10. Income Taxes
Income Tax Provision
Components of the Company’s income tax provision from continuing operations are as follows:
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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(Dollars in millions) |
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Current: |
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|
|
|
|
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|
|
|
|
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Federal |
|
$ |
11.1 |
|
|
$ |
(1.9 |
) |
|
$ |
(4.2 |
) |
|
State |
|
|
0.6 |
|
|
|
1.3 |
|
|
|
0.2 |
|
|
Foreign |
|
|
15.7 |
|
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|
13.3 |
|
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16.0 |
|
|
Total current tax provision |
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27.4 |
|
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|
12.7 |
|
|
|
12.0 |
|
|
Deferred: |
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Federal |
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2.6 |
|
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|
(1.6 |
) |
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|
(19.2 |
) |
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State |
|
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(1.2 |
) |
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0.5 |
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3.0 |
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|
Foreign |
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0.2 |
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|
(0.2 |
) |
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0.0 |
|
|
Total deferred tax provision (benefit) |
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1.6 |
|
|
|
(1.3 |
) |
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|
(16.2 |
) |
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Total income tax provision (benefit) |
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$ |
29.0 |
|
|
$ |
11.4 |
|
|
$ |
(4.2 |
) |
Income (loss) before income taxes for 2017, 2016 and 2015 included $81.6 million, $48.2 million and $(15.2) million, respectively, from foreign operations.
On December 22, 2017, the Tax Cut and Jobs Act (“Tax Act”) was signed into law. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the corporate income tax rate to 21 percent from 35 percent and imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. Most of the Tax Act’s changes are applicable for tax years beginning after December 31, 2017.
Changes in tax rates and tax laws and their impact on deferred taxes are accounted for in the period of legislative enactment. Shortly after the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from the enactment date. Accordingly, the Company has recorded a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax and will continue to gather additional information related to estimates surrounding the measurement of the impact. Such additional analysis includes collecting and refining necessary data and interpreting additional guidance issued by the tax authorities and other standard-setting bodies. Any adjustments to the Company’s estimates may materially impact our income tax expense in the period in which the adjustments are made.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. However, the Company is still analyzing certain aspects of the Tax Act and is refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax items. The Company estimated the impact of the corporate income tax rate reduction and recorded a provisional charge of $7.4 million for the year ended December 31, 2017.
The Tax Act imposes a one-time transition tax on unrepatriated earnings of foreign subsidiaries through December 31, 2017 that have not previously been subject to federal tax. The Company estimated this one-time transition tax and recorded a provisional charge to income tax expense of $13.1 million. This amount has been further reduced by current year domestic net operating losses and other tax credits resulting in an estimated cash payment of approximately $4.7 million that the Company expects to elect to pay in installments over the next eight years. The Company has not yet completed its calculation of the total post-1986 unrepatriated earnings for its foreign subsidiaries and this calculation will not be finalized until the Company’s 2017 federal income tax return is filed. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets, which is a defined term under the Tax Act and other provisions that remain subject to interpretation.
For tax years beginning after December 31, 2017, The Tax Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”) that imposes a minimum tax on earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. Due to its complexity and a current lack of guidance on certain elements of the calculation of the tax, the Company is not yet able to determine whether it will adopt a policy to provide deferred tax on existing temporary differences that may result in a future GILTI tax, or treat the tax paid as a period expense in the year incurred.
The provision for income taxes is reconciled with the federal statutory rate as follows:
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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Federal income tax rate |
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35.0 |
% |
|
|
35.0 |
% |
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|
35.0 |
% |
|
State income taxes, net of federal tax benefit |
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(1.6 |
) |
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(0.8 |
) |
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2.3 |
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Foreign earnings taxed at different rates |
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(21.6 |
) |
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(10.1 |
) |
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(8.3 |
) |
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Transition tax from Tax Act |
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21.7 |
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0.0 |
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0.0 |
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Deferred tax adjustments from Tax Act |
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12.3 |
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0.0 |
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0.0 |
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Change in tax contingency reserves |
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2.2 |
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6.5 |
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1.5 |
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Valuation allowance adjustments |
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0.9 |
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(1.9 |
) |
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(13.0 |
) |
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Domestic production activities deduction |
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0.0 |
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0.0 |
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(0.6 |
) |
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Goodwill impairment |
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0.0 |
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0.0 |
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(10.9 |
) |
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Deferred tax adjustments |
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0.0 |
|
|
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(0.2 |
) |
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0.4 |
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Other |
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(0.8 |
) |
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|
1.1 |
|
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(1.1 |
) |
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|
48.1 |
% |
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29.6 |
% |
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|
5.3 |
% |
As a result of the Tax Act and the one-time mandatory transition tax, all previously unremitted earnings for which a U.S. deferred tax liability had not been accrued have now been subject to U.S. tax. At December 31, 2017, there was approximately $398 million of such unremitted earnings. Substantially all unremitted earnings will remain indefinitely invested in our foreign subsidiaries for the foreseeable future. In the event these earnings are remitted as a dividend, they could be subject to taxation based on currency gains or losses, state taxes, and foreign withholding taxes. We estimate that we will not incur significant additional taxes on those potential remittances.
Taxes Excluded from Net Income Attributable to Koppers
The amount of income tax expense (benefit) included in comprehensive income (loss) but excluded from net income attributable to Koppers relating to adjustments to copper swap contracts is $3.5 million, $8.0 million, and $(1.2) million for the years ended December 31, 2017, 2016 and 2015, respectively.
The amount of income tax expense included in comprehensive income (loss) but excluded from net income attributable to Koppers relating to adjustments to reflect the unfunded status of employee post-retirement benefit plans is $2.8 million, $2.0 million, and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The amount of income tax expense included in shareholders’ equity but excluded from net income attributable to Koppers relating to the expense for restricted stock and employee stock options recognized differently for financial and tax reporting purposes is $0.4 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively.
The Company adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” effective October 1, 2017. ASU 2018-02 requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification is the difference between the tax-effected items that are included in accumulated other comprehensive income and were recorded at the historical 35 percent corporate income tax rate and those same items that are now recorded at the newly enacted 21 percent corporate income tax rate. This difference was $3.2 million for the year ended December 31, 2017
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
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December 31, |
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2017 |
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2016 |
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|
(Dollars in millions) |
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Deferred tax assets: |
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Federal and state tax loss carryforwards (expiring from 2018-2036) |
|
$ |
21.2 |
|
|
$ |
11.3 |
|
|
Tax credits |
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|
15.0 |
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15.4 |
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|
Reserves, including insurance, environmental and deferred revenue |
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14.3 |
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22.3 |
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Asset retirement obligations |
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|
11.9 |
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|
12.0 |
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|
Pension and other postretirement benefits obligations |
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|
10.8 |
|
|
|
19.2 |
|
|
Foreign tax loss carryforwards (expiring beginning in 2018) |
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|
9.3 |
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|
10.1 |
|
|
Accrued employee compensation |
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6.3 |
|
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|
8.9 |
|
|
Book/tax inventory accounting differences |
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|
1.5 |
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3.5 |
|
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Other |
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|
6.1 |
|
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|
6.6 |
|
|
Valuation allowance |
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|
(44.5 |
) |
|
|
(40.2 |
) |
|
Total deferred tax assets |
|
|
51.9 |
|
|
|
69.1 |
|
|
Deferred tax liabilities: |
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|
|
|
|
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Tax over book depreciation and amortization |
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|
33.2 |
|
|
|
42.7 |
|
|
Gain on derivative contracts |
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|
7.0 |
|
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4.2 |
|
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Other |
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|
0.7 |
|
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|
1.4 |
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Total deferred tax liabilities |
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|
40.9 |
|
|
|
48.3 |
|
|
Net deferred tax assets |
|
$ |
11.0 |
|
|
$ |
20.8 |
|
A valuation allowance is necessary when it is more likely than not that a deferred tax asset will not be realized. Certain deferred tax assets reflected above are not expected to be realized and a valuation allowance has been provided for them. Valuation allowances are recorded to offset the following deferred tax assets:
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December 31, |
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|
|
2017 |
|
|
2016 |
|
||
|
State temporary differences, net operating losses and tax credits |
|
$ |
18.7 |
|
|
$ |
13.2 |
|
|
Federal foreign tax credits |
|
|
13.8 |
|
|
|
14.3 |
|
|
Foreign temporary differences, net operating losses and capital losses |
|
|
12.0 |
|
|
|
12.7 |
|
|
Total valuation allowances |
|
$ |
44.5 |
|
|
$ |
40.2 |
|
During 2017, the Company generated additional net operating losses in certain states which require each legal entity to file a separate return. As it is not expected that certain entities will generate future taxable income to realize the benefit of these losses, the related valuation allowance was increased by $5.5 million.
Management evaluated the ability to realize the deferred tax assets that are related to our domestic operations, particularly in light of our domestic financial reporting losses. In assessing the need for a valuation allowance, we considered all positive and negative evidence related to the realization of our net deferred tax assets. This assessment considered, among other matters, the nature and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, and tax planning alternatives. Additionally, there were unusual or non-recurring charges that greatly attributed to these domestic losses. As a result, management has concluded that its domestic operations will generate sufficient income in periods when these deferred tax assets become deductible and that these deferred tax assets will be realized.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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December 31, |
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|
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2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
9.7 |
|
|
$ |
7.7 |
|
|
$ |
7.2 |
|
|
Additions based on tax provisions related to the current year |
|
|
0.1 |
|
|
|
0.9 |
|
|
|
1.4 |
|
|
Additions for tax provisions of prior years |
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|
2.7 |
|
|
|
1.5 |
|
|
|
0.0 |
|
|
Reductions of tax provisions of prior years |
|
|
(3.4 |
) |
|
|
0.0 |
|
|
|
(0.7 |
) |
|
Reductions as a result of a lapse of the applicable statute of limitations |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
Balance at end of year |
|
$ |
8.7 |
|
|
$ |
9.7 |
|
|
$ |
7.7 |
|
As of December 31, 2017 and 2016, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $4.4 million and $5.7 million, respectively.
The Company recognizes interest expense (income) and any related penalties from unrecognized tax benefits in income tax expense. For the years ended December 31, 2017, 2016, and 2015, the Company recognized $(0.6) million, $1.2 million and $(1.5) million, respectively, in interest and penalties. As of December 31, 2017 and 2016, the Company had accrued interest and penalties of approximately $3.6 million and $4.2 million, respectively.
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months by approximately $4 million due to the expirations of certain foreign and state statutes of limitations and potential audit resolutions. The Company does not anticipate significant increases to the amount of unrecognized tax benefits within the next twelve months.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, U.S. state, or non-U.S. income tax examinations by tax authorities for years before 2013.