8. INCOME TAXES
The Company is subject to federal, state and local income taxes in the United States, as well as income taxes in Canada, Mexico and other foreign jurisdictions. The domestic (United States) and foreign components of the Company's income (loss) before income taxes were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Domestic (United States) | $ | (18.0 | ) | | $ | 27.6 |
| | $ | 46.6 |
|
Foreign | 16.1 |
| | 13.2 |
| | (1.7 | ) |
Income (loss) before income taxes | $ | (1.9 | ) | | $ | 40.8 |
| | $ | 44.9 |
|
Income tax expense (benefit) in the Consolidated Statements of Operations consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Current Provision: | | | | | |
U.S. Federal | $ | 4.8 |
| | $ | 3.6 |
| | $ | — |
|
U.S. State | 1.5 |
| | 1.5 |
| | 1.7 |
|
Foreign | 3.2 |
| | 3.6 |
| | 1.6 |
|
Total current income tax expense | $ | 9.5 |
| | $ | 8.7 |
| | $ | 3.3 |
|
| | | | | |
Deferred, net: | | | | | |
U.S. Federal | $ | 16.3 |
| | $ | 9.6 |
| | $ | 14.8 |
|
U.S. State | (2.7 | ) | | 1.9 |
| | 0.5 |
|
Foreign | (11.7 | ) | | (0.4 | ) | | (0.4 | ) |
Total deferred, net | $ | 1.9 |
| | $ | 11.1 |
| | $ | 14.9 |
|
Provision for income tax expense (benefit) | $ | 11.4 |
| | $ | 19.8 |
| | $ | 18.2 |
|
Reconciliation between the federal statutory rate and the effective tax rate is as follows (see Note 9, Related Party Transactions for additional information related to the Tax Receivable Agreement): |
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Income (loss) before income taxes | $ | (1.9 | ) | | $ | 40.8 |
| | $ | 44.9 |
|
Statutory U.S. income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax expense using statutory U.S. income tax rate | $ | (0.7 | ) | | $ | 14.3 |
| | $ | 15.7 |
|
Foreign income tax rate differential | (1.4 | ) | | (1.1 | ) | | 0.2 |
|
State tax (net of federal benefit) | (0.5 | ) | | 2.8 |
| | 1.6 |
|
Non-deductible expenses | 2.2 |
| | 2.3 |
| | 1.5 |
|
Tax Receivable Agreement (a) | (3.8 | ) | | 1.6 |
| | 0.7 |
|
Tax credits (b) | (4.0 | ) | | — |
| | — |
|
Foreign exchange loss (c) | — |
| | — |
| | (1.2 | ) |
Impact of U.S. Tax Act (Federal and State) | 30.2 |
| | — |
| | — |
|
Change in valuation allowance - U.S. Federal and State (d) | — |
| | — |
| | (0.8 | ) |
Change in valuation allowance - Foreign | (13.7 | ) | | (0.5 | ) | | 1.7 |
|
Goodwill impairment | 2.1 |
| | — |
| | 0.7 |
|
Foreign taxes | 0.7 |
| | 0.5 |
| | 0.1 |
|
Other (e) | 0.3 |
| | (0.1 | ) | | (2.0 | ) |
Income tax provision (benefit) | $ | 11.4 |
| | $ | 19.8 |
| | $ | 18.2 |
|
Effective income tax rate | (600.0 | )% | | 48.5 | % | | 40.5 | % |
(a) Includes a $4.7 million tax rate benefit for the federal tax rate change as part of the Tax Act and a $0.9 million tax rate increase for other fair value changes in 2017.
(b) Includes a $3.1 million benefit for credits related to foreign taxes and research and experimentation activities recognized in conjunction with the third quarter of 2017 filing of Veritiv’s 2016 U.S. federal tax return and amended 2015 and 2014 U.S. federal tax returns.
(c) Recognition of a 2015 U.S. tax benefit with respect to a foreign exchange loss on the capitalization of an intercompany loan with the Company's Canadian subsidiary.
(d) Increase in Section 382 limitation resulting from recognition of 2015 built-in gains.
(e) In 2015, Other primarily relates to tax benefits related to uncertain tax positions, taxes allocated to comprehensive income, adjustments for prior year tax matters and fuel tax credits.
The Tax Act was signed into law on December 22, 2017. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%, implementation of a territorial tax system and a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. Veritiv recognized the tax effects of the Tax Act in the year ended December 31, 2017 and recorded $30.2 million in provisional tax expense, of which $23.0 million related primarily to the remeasurement of the Company's deferred taxes to the 21% tax rate and $7.2 million related to the one-time transition tax.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. 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. In accordance with SAB 118, the Company has determined that remeasurement of its deferred tax assets and liabilities, one-time transition tax, impact of the Tax Act on state taxes, and tax liability associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis are provisional amounts and reasonable estimates at December 31, 2017. The impact of the Tax Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, completion of the Company's 2017 U.S. federal and state tax returns in 2018, completion of earnings and profits and foreign income tax calculations for the Company's non-U.S. subsidiaries, and actions the Company may take as a result of the Tax Act. Additional work is necessary for a more detailed analysis of Veritiv's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. The Company has not accounted for the tax impacts related to the Global Intangible Low Tax Income (GILTI), Base Erosion Anti Abuse Tax or Foreign Derived Intangible Income regimes or any of the other provisions of the Tax Act that are not effective until fiscal year 2018. Additionally, the Company has not concluded on any applicable accounting policy election associated with GILTI. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete.
Deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 |
(in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Deferred income tax assets: | | | | | | | |
Accrued compensation | $ | 11.6 |
| | $ | 0.2 |
| | $ | 17.7 |
| | $ | 0.1 |
|
Financing obligations to related party | 47.3 |
| | 0.8 |
| | 77.5 |
| | 0.8 |
|
Goodwill and other intangibles, net | 1.9 |
| | — |
| | 4.6 |
| | — |
|
Long-term compensation | 21.3 |
| | 4.1 |
| | 21.2 |
| | 3.8 |
|
Net operating losses and credit carryforwards | 44.9 |
| | 11.8 |
| | 74.1 |
| | 13.6 |
|
Allowance for doubtful accounts | 10.0 |
| | 0.1 |
| | 11.9 |
| | — |
|
Other | 5.6 |
| | 0.6 |
| | 3.5 |
| | 0.8 |
|
Gross deferred income tax assets | 142.6 |
| | 17.6 |
| | 210.5 |
| | 19.1 |
|
Less valuation allowance | (4.7 | ) | | (3.6 | ) | | (6.5 | ) | | (18.1 | ) |
Total deferred tax asset | 137.9 |
| | 14.0 |
| | 204.0 |
| | 1.0 |
|
Deferred income tax liabilities: | | | | | | | |
Property and equipment, net | (54.2 | ) | | — |
| | (86.7 | ) | | — |
|
Inventory reserve | (33.5 | ) | | — |
| | (48.2 | ) | | — |
|
Other | (4.6 | ) | | — |
| | (8.3 | ) | | — |
|
Total deferred tax liability | (92.3 | ) | | — |
| | (143.2 | ) | | — |
|
Net deferred income tax asset | $ | 45.6 |
| | $ | 14.0 |
| | $ | 60.8 |
| | $ | 1.0 |
|
Deferred income tax asset valuation allowance is as follows:
|
| | | | | | | | | | | |
(in millions) | U.S. | | Non-U.S. | | Total |
Balance at December 31, 2015 | $ | 6.3 |
| | $ | 15.5 |
| | $ | 21.8 |
|
Additions | 0.2 |
| | 3.4 |
| | 3.6 |
|
Subtractions | — |
| | (0.9 | ) | | (0.9 | ) |
Currency translation adjustments | — |
| | 0.1 |
| | 0.1 |
|
Balance at December 31, 2016 | 6.5 |
| | 18.1 |
| | 24.6 |
|
Additions | — |
| | 0.2 |
| | 0.2 |
|
Subtractions (a) | (1.8 | ) | | (16.0 | ) | | (17.8 | ) |
Currency translation adjustments | — |
| | 1.3 |
| | 1.3 |
|
Balance at December 31, 2017 | $ | 4.7 |
| | $ | 3.6 |
| | $ | 8.3 |
|
(a) Includes a $13.4 million benefit for release of the valuation allowance against net deferred tax assets in Canada reflecting the Company’s cumulative recent income and improved expectation of future taxable income.
The Merger resulted in a significant change in the ownership of the Company, which, pursuant to the Internal Revenue Code Section 382, imposes annual limits on the Company’s ability to utilize its U.S. federal and state net operating loss carryforwards ("NOLs"). The Company’s NOLs will continue to be available to offset taxable income (until such NOLs are either utilized or expire) subject to the Section 382 annual limitation. This limitation is increased for built-in gains recognized within a 60-month period following the ownership change to the extent of total unrealized built-in gains. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years.
In general, it is the practice and intention of Veritiv to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2017, Veritiv’s tax basis exceeded its financial reporting basis in certain investments in non-U.S. subsidiaries. The Company does not believe these temporary differences will reverse in the foreseeable future and, therefore, no deferred tax asset has been recognized with respect to these basis differences. Additionally, no deferred tax liability has been recognized for income and withholding tax liabilities associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis. The provisional estimate of such temporary differences totaled approximately $25.8 million as of December 31, 2017. The provisional estimate of income and withholding tax liability associated with these temporary differences is immaterial. Veritiv will record the tax effects of any change in its prior provisional estimates, with respect to these investments, and disclose any unrecognized deferred tax impact for temporary differences related to its foreign investments, if practicable, in the period that it is first able to determine a change, but no later than December 31, 2018.
Veritiv applies a "more likely than not" threshold to the recognition and de-recognition of uncertain tax positions. A change in judgment related to prior years' uncertain tax positions is recognized in the period of such change.
The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. Total gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015, as well as activity within each of the years, was not material.
In the U.S., Veritiv is generally subject to examination by the Internal Revenue Service ("IRS") for fiscal years 2014 and later and certain states for fiscal years 2013 and later; however, it may be subject to IRS and state tax authority adjustments for years prior to 2014 to the extent of losses or other tax attributes carrying forward from the earlier years. Veritiv Canada remains subject to examination by the Canadian Revenue Agency and certain provinces for fiscal years 2012 and later.
As of December 31, 2017, Veritiv has federal, state and foreign income tax NOLs available to offset future taxable income of $167.1 million, $165.5 million and $49.2 million, respectively, which will expire at various dates from 2018 through 2035, with the exception of certain foreign NOLs that do not expire but have a full valuation allowance.