Note 15: Income Taxes
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”), resulting in significant modifications to existing law. HGV follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of Accounting Standards Codification Topic 740 (“ASC Topic 740”) in situations where we do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when we have obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.
As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act. However, in certain cases, as described below, we have made a reasonable estimate of the effects on the one-time repatriation tax and its existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the Act. Additionally, we have not yet elected an accounting policy to account for the tax upon Global Intangible Low-Taxed Income in either of the following ways: 1) as a period charge in the future period the tax arises or 2) as part of deferred taxes related to the investment or subsidiary.
One-Time Repatriation Tax: We have included a provisional current income tax payable in the amount of $1 million (net of applicable foreign tax credit) related to the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The provisional amount is based on information currently available, including estimated tax earnings and profits from foreign investments. We will continue to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries, in order to complete the accounting for the effects of the estimated transition tax. It is our intention to complete the necessary analysis within the measurement period.
Deferred tax assets and liabilities: We have re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was $132 million of deferred tax benefit, which consisted primarily of the re-measurement of deferred tax assets and liabilities from 35% to 21%.
The Company was a party to several intercompany asset transfers with Hilton prior to the spin-off. As required under U.S. tax regulations, the gain resulting from the intercompany transfer of these assets should be deferred and no deferred tax asset or liability should be recognized until a recognition event occurs. On January 3, 2017, Hilton executed a tax-free spin-off of HGV, which met the requirement of a recognition event. On the spin-off date, for the assets transferred, we recognized a stepped-up tax basis, re-measured the asset by applying applicable tax rate changes and evaluated the realizability of the asset. This resulted in a reduction to our net deferred tax liability and an increase in our Additional paid-in capital of $9 million on our consolidated balance sheet as of December 31, 2017. Additionally, upon Hilton’s filing of the pre spin-off income tax returns, we recorded a return-to-provision true-up, which resulted in a reduction to our net deferred tax liability and an increase in our Additional paid-in capital of $1 million on the consolidated balance sheet as of December 31, 2017.
Our tax provision includes federal, state and foreign income taxes payable. The domestic and foreign components of income before taxes were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
($ in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. income before tax |
|
$ |
283 |
|
|
$ |
270 |
|
|
$ |
275 |
|
|
Foreign income before tax |
|
|
28 |
|
|
|
23 |
|
|
|
17 |
|
|
Income before taxes |
|
$ |
311 |
|
|
$ |
293 |
|
|
$ |
292 |
|
The components of our provision for income taxes were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
($ in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
94 |
|
|
$ |
87 |
|
|
$ |
85 |
|
|
State |
|
|
11 |
|
|
|
8 |
|
|
|
7 |
|
|
Foreign |
|
|
8 |
|
|
|
7 |
|
|
|
6 |
|
|
Total current |
|
|
113 |
|
|
|
102 |
|
|
|
98 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(137 |
) |
|
|
21 |
|
|
|
18 |
|
|
State |
|
|
8 |
|
|
|
2 |
|
|
|
2 |
|
|
Total deferred |
|
|
(129 |
) |
|
|
23 |
|
|
|
20 |
|
|
Total provision for income taxes |
|
$ |
(16 |
) |
|
$ |
125 |
|
|
$ |
118 |
|
Reconciliations of our tax provision at the U.S. statutory rate to the provision (benefit) for income taxes were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
($ in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory U.S. federal income tax provision |
|
$ |
109 |
|
|
$ |
102 |
|
|
$ |
102 |
|
|
State and local income taxes, net of U.S. federal tax benefit |
|
|
12 |
|
|
|
10 |
|
|
|
9 |
|
|
Foreign income tax expense |
|
|
7 |
|
|
|
7 |
|
|
|
6 |
|
|
U.S. benefit of foreign taxes |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
Non-deductible transactions costs |
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
Interest on installment sales, net of U.S. federal tax benefit |
|
|
3 |
|
|
|
7 |
|
|
|
7 |
|
|
Interest on installment sales adjustment |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
U.S. tax reform: one-time repatriation tax |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
U.S. tax reform: remeasurement of deferred tax |
|
|
(132 |
) |
|
|
— |
|
|
|
— |
|
|
U.S. tax reform: remeasurement of long-term interest liability on installment sales, net of federal tax benefit at 21% |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
|
Provision for income taxes |
|
$ |
(16 |
) |
|
$ |
125 |
|
|
$ |
118 |
|
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The compositions of net deferred tax balances were as follows:
|
|
|
December 31, |
|
|||||
|
($ in millions) |
|
2017 |
|
|
2016 |
|
||
|
Deferred income taxes assets |
|
$ |
1 |
|
|
$ |
— |
|
|
Deferred income tax liabilities |
|
|
(250 |
) |
|
|
(389 |
) |
|
Net deferred taxes |
|
$ |
(249 |
) |
|
$ |
(389 |
) |
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The tax effects of the temporary differences and carryforwards that give rise to our net deferred tax liability were as follows:
|
|
|
December 31, |
|
|||||
|
($ in millions) |
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
9 |
|
|
$ |
11 |
|
|
Other reserves |
|
|
42 |
|
|
|
52 |
|
|
Deferred tax assets |
|
|
51 |
|
|
|
63 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(54 |
) |
|
|
(87 |
) |
|
Amortizable intangible assets |
|
|
(10 |
) |
|
|
(17 |
) |
|
Deferred income |
|
|
(236 |
) |
|
|
(347 |
) |
|
Other liabilities |
|
|
— |
|
|
|
(1 |
) |
|
Deferred tax liabilities |
|
|
(300 |
) |
|
|
(452 |
) |
|
Net deferred taxes |
|
$ |
(249 |
) |
|
$ |
(389 |
) |