Match Group is included within IAC's tax group for purposes of federal and consolidated state income tax return filings. In all periods presented, current income tax provision and deferred income tax benefit have been computed for Match Group on an as if stand-alone, separate return basis. Match Group’s payments to IAC for its share of IAC’s consolidated federal and state tax return liabilities have been reflected within cash flows from operating activities in the accompanying consolidated and combined statement of cash flows.
U.S. and foreign earnings before income taxes are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
U.S. | $ | 143,286 |
| | $ | 109,457 |
| | $ | 168,661 |
|
Foreign | 108,839 |
| | 131,759 |
| | 30,044 |
|
Total | $ | 252,125 |
| | $ | 241,216 |
| | $ | 198,705 |
|
The components of the provision for income taxes are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Current income tax provision: | | | | | |
Federal | $ | (11,533 | ) | | $ | 44,782 |
| | $ | 73,604 |
|
State | (512 | ) | | 4,427 |
| | 7,193 |
|
Foreign | 26,444 |
| | 23,964 |
| | 5,672 |
|
Current income tax provision | 14,399 |
| | 73,173 |
| | 86,469 |
|
Deferred income tax benefit: | | | | | |
Federal | (102,337 | ) | | (2,119 | ) | | (14,173 | ) |
State | (15,731 | ) | | (280 | ) | | (1,090 | ) |
Foreign | (183 | ) | | (7,899 | ) | | (5,664 | ) |
Deferred income tax benefit | (118,251 | ) | | (10,298 | ) | | (20,927 | ) |
Income tax (benefit) provision | $ | (103,852 | ) | | $ | 62,875 |
| | $ | 65,542 |
|
The deferred tax asset for net operating losses (“NOLs”) was increased by $279.7 million for the year ended December 31, 2017 for excess tax deductions attributable to stock-based compensation. The related income tax benefit was recorded as a component of the deferred income tax benefit. The current income tax payable was reduced by $29.7 million and $38.4 million for the years ended December 31, 2016 and 2015, respectively, for excess tax deductions attributable to stock-based compensation. For the years ended December 31, 2016 and 2015, the related income tax benefits were recorded as increases to additional paid-in capital.
The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below. The valuation allowance is primarily related to deferred tax assets for net operating losses.
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Accrued expenses | $ | 4,327 |
| | $ | 7,428 |
|
Net operating loss carryforwards | 143,156 |
| | 24,907 |
|
Stock-based compensation | 13,236 |
| | 27,476 |
|
Other | 16,217 |
| | 8,242 |
|
Total deferred tax assets | 176,936 |
| | 68,053 |
|
Less valuation allowance | (24,795 | ) | | (23,411 | ) |
Net deferred tax assets | 152,141 |
| | 44,642 |
|
Deferred tax liabilities: | | | |
Intangible and other assets | (52,838 | ) | | (61,980 | ) |
Fixed assets | (3,164 | ) | | (2,276 | ) |
Other | (1,418 | ) | | (439 | ) |
Total deferred tax liabilities | (57,420 | ) | | (64,695 | ) |
Net deferred tax assets (liabilities) | $ | 94,721 |
| | $ | (20,053 | ) |
At December 31, 2017, the Company has federal and state net operating losses (“NOLs”) of $524.2 million and $217.4 million, respectively. If not utilized, the federal NOLs will expire in 2037, and the state NOLs will expire at various times primarily between 2027 and 2037. At December 31, 2017, the Company has foreign NOLs of $76.9 million available to offset future income. Of these foreign NOLs, $73.8 million can be carried forward indefinitely and $3.1 million will expire at various times between 2018 and 2027. During 2017, the Company recognized tax benefits related to NOLs of $134.7 million. At December 31, 2017, the Company has federal capital losses of $10.4 million. If not utilized, the capital losses will expire between 2021 and 2022. Utilization of capital losses will be limited to the Company’s ability to generate future capital gains.
At December 31, 2017, the Company has tax credit carryforwards of $8.1 million. Of this amount, $4.5 million relates to federal and state tax credits for research activities, $3.0 million relates to foreign tax credits and $0.6 million to various other credits. Of these credit carryforwards, $1.2 million can be carried forward indefinitely and $6.9 million will expire within twenty years.
The Company regularly assesses the realizability of deferred tax assets considering all available evidence, including, to the extent applicable, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, tax filing status, the duration of statutory carryforward periods, available tax planning and historical experience. As of December 31, 2017, the Company has a gross deferred tax asset of $131.5 million that the Company expects to fully utilize on a more likely than not basis.
During 2017, the Company’s valuation allowance increased by $1.4 million primarily due to an other-than-temporary impairment charges on a cost method investment and an increase in foreign tax loss carryforwards. At December 31, 2017, the Company has a valuation allowance of $24.8 million related to the portion of NOLs and other items for which it is more likely than not that the tax benefit will not be realized.
A reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows:
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Income tax provision at the federal statutory rate of 35% | $ | 88,244 |
| | $ | 84,425 |
| | $ | 69,547 |
|
Change in tax reserves, net | (443 | ) | | (1,049 | ) | | (595 | ) |
State income taxes, net of effect of federal tax benefit | 2,471 |
| | 2,804 |
| | 3,946 |
|
Foreign income taxed at a different statutory rate | (15,014 | ) | | (13,761 | ) | | (2,698 | ) |
Foreign rate change | (1,523 | ) | | (4,454 | ) | | — |
|
Transition tax | 23,748 |
| | — |
| | — |
|
Deferred tax adjustment for enacted changes in tax laws and rates | 68,594 |
| | — |
| | — |
|
Equity compensation | (278,343 | ) | | 3,247 |
| | 1,767 |
|
Non-taxable contingent consideration fair value adjustments | 1,839 |
| | (3,193 | ) | | (3,898 | ) |
Non-taxable foreign currency exchange gains and losses | 6,231 |
| | (6,837 | ) | | (3,776 | ) |
Other, net | 344 |
| | 1,693 |
| | 1,249 |
|
Income tax (benefit) provision | $ | (103,852 | ) | | $ | 62,875 |
| | $ | 65,542 |
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including penalties but excluding interest, is as follows:
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| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Balance at January 1 | $ | 25,913 |
| | $ | 24,908 |
| | $ | 10,935 |
|
Additions based on tax positions related to the current year | 697 |
| | 1,706 |
| | 2,903 |
|
Additions for tax positions of prior years | 1,104 |
| | 1,414 |
| | 12,846 |
|
Reductions for tax positions of prior years | (1,233 | ) | | (783 | ) | | (902 | ) |
Settlements | — |
| | (258 | ) | | — |
|
Expiration of applicable statute of limitations | (1,418 | ) | | (1,074 | ) | | (874 | ) |
Balance at December 31 | $ | 25,063 |
| | $ | 25,913 |
| | $ | 24,908 |
|
The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in the income tax provision. At both December 31, 2017 and 2016, the Company had accrued $1.8 million and $1.5 million, respectively, for the payment of interest. At December 31, 2017 and 2016, the Company had accrued $1.5 million and $1.6 million, respectively, for penalties.
Match Group is routinely under audit by federal, state, local and foreign authorities in the area of income tax as a result of previously filed separate company tax returns and consolidated tax returns with IAC. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service is currently auditing IAC’s federal income tax returns for the years ended December 31, 2010 through 2012, which includes the operations of Match Group. The statute of limitations for the years 2010 through 2012 has been extended to June 30, 2019, and the statute of limitations for the year 2013 has been extended to June 30, 2018. Various other jurisdictions are open to examination for tax years beginning with 2009. Income taxes payable include reserves considered sufficient to pay assessments that may result from examination of prior year tax returns. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Although management currently believes changes to reserves from period to period and differences between amounts paid, if any, upon resolution of issues raised in audits and amounts previously provided will not have a material impact on the liquidity, results of operations, or financial condition of the Company, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
At December 31, 2017 and 2016, unrecognized tax benefits, including interest, were $26.8 million and $27.4 million, respectively. At December 31, 2017 and 2016, approximately $17.6 million and $17.7 million, respectively, were included in unrecognized tax benefits for tax positions included in IAC’s consolidated tax return filings. If unrecognized tax benefits at December 31, 2017 are subsequently recognized, $25.3 million, net of related deferred tax assets and interest, would reduce income tax expense. The comparable amount as of December 31, 2016 was $25.9 million. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $9.8 million by December 31, 2018, primarily due to settlements and expirations of statutes of limitations.
On December 22, 2017, the U.S. enacted the Tax Act, which subjects to U.S. taxation certain previously deferred earnings of foreign subsidiaries as of December 31, 2017 (“Transition Tax”) and implements a number of changes that take effect on January 1, 2018, including but not limited to, a reduction of the U.S. federal corporate tax rate from 35% to 21% and a new minimum tax on GILTI earned by foreign subsidiaries. The Company’s income tax provision for the year ended December 31, 2017 includes expense of $92.3 million related to the Tax Act, of which, $23.7 million relates to the Transition Tax and a $68.6 million relates to the remeasurement of U.S. net deferred tax assets due to the reduction in the corporate income tax rate. The Company has sufficient current year net operating losses to offset the taxable income resulting from the Transition Tax and, therefore, will not be required to pay the one-time Transition Tax.
The Transition Tax on deemed repatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and has recorded a provisional transition tax expense of $23.7 million. Any adjustment of the Company’s provisional tax expense will be reflected as a change in estimate in its results in the period in which the change in estimate is made in accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. The Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax and expects to finalize its calculation prior to the filing of IAC’s U.S. federal tax return, which includes the operations of Match Group, which is due October 15, 2018. In addition, our estimates may also be impacted and adjusted as the law is clarified and additional guidance is issued at the federal and state levels.
As of December 31, 2017, the Company has $69.2 million in foreign cash that can be repatriated without any significant tax consequences as it has been substantially subjected to U.S. income tax under the Transition Tax imposed by the Tax Act. The Company has not provided for approximately $0.9 million of deferred taxes as the foreign cash earnings are indefinitely reinvested outside the U.S. The Company reassess its intention to remit or permanently reinvest these cash earnings each reporting period; any required adjustment to the income tax provision would be reflected in the period that the Company changes this judgment.