CINEMARK USA INC /TX

14.	INCOME TAXES

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.

The Company recorded a net one-time benefit of $44,889, all non-cash, related to enactment of the Tax Act, including a re-measurement of deferred tax liabilities using the lower U.S. corporate income tax rate, a reassessment of permanently reinvested earnings, a deemed repatriation tax, and a reduction in a deferred tax asset with regard to foreign tax credit carryforwards.

The adjustments to deferred tax assets and liabilities and the liability related to the transition tax are provisional amounts based on information available as of December 31, 2017. These amounts may change due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company has made, and additional guidance that may be issued by the U.S. government. The Company will complete its analysis over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net income from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.

The Company’s provision for federal and foreign income tax expense for continuing operations consisted of the following:

	Year Ended December 31,
	2015		2016		2017
Income before income taxes:
U.S.	$	262,336	$	277,474	$	282,896
Foreign		88,015		85,890		64,842
Total	$	350,351	$	363,364	$	347,738

Current and deferred income taxes were as follows:

	Year Ended December 31,
	2015			2016			2017
Current:
Federal	$	72,185		$	66,210		$	55,224
Foreign		35,874			32,047			29,306
State		10,806			12,061			10,741
Total current expense	$	118,865		$	110,318		$	95,271
Deferred:
Federal	$	10,420		$	(13,667	)	$	(14,046	)
Foreign		(3,339	)		1,674			(4,270	)
State		4,014			6,526			3,301
Total deferred taxes	$	11,095		$	(5,467	)	$	(15,015	)
Income taxes	$	129,960		$	104,851		$	80,256

A reconciliation between income tax expense and taxes computed by applying the applicable statutory federal income tax rate to income before income taxes follows:

	Year Ended December 31,
	2015			2016			2017
Computed statutory tax expense	$	122,623		$	127,176		$	121,708
Foreign inflation adjustments		(1,295	)		(281	)	—
State and local income taxes, net of federal income tax impact		9,640			12,081			12,857
Foreign losses not benefited and changes in valuation allowance		(2,408	)		(34,757	)		249
Foreign tax rate differential		(2,660	)		(942	)		(245	)
Foreign dividends	—				68,684			13,662
Foreign tax credits	—				(62,815	)		(21,647	)
Impacts related to 2017 Tax Act ⁽¹⁾	—			—				(44,889	)
Changes in uncertain tax positions		3,717			921			983
Other — net		343			(5,216	)		(2,422	)
Income taxes	$	129,960		$	104,851		$	80,256

⁽¹⁾

Includes one-time benefit due to re-measurement of net deferred tax liabilities using a lower U.S. corporate tax rate and a reassessment of permanently reinvested earnings of ($79,834), a deemed repatriation tax of $14,512, and a reduction in deferred tax assets with regard to foreign tax credit carryforwards of $20,433.

U.S. income taxes have been provided on deemed repatriated earnings of $352,632 related to the Company’s non-U.S. companies as of December 31, 2017 as a result of the enactment of the Tax Act. The Company recorded a net transition tax of $14,512 on the deemed repatriated earnings during the year ended December 31, 2017. Before the Tax Act, U.S. income taxes and foreign withholding taxes had not been provided on earnings of $316,346 and $251,439 that had not been distributed by the Company’s non-U.S. companies as of December 31, 2015 and 2016, respectively. The Company’s intention before enactment of the Tax Act was to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. While the Company’s investment in foreign subsidiaries continues to be permanent in duration, the Company may periodically repatriate a portion of these earnings to the extent that it does not incur additional U.S. tax liability. The Company considers any excess of the amount for financial reporting over the tax basis of its investment in its foreign subsidiaries to be indefinitely reinvested. At this time, the determination of deferred tax liabilities on this amount is not practicable.

Deferred Income Taxes

The tax effects of significant temporary differences and tax loss and tax credit carryforwards comprising the net long-term deferred income tax liabilities as of December 31, 2016 and 2017 consisted of the following:

	December 31,
	2016			2017
Deferred liabilities:
Theatre properties and equipment	$	176,781		$	147,208
Intangible asset — other		36,052			30,770
Intangible asset — tradenames		112,747			72,967
Investment in partnerships		107,066			67,449
Total deferred liabilities		432,646			318,394
Deferred assets:
Deferred lease expenses		24,026			14,714
Exchange (gain) loss		(731	)		220
Deferred revenue - NCM		130,005			85,816
Capital lease obligations		85,721			67,369
Other tax loss carryforwards		15,883			15,564
Other tax credit carryforwards		48,033			38,436
Other expenses, not currently deductible for tax purposes		11,270			13,801
Total deferred assets		314,207			235,920
Net deferred income tax liability before valuation allowance		118,439			82,474
Valuation allowance against deferred assets – non-current		14,524			35,246
Net deferred income tax liability	$	132,963		$	117,720
Net deferred tax liability — Foreign	$	7,571		$	3,073
Net deferred tax liability — U.S.		125,392			114,647
Total	$	132,963		$	117,720

A significant portion of our foreign tax credit carryforwards expire in 2024. Some foreign net operating losses will expire in the next reporting period; however, some losses may be carried forward indefinitely. State net operating losses may be carried forward for periods of between five and twenty years with the last expiring year being 2037.

The Company’s valuation allowance changed from $14,524 at December 31, 2016 to $35,246 at December 31, 2017 (See Note 18). The increase was a result of the Tax Act and its impact on the estimated usage of foreign tax credit carryforwards before their expiration.

Uncertain Tax Positions

The following is a reconciliation of the total amounts of unrecognized tax benefits excluding interest and penalties, for the years ended December 31, 2015, 2016 and 2017:

	Year Ended December 31,
	2015			2016			2017
Balance at January 1,	$	16,515		$	17,133		$	17,403
Gross increases - tax positions in prior periods		40			13			92
Gross decreases - tax positions in prior periods	—			—			(12		)
Gross increases - current period tax positions		2,112			923			265
Settlements		(871	)		(924	)		(177	)
Foreign currency translation adjustments		(663	)		258			695
Balance at December 31,	$	17,133		$	17,403		$	18,266

The Company had $18,190 and $20,232 of unrecognized tax benefits, including interest and penalties, as of December 31, 2016 and 2017, respectively. Of these amounts, $18,190 and $20,232 represent the amount of unrecognized tax benefits that if recognized would impact the effective income tax rate for the years ended December 31, 2016 and 2017, respectively. The Company had $4,111 and $5,288 accrued for interest and penalties as of December 31, 2016 and 2017, respectively.

The Company participates in the consolidated income tax return of Cinemark Holdings, Inc. in the U.S. federal jurisdiction and in certain state and foreign jurisdictions, and is routinely under audit by many different tax authorities. The Company believes that its accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. The Company is no longer subject to income tax audits from the Internal Revenue Service for years before 2014. The Company is no longer subject to state income tax examinations by tax authorities in its major state jurisdictions for years before 2013. The Company is no longer subject to non-U.S. income tax examinations by tax authorities in its major non-U.S. tax jurisdictions for years before 2005.

The Company is currently under audit in the non-U.S. tax jurisdictions of Brazil and Chile. The Company believes that it is reasonably possible that the Chile audit will be completed within the next twelve months.