded a provisional repatriation tax amount of $46 million, which it will elect to pay over eight years, and which impacted the 2017 tax rate. The current portion of $4 million is included on the Company’s Consolidated Balance Sheet in Income and other taxes receivable and the remaining $42 million is included in Other liabilities and deferred credits. While the Company has made a reasonable estimate of the repatriation tax amount, it continues to analyze various factors, including the impact of foreign tax credits available to offset the tax. The Company continues to gather additional information and monitor for further interpretive guidance in order to finalize its calculations and complete its accounting for the repatriation tax liability.

Additionally, the Company continues to assess the impact of the U.S. Tax Reform with respect to its current strategy of reinvesting profits of foreign subsidiaries back into those foreign operations. The Company has not completed its analysis of the impacts of the U.S. Tax Reform and how these changes will impact operational decisions around the utilization of cash residing in the foreign subsidiaries. If, after analysis, the Company’s management determines that it will no longer reinvest all earnings of its foreign subsidiaries, then the Company would need to determine if a provision for the undistributed foreign earnings is required. As such, the Company has not recorded a tax liability amount for this item. It is possible that such a tax liability, if recorded in the future, could have a significant impact on the effective tax rate in the period that it is recorded.

During 2016, the Company recorded $18 million of tax credits, mainly research and experimentation credits, which significantly impacted the effective tax rate. The effective tax rate for 2016 was also significantly impacted by the Company’s foreign operations being taxed at lower statutory tax rates.

During 2015, the Company recorded $16 million of tax credits, mainly research and experimentation credits, which significantly impacted the effective tax rate. The effective tax rate for 2015 was also impacted by the manufacturing deduction in the U.S., enacted law changes in various U.S. states, and the impact of the Company’s foreign operations being taxed at lower statutory tax rates.

Deferred tax assets and liabilities are based on tax rates that are expected to be in effect in future periods when deferred items are expected to reverse. Changes in tax rates or tax laws affect the expected future benefit or expense. The effect of such changes that occurred during each of the last three fiscal years is included in “Tax rate changes” disclosed under the effective income tax rate reconciliation shown above.

DEFERRED TAX ASSETS AND LIABILITIES

The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2017 and December 31, 2016 are comprised of the following:

 

At December 31, 2017, the Company had less than $1 million of federal net operating loss carryforwards remaining which expire in 2032. These U.S. federal net operating losses are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), that can vary from year to year. The Company also has other foreign net operating losses and deduction limitations of $150 million, which may be carried forward indefinitely.

In assessing the realizability of deferred tax assets, management 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 periods in which temporary differences become deductible.

The Company evaluates the realization of deferred tax assets on a quarterly basis. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires significant judgment. All available evidence, both positive and negative, is considered when determining whether, based on the weight of that evidence, a valuation allowance is needed. Specifically, the Company evaluated the following items:

Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, with the exception of certain state credits for which a valuation allowance of $6 million exists at December 31, 2017, and certain foreign loss carryforwards for which a valuation allowance of $19 million exists at December 31, 2017. Of this amount, $3 million impacted tax expense and the effective tax rate for 2017 (2016 – $(1) million; 2015 – $(1) million).

The Company historically has not provided for a U.S. income tax liability on undistributed earnings of its foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect full provision for income taxes, are currently indefinitely reinvested in foreign operations. The Company is still analyzing the impact of the U.S. Tax Reform on its cash repatriation strategies and a change could result in the need for the Company to record a tax liability on the undistributed earnings of some or all of its foreign operations.

The U.S. Tax Reform also includes a base erosion provision for Global Intangible Low-Taxed Income (“GILTI”). Beginning in 2018, the GILTI provisions require the Company to include in its U.S. income tax return earnings of foreign subsidiaries that are in excess of an allowable return on the tangible assets of the foreign subsidiaries. The Company is required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into the measurement of deferred taxes (the “deferred method”). The Company is continuing to evaluate the GILTI tax rules and has not yet adopted a policy to account for the related impacts.

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

At December 31, 2017, the Company had gross unrecognized tax benefits of approximately $37 million ($43 million and $41 million for 2016 and 2015, respectively). If recognized in 2018, these tax benefits would impact the effective tax rate. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained.

 

 

The Company recorded $1 million of accrued interest associated with unrecognized tax benefits for the period ending December 31, 2017 ($1 million and $1 million for 2016 and 2015, respectively). The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of tax expense. The Company believes it is reasonably possible that up to $8 million of its unrecognized tax benefits may be recognized by December 31, 2018, which could significantly impact the effective tax rate. However, the amount and timing of the recognition of these benefits is subject to some uncertainty.

The major jurisdictions where the Company and its subsidiaries will file tax returns for 2017, in addition to filing one consolidated U.S. federal income tax return, are Canada, Sweden and Spain. The Company and its subsidiaries will also file returns in various other countries in Europe and Asia as well as various U.S. states and Canadian provinces. At December 31, 2017, the Company’s subsidiaries are subject to foreign federal income tax examinations for the tax years 2007 through 2016, with federal years prior to 2014 being closed from a cash tax liability standpoint in the U.S., but the loss carryforwards can be adjusted in any open year where the loss has been utilized. The Company does not anticipate that adjustments stemming from these audits would result in a significant change to the results of its operations and financial condition.

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