Entity information:

• Entity registrant name: FOGO DE CHAO, INC.
• CIK: 0001627487
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1627487/000156459018005016/0001564590-18-005016-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1627487/000156459018005016/fogo-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1627487/000156459018005016/fogo-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001627487
• Generator: Donnelley Financial Solutions
• Total assets: 542,613,000
• Income tax expense (benefit): -1,470,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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14. Income Taxes

Federal Tax Reform

On December 22, 2017, the Tax Act was signed into law effective January 1, 2018. The Tax Act significantly revised the US tax code by, in part but not limited to: a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of US 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. Under Accounting Standards Codification 740, Income Taxes, the Company must recognize the effects of tax law changes in the period in which the new legislation is enacted.

The Company has calculated a reasonable estimate of the impact of the Tax Act in its year-end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The provisional tax benefit recorded related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $14,978. The provisional tax expense related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $6,457.  

The Tax Act provides for a one-time transition tax under section 965 on previously untaxed post-1986 foreign income of specified foreign corporations owned by US shareholders by deeming those earnings to be repatriated. Foreign earnings considered held in the form of cash and cash equivalents are taxed at an effective rate of 15.5%, and the remaining earnings are taxed at an effective rate of 8%, which includes a partial participation exemption. The Company recorded $6,457 expense related to its one-time repatriation inclusion. As addressed below, this amount is presented as provisional while the Company continues to review the balance of foreign earnings required to be included under section 965(a).

The Company has historically not utilized a foreign tax credit, instead opting to deduct all foreign taxes paid. In Fiscal 2017, the Company elected to calculate and utilize a foreign tax credit. The Company recorded a $2,134 benefit related to foreign tax credits which includes a credit benefit of $3,283 net of the $1,149 Section 78 gross up expense. As addressed below, this amount is presented as provisional while the Company continues to review its foreign tax pool balance and attributes relevant to the section 904 foreign tax credit limitation.

The Tax Act provides for 100% bonus depreciation for eligible property placed in service after September 27, 2017, and before 2023. The Tax Act allows a Company to make an election for the 2017 tax year to apply 50% bonus depreciation rather than 100% bonus depreciation on eligible property. At this time, the Company plans to elect the 50% bonus depreciation. As addressed below, this amount is presented as provisional while the Company continues to review the impact of 100% bonus depreciation on its foreign tax credit utilization.    

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US 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. Pursuant to SAB 118, the Company is presenting the adjustments to deferred tax assets and liabilities, the liability related to the transition tax, and foreign tax credits as provisional amounts because it has the necessary information to develop a reasonable estimate. As further regulatory guidance is issued by the applicable taxing authorities and as accounting treatment is clarified, additional work may be necessary to ensure earnings as required by the calculations are properly determined. As the Company performs additional analysis on the application of the law, and as the Company refines its estimates in calculating the effect, the Company’s final analysis may be different from current provisional amounts. Any changes to the provisional amounts will be recognized in the period completed which could materially affect the Company’s tax obligations and effective tax rate. Additionally, as a result of the Tax Act, the Company has not completed its evaluation of its indefinite reinvestment assertion with regard to foreign earnings under ASC 740-30. As a result, deferred tax liabilities may be increased or decreased during the period allowed under SAB 118.

The effects of other provisions of the Tax Act are not expected to have a material impact on the Company’s Fiscal 2017 consolidated financial statements. Other provisions of the Tax Act may impact the Company in Fiscal 2018. These include the new section 951A Global Intangible Low-Taxed Income (“GILTI”) anti-deferral rules and the section 245A deduction for certain dividends received from foreign corporations. The Company has not completed its analysis of the effect of these provisions, hence no estimate can currently be made and no provisional amounts were recorded in the financial statements for the impact of these provisions of the Tax Act. Based on the current interpretation, the Company may choose a method as an accounting policy to record deferred taxes in relation to the GILTI provisions or to record the tax in the period in which it occurs. Pursuant to SAB 118, the Company has not elected an accounting policy for the effect of the GILTI tax law provisions.

Income from Continuing Operations Before Income Taxes

The following table summarizes the income from continuing operations before income taxes in the following jurisdictions for Fiscal 2017, Fiscal 2016 and Fiscal 2015:

 

 

Income Tax Provision

The income tax expense (benefit) from continuing operations for Fiscal 2017, Fiscal 2016 and Fiscal 2015 consists of the following:

 

 

Effective and Statutory Rate Reconciliation

The following table summarizes a reconciliation of income tax expense (benefit) for continuing operations, calculated at the US statutory federal income tax rate of 35%, to total income tax expense (benefit) for Fiscal 2017, Fiscal 2016 and Fiscal 2015:

 

The significant components of the difference between Fiscal 2017 statutory rate and the annual effective tax rate are attributable to accounting for the estimated tax impact of the Tax Act, employment tax credits, statutory rate differential between foreign jurisdictions and the US, state taxes, and foreign tax credits. The significant components of the difference between the Fiscal 2016 statutory tax rate and the annual effective tax rate are attributable to employment tax credits, statutory tax rate differential between foreign jurisdictions and the US, subpart F income, nondeductible expenses, and state taxes.

During the first and second quarters of Fiscal 2017, the Company recognized discrete tax benefits of $153 and $62, respectively, resulting from refunds received related to prior year state and local income tax returns. During the third quarter of Fiscal 2017, the Company identified an error in the accounting for a prior period business acquisition resulting from the omission of tax basis related to two of its restaurants that were under construction at the time of the acquisition. The Company corrected this error in the third quarter of Fiscal 2017, which resulted in a $2,415 adjustment decreasing net deferred tax liabilities and goodwill and the recognition of a discrete tax benefit of $197.

During the first quarter of Fiscal 2015, the Company recognized a $308 discrete tax benefit related to a true-up of the deferred tax asset on Fiscal 2014 alternative minimum tax credits.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered.

Significant components of deferred tax assets and liabilities as of December 31, 2017 and January 1, 2017 are as follows:

 

The Company has net deductible goodwill for income tax purposes of $62,583 at December 31, 2017.

The Company has gross US federal net operating loss carryforwards in the amount of $12,701 at January 1, 2017, which are expected to be fully utilized at December 31, 2017. The Company has foreign net operating losses of $926 at December 31, 2017 and $405 at January 1, 2017 which will begin to expire in 2023. The Company has state net operating loss carryforwards in various states in the amount of $4,767 that expire over the next 17 years. The Company has AMT credit carryforwards of $677. As a result of TCJA, the Company can claim up to 50% of the total credit to offset regular tax starting in tax year 2018 with the remaining credit amount refundable by 2021. The international AMT credit carryforward can be carried forward indefinitely. The Company has general business tax credit carryforwards of approximately $12,967 which begin to expire in 2033 - 2037 and foreign tax credit carryforwards of $589 which begin to expire in 2027. Immediately before expiration, unused general business credits may be claimed as a deduction in the following year.

The Company had historically provided deferred taxes under ASC 740-30-25, formerly APB 23, for the presumed repatriation to the US of earnings from the Company’s Brazilian subsidiaries. In June 2015, the Company asserted that the outside basis difference, including undistributed earnings, of its Brazilian subsidiaries would be indefinitely reinvested in operations outside the US. This was primarily driven by a reduction in debt service costs on a go-forward basis as a result of the IPO. The assertion was supported by future US cash projections and the Company’s intent to continue using foreign-generated cash to invest in foreign restaurants. As a result of the change in assertion, the Company reduced its deferred tax liabilities related to undistributed foreign earnings by $13,877. In 2016, the Company effectuated an internal restructuring whereby it created a new Dutch holding company, FDC Netherlands Coöperatief U.A. (“Fogo Co-op”) and contributed all of its Brazilian subsidiaries to Fogo Co-op. For US federal income tax purposes, this transaction was structured as a tax-free reorganization. Since the restructuring, Fogo Co-op is treated as the regarded or separate legal entity for US federal income tax purposes and the Brazilian entities are branches or divisions of Fogo Co-op. Consequently, income or losses earned by the Brazilian entities are deemed to be earned by Fogo Co-op for US federal income tax purposes.

The Company is not able to determine a reasonable estimate of the deferred tax liability, if any, that would be recorded if the Company were to change its indefinite reinvestment assertion. Missing or incomplete information relevant to this analysis includes tax basis and book basis in the shares of Fogo Co-op. In addition, the undistributed earnings of approximately $51,468 related to Fogo Co-Op could be subject to state income tax or withholding tax. Pursuant to SAB 118, the Company will continue to apply ASC 740 based on the provisions of the tax law in effect immediately prior to the enactment of the Tax Act, including the historical indefinite reinvestment assertion with respect to the outside basis differences.

During 2018, the Company will analyze the impact of the Tax Act on its indefinite reinvestment assertion. This analysis will consider the impact of previously taxed earnings created under section 965, the application of the new section 245A dividends received deduction, the impact of the new section 951A GILTI tax rules, state law changes, the existence of an outside basis difference in excess of earnings, currency translation adjustment impacts, and shifts in the global business environment resulting from the Tax Act.

ASC 740 requires that the Company reduce its deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In 2015, the Company made the decision to release its valuation allowance against its net deferred tax asset. The decision to release the valuation allowance was triggered in conjunction with the IPO. Reduced debt service costs and historic cumulative earnings (US pretax income plus permanent tax differences) were all sources of positive evidence that led the Company to believe that it was more likely than not that it would be able to realize its net deferred tax assets. In 2017, the Company made the decision to record a valuation allowance against its deferred tax assets in Puerto Rico. The Company is in an overall cumulative three year loss position driven primarily by losses generated in 2017 due to the negative impact of hurricane Maria.

Changes in the valuation allowance for deferred tax assets were as follows:

 

 

The Company had no unrecognized tax benefits as of December 31, 2017, January 1, 2017 and January 3, 2016. The Company is subject to income taxes in the US federal jurisdiction and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company has considered whether there are any uncertain tax positions, and has determined that there are no such uncertain tax positions.

The Company is potentially subject to income tax audits in numerous jurisdictions in the US and internationally until the applicable statute of limitations expires. The following is a summary of tax years potentially subject to examination and/or adjustment in the significant tax and business jurisdictions in which the company operates: