Income Taxes
The amounts of income from continuing operations before income taxes and equity in loss of equity method investee for the years ended November 30, 2017, 2016, and 2015, respectively, is as follows (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.K. | $ | (67.0 | ) | | $ | (55.4 | ) | | $ | 8.9 |
|
U.S. | 28.7 |
| | (96.4 | ) | | 26.1 |
|
Foreign | 410.4 |
| | 294.1 |
| | 202.8 |
|
Income from continuing operations before income taxes and equity in loss of equity method investee | $ | 372.1 |
| | $ | 142.3 |
| | $ | 237.8 |
|
The provision for income tax expense (benefit) from continuing operations for the years ended November 30, 2017, 2016, and 2015, respectively, is as follows (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
U.K. | $ | 0.4 |
| | $ | (4.3 | ) | | $ | 4.2 |
|
U.S. | (0.5 | ) | | (32.0 | ) | | (0.1 | ) |
Foreign | 50.3 |
| | 40.4 |
| | 37.2 |
|
Total current | 50.2 |
| | 4.1 |
| | 41.3 |
|
Deferred: | | | | | |
U.K. | (25.7 | ) | | (7.6 | ) | | (2.9 | ) |
U.S. | (35.3 | ) | | 4.4 |
| | 12.9 |
|
Foreign | (39.1 | ) | | (6.0 | ) | | (2.4 | ) |
Total deferred | (100.1 | ) | | (9.2 | ) | | 7.6 |
|
(Benefit) provision for income taxes | $ | (49.9 | ) | | $ | (5.1 | ) | | $ | 48.9 |
|
The following table presents the reconciliation of the provision (benefit) for income taxes between the U.K. rate for 2017 and 2016 and the U.S. tax rate for 2015, respectively, and our effective tax rate (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory tax at U.K. rate (19.3% and 20%, respectively) | $ | 71.9 |
| | $ | 28.4 |
| | $ | — |
|
Statutory tax at U.S. rate (35%) | — |
| | — |
| | 83.2 |
|
Foreign rate differential | (45.5 | ) | | (49.3 | ) | | (45.9 | ) |
Stock-based compensation | (61.2 | ) | | — |
| | — |
|
Tax law change | 1.2 |
| | (17.1 | ) | | (2.4 | ) |
Valuation allowance | (32.6 | ) | | 19.3 |
| | 12.4 |
|
Transaction costs | 4.5 |
| | 13.5 |
| | — |
|
Uncertain tax positions | 2.5 |
| | 7.3 |
| | 0.1 |
|
Other | 9.3 |
| | (7.2 | ) | | 1.5 |
|
(Benefit) provision for income taxes | $ | (49.9 | ) | | $ | (5.1 | ) | | $ | 48.9 |
|
Effective tax rate expressed as a percentage of pre-tax earnings | (13.4 | )% | | (3.6 | )% | | 20.5 | % |
We have not provided a deferred tax liability on approximately $3.9 billion of temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration. This amount includes $2.7 billion of U.S. earnings and $1.2 billion of non-U.S. earnings at November 30, 2017. Those earnings are considered to be indefinitely reinvested, and do not include earnings from certain subsidiaries which are considered distributed. Accordingly, no provision has been provided for those earnings. If we were to repatriate those earnings, in the form of dividends or otherwise, we would be subject to income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the complexity associated with the hypothetical calculation.
The significant components of deferred tax assets and liabilities as of November 30, 2017 and 2016 are as follows (in millions):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Deferred stock-based compensation | 119.6 |
| | 135.0 |
|
Loss and other carryforwards | 113.0 |
| | 187.2 |
|
Other | 109.2 |
| | 106.1 |
|
Gross deferred tax assets | 341.8 |
| | 428.3 |
|
Valuation allowance | (23.6 | ) | | (141.6 | ) |
Realizable deferred tax assets | 318.2 |
| | 286.7 |
|
Deferred tax liabilities: | | | |
Partnership investments | (11.5 | ) | | (74.2 | ) |
Property and equipment | (72.9 | ) | | (69.4 | ) |
Intangible assets | (1,063.2 | ) | | (1,084.7 | ) |
Other | (33.3 | ) | | (38.6 | ) |
Gross deferred tax liabilities | (1,180.9 | ) | | (1,266.9 | ) |
Net deferred tax liability | $ | (862.7 | ) | | $ | (980.2 | ) |
A significant portion of the net deferred tax liability included above relates to the tax effect of the step-up in value of Markit’s intangible assets as a result of the Merger.
As of November 30, 2017, we had loss carryforwards for tax purposes totaling approximately $285.5 million, comprised of $153.8 million of U.S. net operating loss carryforwards, $67.5 million of U.K. net operating loss carryforwards, and $64.2 million of foreign net operating loss carryforwards. If not used, the U.S. net operating loss carryforwards will begin to expire in 2018 and the U.K. and foreign net operating loss carryforwards generally may be carried forward indefinitely. We have analyzed the net operating losses and placed valuation allowances on those where we have determined the realization is not more likely than not to occur.
As of November 30, 2017, we had approximately $13.6 million of foreign tax credit (“FTC”) carryforwards and approximately $8.4 million of research and development (“R&D”) credit carryforwards in the U.S. If not used, the FTC carryforwards will expire between 2023 and 2026, and the R&D credit carryforwards will expire in 2036. We have analyzed the tax credits and placed valuation allowances on those where we have determined the realization is not more likely than not to occur.
The valuation allowance for deferred tax assets decreased by $118.0 million in 2017. The decrease is primarily due to changes in capital structure, which resulted in the elimination of tax attributes and the offsetting valuation allowance.
We have provided what we believe to be an appropriate amount of tax for items that involve interpretation of the tax law. However, events may occur in the future that will cause us to reevaluate our current reserves and may result in an adjustment to the reserve for taxes.
A summary of the activities associated with our reserve for unrecognized tax benefits, interest, and penalties follows (in millions):
|
| | | | | | | |
| Unrecognized Tax Benefits | | Interest and Penalties |
Balance at November 30, 2016 | $ | 9.2 |
| | $ | 0.6 |
|
Additions: | | | |
Current year tax positions | 0.3 |
| | — |
|
Prior year tax positions | 2.5 |
| | 0.7 |
|
Acquired unrecognized tax benefits | — |
| | — |
|
Decreases: | | | |
Lapse of statute of limitations | (0.8 | ) | | (0.1 | ) |
Prior year tax positions | (0.1 | ) | | — |
|
Balance at November 30, 2017 | $ | 11.1 |
| | $ | 1.2 |
|
As of November 30, 2017, the total amount of unrecognized tax benefits was $12.3 million, of which $1.2 million related to interest and penalties. We include accrued interest and accrued penalties related to amounts accrued for unrecognized tax benefits in our provision for income taxes. The entire amount of unrecognized benefits at November 30, 2017 may affect the annual effective tax rate if the benefits are eventually recognized.
It is reasonably possible that we will experience a $1.3 million decrease in the reserve for unrecognized tax benefits within the next 12 months. We would experience this decrease in relation to uncertainties associated with the expiration of applicable statutes of limitation.
We and our subsidiaries file federal, state, and local income tax returns in multiple jurisdictions around the world. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2013.
In December 2017, a law commonly known as the Tax Cuts and Jobs Act (“TCJA”) was enacted in the United States. Among other things, the TCJA reduces the U.S. corporate income tax rate to 21 percent and implements a new system of taxation for non-U.S. earnings, including by imposing a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries. We are currently evaluating the effects of the TCJA, including the one-time deemed repatriation tax and the remeasurement of our deferred tax assets and liabilities.