ncome Taxes
The components of income (loss) before provision for income taxes were as follows (in thousands): |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (204,352 | ) | | $ | 53,613 |
| | $ | 61,392 |
|
Foreign | 92,475 |
| | 80,505 |
| | 69,582 |
|
(Loss) income before provision for income taxes | $ | (111,877 | ) | | $ | 134,118 |
| | $ | 130,974 |
|
The components of income tax (expense) benefit were as follows (in thousands): |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal income taxes: | |
| | |
| | |
|
Current | $ | 6,299 |
| | $ | (30,247 | ) | | $ | (3,563 | ) |
Deferred | (18,731 | ) | | 16,936 |
| | (3,600 | ) |
Foreign income taxes: | |
| | |
| | |
|
Current | (18,030 | ) | | (10,347 | ) | | (5,805 | ) |
Deferred | 312 |
| | 5,178 |
| | (4,314 | ) |
State income taxes: | |
| | |
| | |
|
Current | (430 | ) | | (3,154 | ) | | (425 | ) |
Deferred | 3,988 |
| | 146 |
| | 3,780 |
|
Income tax benefit (expense) | $ | (26,592 | ) | | $ | (21,488 | ) | | $ | (13,927 | ) |
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain undistributed earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) introducing a new provision designed to tax global intangible low-taxed income ("GILTI"); (v) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (vi) creating the base erosion anti-abuse tax ("BEAT"), a new minimum tax; (vii) creating a new limitation on deductible interest expense; (viii) introducing limitations on the deductibility of certain executive compensation; and (ix) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, for the year ended December 31, 2017, the Company recognized income tax expense of $94.4 million comprised of (i) income tax expense of $37.5 million due to the re-measurement of net deferred tax assets; (ii) income tax expense of $63.1 million related to the accrual of the transition tax; (iii) net income tax benefit of $58.7 million from the reversal of previously accrued income taxes on the expected repatriation of foreign earnings (comprised of a $112.1 million reversal, net of $53.4 million accrual); and (iv) income tax expense of $52.6 million for the increase in the valuation allowance on the Company's net deferred tax assets. The accrual of the transition tax and the remeasurement of the net deferred tax assets are provisional and may be adjusted in future periods during 2018 when additional information is obtained. Additional information that may affect these provisional amounts would include, among others: (i) further clarification and guidance regarding how the IRS will implement the Tax Act, (ii) further clarifications and guidance regarding how state tax authorities will implement the Tax Act and the related effect on the Company's state income tax returns, and (iii) potential additional clarifications and guidance from the U.S. Securities and Exchange Commission or the FASB.
In December 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC Topic 740 - Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the Company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Reduction of U.S. Federal Corporate Income Tax Rate
The Tax Act lowered the federal corporate tax rate from 35% to 21%, effective January 1, 2018. As a result, for the year ended December 31, 2017, the Company recorded a decrease in related net deferred tax assets, with a corresponding increase in deferred income tax expense, of $37.5 million.
Deemed Repatriation Transition Tax
The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries. The Company has not yet completed its accounting for the effects of the Transition Tax. However, the Company has made a reasonable estimate, and in the three months and year ended December 31, 2017, recognized provisional income tax expense of $63.1 million. The Company computed this amount based on currently available information; however, there is still uncertainty as to the application of the Tax Act, in particular as it relates to state income taxes. Furthermore, the Company has not yet completed its analysis of the components of the computation, including the amount of the foreign earnings subject to the U.S. income tax, and the portion of foreign earnings held in cash or other specified assets. As a result of the accrual of the Transition Tax, the Company reversed deferred tax liabilities previously accrued on foreign earnings and recognized a net tax benefit of $58.7 million in the fourth quarter of 2017.
Global Intangible Low Taxed Income
The Tax Act created a new requirement related to global intangible low taxed income ("GILTI"). In particular, GILTI earned by controlled foreign corporations ("CFCs") must be included currently in the gross income of the CFC’s U.S. parent. GILTI is computed as the excess of the U.S. parent’s “net CFC tested income” over the net deemed intangible income return, which is currently defined as the excess of (i) 10% of the aggregate of the U.S. parent’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. parent over, and (ii) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
The Company's expectation for future U.S. taxable income inclusions of GILTI depends on (i) its current structure, (ii) estimated future results of its global operations, and (iii) its ability to modify its structure and/or business. The Company has not yet recorded any adjustments to its financial results relating to the potential impacts of the GILTI tax and has elected to record future GILTI impacts in the period in which the costs are incurred.
Actual income tax (expense) benefit differed from the amount computed by applying the U.S. federal tax rate of 35% to pre-tax income (loss) as a result of the following (in thousands): |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected income tax (expense) benefit at statutory rate | $ | 39,157 |
| | $ | (46,941 | ) | | $ | (45,844 | ) |
Increase (decrease) in income tax benefit (expense) resulting from: | | | | | |
Foreign income inclusion | (780 | ) | | (8,868 | ) | | (7,056 | ) |
Foreign earnings reinvestment assertion reversal (a) | 112,087 |
| | — |
| | — |
|
Foreign earnings reinvestment assertion accrual (a) | (53,421 | ) | | — |
| | — |
|
Changes in income tax valuation allowance (a) | (52,563 | ) | | 3,419 |
| | 31,929 |
|
Change in fair value of contingent tax-sharing obligation | 4,344 |
| | — |
| | — |
|
Share-based compensation | 8,901 |
| | 12,940 |
| | — |
|
Research and general business tax credits | 5,718 |
| | 4,063 |
| | 1,879 |
|
State and local taxes, net of federal benefit | 1,330 |
| | (745 | ) | | (4,184 | ) |
Capitalized transaction costs | (6,486 | ) | | — |
| | — |
|
Foreign rate differential | 16,778 |
| | 12,200 |
| | 11,490 |
|
Changes in reserve for uncertain tax positions | 947 |
| | 3,136 |
| | 4,375 |
|
Provision to tax return and other deferred tax adjustments | (536 | ) | | (1,524 | ) | | (5,322 | ) |
Goodwill impairment | — |
| | — |
| | (1,023 | ) |
Federal rate change (a) | (37,468 | ) | | — |
| | — |
|
Transition tax (a) | (63,050 | ) | | — |
| | — |
|
Other, net | (1,550 | ) | | 832 |
| | (171 | ) |
Income tax benefit (expense) | $ | (26,592 | ) | | $ | (21,488 | ) | | $ | (13,927 | ) |
(a) As a result of enactment of the Tax Act, during the fourth quarter of 2017 the Company recorded direct and indirect charges to income tax expense of $94.4 million which is comprised of the following line items noted in the table above: (i) foreign earnings reinvestment assertion reversal; (ii) foreign earnings reinvestment assertion accrual; (iii) change in income tax valuation allowance; (iv) federal rate change; and (v) transition tax.
Acquired Deferred Income Tax Assets and Liabilities
As a result of the Merger, the Company assumed a net deferred tax liability of approximately $11.4 million which consisted primarily of (i) a deferred tax liability of approximately $455.3 million related to temporary differences associated with amortization of intangible assets, (ii) a deferred tax liability of approximately $53.7 million related to unremitted foreign earnings, (iii) a deferred tax asset of approximately $444.0 million related to net operating loss (“NOL”) carryforwards, and (iv) a deferred tax asset of $50.6 million for deferred financing costs. The NOL carryforwards acquired in the Merger consisted of (i) $1.1 billion of U.S. federal NOL carryforwards, (ii) $1.0 billion of domestic state and local NOL carryforwards, and (iii) $66.8 million of foreign NOL carryforwards.
A portion of the NOL carryforwards acquired from inVentiv was generated prior to their acquisition by the Company and therefore is subject to ownership change provisions under Section 382 of the Internal Revenue Code (“Section 382”). Section 382 requires a corporation to limit the amount of its future periods taxable income that can be offset by historic NOL carryforwards and tax credit carryforwards in the event of an “ownership change”, as defined in Section 382. As a result of the Tax Act, the Company recorded a valuation allowance in 2017 due to uncertainties related to the Company’s ability to utilize some of the U.S. deferred tax assets associated with the NOL carryforwards discussed above. The valuation allowance is based on the Company’s estimate of taxable income in the U.S. and various state jurisdictions and the period over which the deferred income tax assets will be recoverable. Should the Company generate sufficient taxable income in future periods, the Company does not expect that the Section 382 limitations will significantly impact the Company’s ability to utilize its federal NOL carryforwards within the applicable expiration periods. Furthermore, the Company has assumed a contingent tax-sharing obligation related to certain pre-Merger transaction tax deductions. As the transaction tax deductions are realized through the utilization of certain acquired NOLs, the Company is obligated to make payments to the former stockholders of inVentiv. The amount of acquired NOLs subject to this contingent tax-sharing obligation is estimated to be approximately $187.8 million.
As a result of the Merger and associated debt financing, the Company re-evaluated and changed its assertion related to whether the Company would repatriate the majority of its undistributed foreign earnings. As a result of concluding that earnings of certain foreign subsidiaries would be repatriated, the Company recorded a corresponding deferred tax liability of $53.4 million. Furthermore, due to the accrual of the Transition Tax required by the Tax Act, the Company reversed the full balance of the deferred tax liability (including the deferred tax liability acquired as part of the Merger), resulting in a tax benefit of $112.1 million. As a result of the Transition Tax, the Company has approximately $649.4 million of previously taxed foreign earnings in the U.S., of which approximately $254.9 million will remain permanently reinvested in the foreign jurisdictions. These earnings are expected to be used to support the growth and working capital needs of the Company's foreign subsidiaries. The Company intends to repatriate its remaining foreign earnings of approximately $394.5 million and, as of December 31, 2017, has accrued anticipated withholding taxes.
The changes in the valuation allowance for deferred tax assets were as follows (in thousands): |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at the beginning of the period | $ | 5,238 |
| | $ | 16,731 |
| | $ | 48,660 |
|
Deferred tax assets assumed through business combinations | 101,527 |
| | — |
| | — |
|
Charged (credited) to income tax expense (a) | 52,563 |
| | (3,419 | ) | | (31,929 | ) |
Foreign tax credit conversion | — |
| | (6,707 | ) | | — |
|
Foreign currency exchange | — |
| | (890 | ) | | — |
|
Other adjustments (b) | 318 |
| | (477 | ) | | — |
|
Balance at the end of the period | $ | 159,646 |
| | $ | 5,238 |
| | $ | 16,731 |
|
| |
(a) | For the year ended December 31, 2017, charge to income tax expense was calculated at 21% federal income tax rate as enacted by the Tax Act. |
| |
(b) | Other adjustments denote the effects of write-offs and recoveries in various jurisdictions with no net tax impact. |
As of December 31, 2017, the valuation allowance increased by $154.4 million, which primarily consisted of (i) an increase of $52.6 million primarily as a result of recording a valuation allowance for U.S. federal and state deferred tax assets, and (ii) an increase of $101.5 million related to a valuation allowance acquired as a result of the Merger. Of this change to the valuation allowance, $52.6 million was charged to income tax expense during the fourth quarter of 2017.
As of December 31, 2017, the Company assessed both positive and negative evidence in evaluating whether it could support the recognition of its U.S. net deferred tax asset position or if a valuation allowance would be required. A significant piece of objective negative evidence that the Company considered was the cumulative loss over the three-year period ended December 31, 2017. This objective negative evidence was weighed against the subjective positive evidence available to the Company and it was determined that the positive evidence was not sufficient to overcome the substantial negative evidence. Therefore, the Company recorded a charge to income tax expense in the amount of $52.6 million for the net increase in the valuation allowance.
As of December 31, 2016, the Company released a portion of the valuation allowance primarily related to foreign deferred tax assets based on the Company's current and anticipated future earnings in certain foreign operations. The release of the valuation allowance resulted in an income tax benefit of $3.4 million during the year ended December 31, 2016.
As of December 31, 2015, the Company assessed both positive and negative evidence available to estimate whether future taxable income would be available to permit the use of the existing deferred tax assets. Accordingly, based on the Company achieving sustained profitability in 2015, the Company reevaluated its ability to consider other subjective evidence, such as the reliability of the Company's projections for future growth. The Company expected it would no longer need a significant portion of the valuation allowance related to these deferred tax assets. As a result of this change in assertion, the valuation allowance was released on the net deferred tax assets in the United States. The release of these valuation allowances resulted in an income tax benefit of $31.9 million during the year ended December 31, 2015.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows (in thousands): |
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | |
| | |
|
Net operating losses | $ | 308,606 |
| | $ | 12,607 |
|
Tax credits | 55,920 |
| | 4,690 |
|
Deferred revenue | 15,719 |
| | 4,630 |
|
Foreign exchange | 978 |
| | 10,430 |
|
Employee compensation and other benefits | 31,956 |
| | 18,382 |
|
Allowance for doubtful accounts | 1,975 |
| | 1,660 |
|
Deferred rent | 2,258 |
| | 729 |
|
Accrued liabilities | 9,306 |
| | 5,280 |
|
Other | 2,698 |
| | 68 |
|
Total deferred tax assets | 429,416 |
| | 58,476 |
|
Less: valuation allowance | (159,646 | ) | | (5,238 | ) |
Net deferred tax assets | 269,770 |
| | 53,238 |
|
Deferred tax liabilities: | |
| | |
|
Undistributed foreign earnings | (7,346 | ) | | — |
|
Foreign branch operations | (1,652 | ) | | (2,564 | ) |
Depreciation and amortization | (276,502 | ) | | (42,272 | ) |
Other | (1,918 | ) | | (1,971 | ) |
Total deferred tax liabilities | (287,418 | ) | | (46,807 | ) |
Net deferred tax assets (liabilities) | $ | (17,648 | ) | | $ | 6,431 |
|
As of December 31, 2017 and 2016, the Company had U.S. Federal NOL carryforwards, including those from inVentiv discussed above, of approximately $1.0 billion and $5.4 million, respectively. A valuation allowance has been established for jurisdictions where future benefit is uncertain. As of December 31, 2017, the Company established a full valuation allowance against the federal NOL carryforward balance.
As of December 31, 2017 and 2016, the Company had state NOL carryforwards, including those from inVentiv discussed above, of approximately $1.2 billion and $52.0 million, respectively, a portion of which will expire annually beginning in 2018. The Company also had foreign NOL carryforwards, including those from inVentiv discussed above, of $124.8 million and $54.3 million as of December 31, 2017 and 2016, respectively. A valuation allowance has been established for jurisdictions where the future benefit of the NOL carryforwards is uncertain.
The Company recognizes a tax benefit from any uncertain tax positions only if they are more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. Components of the reserve are classified as either a current or a long-term liability in the accompanying consolidated balance sheets based on when the Company expects each of the items to be settled.
The Company had gross unrecognized tax benefits, exclusive of associated interest and penalties, of approximately $43.7 million and $15.7 million as of December 31, 2017 and 2016, respectively. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had accrued interest and penalties related to uncertain tax positions of $5.0 million and $0.1 million, respectively. For the year ended December 31, 2017, the Company recorded in the accompanying consolidated statements of operations a tax expense of $0.9 million related to interest and penalties associated with uncertain tax positions. For the years ended December 31, 2016 and 2015, the Company recorded in the accompanying consolidated statements of operations a tax expense of $2.0 million, and $0.3 million, respectively, related to interest and penalties associated with uncertain tax positions. If recognized, the total amount of unrecognized tax benefits that would impact the effective tax rate is $21.2 million.
The Company anticipates that during the next 12 months, the unrecognized tax benefits will decrease by approximately $1.4 million. A reconciliation of the beginning and ending balances of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands): |
| | | |
Unrecognized tax benefits balance at December 31, 2014 | $ | 21,566 |
|
Lapse of statute of limitations | (2,106 | ) |
Increases for tax positions of prior years | 2,001 |
|
Decreases for tax positions of prior years | (1,594 | ) |
Impact of foreign currency translation | (837 | ) |
Unrecognized tax benefits balance at December 31, 2015 | 19,030 |
|
Lapse of statute of limitations | (1,446 | ) |
Increases for tax positions of prior years | 308 |
|
Decreases for tax positions of prior years | (2,275 | ) |
Impact of foreign currency translation | 121 |
|
Unrecognized tax benefits balance at December 31, 2016 | 15,738 |
|
Increases for tax positions in the current year | 191 |
|
Increases for tax positions of prior years | 27,974 |
|
Decreases for tax positions in prior year | (226 | ) |
Impact of foreign currency translation | 1 |
|
Unrecognized tax benefits at December 31, 2017 | $ | 43,678 |
|
Due to the geographic breadth of the Company's operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes which will be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, the Company will record additional income tax expense or benefit in the period in which such resolution occurs.
The Company remains subject to audit by the IRS and various state taxing jurisdictions back to 1998 due to NOL carryforwards. The Company's tax filings are open to investigation from 2014 forward in the United Kingdom, which is the jurisdiction of the Company's largest foreign operation.
inVentiv’s federal income tax return for tax year 2014 is currently under examination by the Internal Revenue Service. In addition, inVentiv’s income tax returns for various tax years are currently under examination by the respective tax authorities in Germany, India, and Japan. The Company believes that its reserve for uncertain tax positions is adequate to cover existing risks or exposures related to all open tax years.
Recently Adopted Accounting Standards
Effective January 1, 2017, the Company adopted new guidance under ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. For additional discussion of the new guidance, see "Note 1 - Basis of Presentation and Summary of Significant Accounting Policies" to the accompanying consolidated financial statements.