NOTE 8 – INCOME TAXES
The U.S. and International components of income before income taxes consisted of the following for the years ended December 31, 2017, 2016 and 2015:
|
In millions |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
$ |
(9.6 |
) |
|
$ |
381.1 |
|
|
$ |
378.8 |
|
|
Foreign |
|
(98.3 |
) |
|
|
(53.0 |
) |
|
|
32.1 |
|
|
Total income before income taxes |
$ |
(107.9 |
) |
|
$ |
328.1 |
|
|
$ |
410.9 |
|
Significant components of our income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
In millions |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
United States - federal |
$ |
107.0 |
|
|
$ |
102.0 |
|
|
$ |
105.9 |
|
|
United States - state and local |
|
10.0 |
|
|
|
11.6 |
|
|
|
15.6 |
|
|
Foreign |
|
7.1 |
|
|
|
10.6 |
|
|
|
16.5 |
|
|
|
|
124.1 |
|
|
|
124.2 |
|
|
|
138.0 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
United States - federal |
|
(256.1 |
) |
|
|
19.1 |
|
|
|
23.8 |
|
|
United States - state and local |
|
(9.8 |
) |
|
|
(2.5 |
) |
|
|
2.5 |
|
|
Foreign |
|
(9.1 |
) |
|
|
(20.6 |
) |
|
|
(21.4 |
) |
|
|
|
(275.0 |
) |
|
|
(4.0 |
) |
|
|
4.9 |
|
|
Total (benefit) provision |
$ |
(150.9 |
) |
|
$ |
120.2 |
|
|
$ |
142.9 |
|
A reconciliation of the income tax provision computed at the federal statutory rate to the effective tax rate for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory income tax rate |
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal tax effect |
|
3.9 |
% |
|
|
1.5 |
% |
|
|
3.1 |
% |
|
Foreign tax rates |
|
(2.7 |
)% |
|
|
2.1 |
% |
|
|
(0.4 |
)% |
|
Permanent - other items |
|
(2.1 |
)% |
|
|
0.8 |
% |
|
|
0.4 |
% |
|
Permanent - goodwill impairment |
|
(12.0 |
)% |
|
|
- |
|
|
|
- |
|
|
U.S. Tax Reform Act |
|
120.3 |
% |
|
|
- |
|
|
|
- |
|
|
Valuation allowance |
|
(4.6 |
)% |
|
|
2.1 |
% |
|
|
- |
|
|
Stock-based compensation |
|
(0.6 |
)% |
|
|
(1.8 |
)% |
|
|
- |
|
|
Other |
|
2.7 |
% |
|
|
(3.1 |
)% |
|
|
(3.3 |
)% |
|
Effective tax rate |
|
139.9 |
% |
|
|
36.6 |
% |
|
|
34.8 |
% |
Cash payments for income taxes were $128.9 million, $111.5 million, and $125.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Our deferred tax liabilities and assets at December 31, 2017 and 2016 were as follows:
|
In millions |
|
||||||
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
$ |
(56.4 |
) |
|
$ |
(78.5 |
) |
|
Goodwill and intangibles |
|
(490.0 |
) |
|
|
(690.4 |
) |
|
Other |
|
(17.2 |
) |
|
|
(7.9 |
) |
|
Total deferred tax liabilities |
|
(563.6 |
) |
|
|
(776.8 |
) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
141.2 |
|
|
|
93.7 |
|
|
Net operating tax loss carry-forwards |
|
38.3 |
|
|
|
38.3 |
|
|
Other |
|
38.6 |
|
|
|
17.9 |
|
|
Less: valuation allowance |
|
(16.1 |
) |
|
|
(15.4 |
) |
|
Total deferred tax assets |
|
202.0 |
|
|
|
134.5 |
|
|
Net deferred tax liabilities |
$ |
(361.6 |
) |
|
$ |
(642.3 |
) |
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Tax Act results in a related change in assertion on expected foreign withholding taxes.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") in December 2017 to address the application of U.S. GAAP in 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. That guidance specifies that, for income tax effects of the Tax Act that can be reasonably estimated but for which the accounting and measurement analysis is not yet complete, entities should report provisional amounts in the reporting period that includes the enactment date and those provisional amounts can be adjusted for a measurement period not to exceed one year from the enactment date. Additionally, for income tax effects of the Tax Act that cannot be reasonably estimated, entities should report provisional amounts for those income tax effects in the first reporting period in which a reasonable estimate can be determined, not to exceed one year from the enactment date.
In accordance with SAB 118 and our understanding of the Tax Act and guidance available as of the date of this filing, the Company has calculated its best estimate of the impact of the Tax Act on its year end 2017 income tax benefit/provision and as a result has recorded an income tax (benefit) of ($129.8) million in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, the one-time transition tax on the mandatory deemed repatriation of foreign earnings and the related expected foreign withholding taxes on such earnings are reflected in the table below. The provisional estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, clarification of the definition of cash and cash equivalents and state tax conformity to federal tax changes.
The net tax (benefit) of recognized related to the Tax Act is as follows:
|
In millions |
|
||
|
Remeasurment of net deferred tax liabilities due to enacted rate reduction |
$ |
167.7 |
|
|
Section 965 transition tax on foreign earnings |
|
(24.3 |
) |
|
Foreign withholding taxes on such earnings |
|
(13.6 |
) |
|
Net tax benefit from the Tax Act |
$ |
129.8 |
|
The Section 965 transition tax is based on a deemed repatriation of foreign earnings and profits of $149.2 million at December 31, 2017.
As a result of the Tax Act, the Company has re-evaluated its assertion related to the indefinite reinvestment of unremitted foreign earnings and recorded a provisional deferred tax liability in the amount of $13.6 million for expected withholding taxes related to remittances between certain foreign subsidiaries. Although the Company has recorded this deferred tax liability, the Company is still evaluating how the Tax Act will affect the Company’s accounting position related to the indefinite reinvestment of unremitted foreign earnings. During the measurement period, the Company may reflect adjustments to this provisional amount upon obtaining, preparing, and analyzing the necessary information to complete the accounting under ASC 740 – Income Taxes. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
The Tax Act also establishes global intangible low-taxed income ("GILTI") provisions that impose a tax on foreign income in excess of a deemed return on intangible assets of foreign corporations. The Company is in the process of evaluating the impact of prospective taxes on GILTI and has not yet determined whether its accounting policy will be to recognize deferred taxes for basis differences that are expected to affect the amount of GILTI inclusion upon reversal or to recognize taxes on GILTI as an expense in the period incurred. While the Company is still evaluating its prospective accounting policy for taxes on GILTI, the provisional estimates of the tax effects of the Tax Act were reported on the basis that the taxes on GILTI will be recognized in tax expense in the year it is incurred as a period expense.
At December 31, 2017, net operating loss carry-forwards for U.S. federal and state income tax purposes have been fully utilized, excluding net operating loss carry-forwards related to our acquisitions on which certain limitations are placed at December 31, 2017. The net operating loss carry-forwards from foreign and domestic acquisitions are approximately $118.2 million and certain of these net operating loss carry-forwards begin to expire in 2018. The tax benefit of these net operating losses is approximately $38.3 million at December 31, 2017, on which a valuation allowance of $8.6 million was recorded offsetting such tax benefit. At December 31, 2017, the Company has recorded a valuation allowance of $7.5 million against tax deductible goodwill.
We file income tax returns in the United States, in various states and in certain foreign jurisdictions.
With a few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years prior to 2012. The U.S. Internal Revenue Service is currently conducting an audit of our 2014 corporate income tax return and no significant adjustments are anticipated.
The Company has recorded liabilities to cover certain uncertain tax positions. Such uncertain tax positions relate to additional taxes that the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities, proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the accrual for uncertain tax positions as deemed necessary. The estimated amount of the liability associated with the Company’s uncertain tax positions that may significantly increase or decrease within the next twelve months cannot be reasonably estimated.
The total amount of unrecognized tax benefit at December 31, 2017 is $27.4 million. The amount of uncertain tax positions that, if recognized, would affect the effective tax rate is approximately $22.2 million. We recognized interest and penalties related to income tax reserves in the amount of $0.3 million, $1.3 million, and $0.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, as a component of income tax expense.
The following table summarizes the aggregate changes in unrecognized tax benefits during the years ended December 31, 2017 and 2016:
|
In millions |
|
||
|
Unrecognized tax positions as of January 1, 2016 |
$ |
24.9 |
|
|
Gross increases - tax positions in prior periods |
|
0.8 |
|
|
Gross increases - current period tax positions |
|
2.9 |
|
|
Settlement |
|
(0.2 |
) |
|
Lapse of statute of limitations |
|
(1.7 |
) |
|
Unrecognized tax positions as of December 31, 2016 |
|
26.7 |
|
|
Gross increases - tax positions in prior periods |
|
0.7 |
|
|
Gross increases - current period tax positions |
|
5.1 |
|
|
Settlement |
|
(0.5 |
) |
|
Lapse of statute of limitations |
|
(4.6 |
) |
|
Unrecognized tax positions as of December 31, 2017 |
$ |
27.4 |
|
The table above includes amounts that relate to uncertain tax positions from acquired companies. Purchase agreements to acquire the stock of a target generally provide that the seller is liable for and has indemnified Stericycle against all income tax liabilities for periods prior to the acquisition. Stericycle will be responsible for unrecognized tax benefits and related interest and penalties for periods after the acquisition.