INCOME TAXES
On December 22, 2017, the U.S. TCJA legislation, as defined herein, was enacted into law, which significantly revises the Internal Revenue Code of 1986, as amended. The U.S. TCJA includes, among other items, (1) permanent reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; (2) limitations on the tax deduction for net interest expense to 30% of adjusted earnings; (3) a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (4) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base); and (5) modifying or repealing many other business deductions and credits (including modifications to annual foreign tax credit limitations).
We have assessed the impacts of the changes from the U.S. TCJA and recorded a provisional non-cash net tax charge of $107.8 million as of December 31, 2017. This provisional tax charge includes a one-time $81.1 million remeasurement of the net U.S. deferred tax assets to the lower enacted U.S. corporate tax rate of 21% and establishment of a valuation allowance of $26.1 million on certain interest and foreign tax credit carryforwards as a result of other provisions in the U.S. TCJA effective January 1, 2018. We intend to maintain this valuation allowance unless further regulatory guidance provides sufficient positive evidence to support the realizability of the deferred tax assets. Additionally, we recorded $0.6 million of withholding tax on unremitted earnings due to the implementation of the territorial tax system. At present, we do not estimate any material impacts from the repatriation tax. While we have completed our provisional analysis of the income tax effects of the U.S. TCJA, the related tax charge may differ, possibly materially, due to further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decisions we may take as a result of the new legislation. We will complete our analysis over the one-year measurement period from the enactment of the law as provided for by SAB 118, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.
Domestic and Foreign Components of Income Before Income Taxes
|
| | | | | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
Domestic | $ | 41.8 |
| $ | 27.9 |
| $ | (22.5 | ) |
Foreign | 147.8 |
| 54.8 |
| 180.4 |
|
Total | $ | 189.6 |
| $ | 82.7 |
| $ | 157.9 |
|
Provision (Benefit) for Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 |
| Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total |
U.S. federal | $ | 4.6 |
| $ | 102.8 |
| $ | 107.4 |
| $ | 0.9 |
| $ | (1.3 | ) | $ | (0.4 | ) | $ | — |
| $ | 17.8 |
| $ | 17.8 |
|
U.S. state and local | 1.7 |
| 0.4 |
| 2.1 |
| 3.7 |
| 8.2 |
| 11.9 |
| 3.1 |
| 8.5 |
| 11.6 |
|
Foreign | 43.9 |
| (11.5 | ) | 32.4 |
| 49.4 |
| (22.8 | ) | 26.6 |
| 65.2 |
| (32.5 | ) | 32.7 |
|
Total | $ | 50.2 |
| $ | 91.7 |
| $ | 141.9 |
| $ | 54.0 |
| $ | (15.9 | ) | $ | 38.1 |
| $ | 68.3 |
| $ | (6.2 | ) | $ | 62.1 |
|
Reconciliation to U.S. Statutory Rate
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 |
Statutory U.S. federal income tax rate (1) | $ | 66.4 |
| 35.0 | % | $ | 29.0 |
| 35.0 | % | $ | 55.2 |
| 35.0 | % |
Foreign income taxed at rates other than 35% | (56.2 | ) | (29.6 | ) | (45.6 | ) | (55.1 | ) | (41.4 | ) | (26.2 | ) |
Changes in valuation allowances | 45.3 |
| 23.9 |
| 9.6 |
| 11.6 |
| 34.4 |
| 21.8 |
|
Foreign exchange gain (loss), net | (17.7 | ) | (9.3 | ) | 3.1 |
| 3.7 |
| (10.5 | ) | (6.6 | ) |
Unrecognized tax benefits | 3.1 |
| 1.6 |
| 7.1 |
| 8.6 |
| 0.4 |
| 0.3 |
|
Foreign taxes | 4.1 |
| 2.2 |
| 4.5 |
| 5.4 |
| 5.8 |
| 3.7 |
|
Non-deductible interest | 9.8 |
| 5.2 |
| 6.7 |
| 8.1 |
| 4.9 |
| 3.1 |
|
Non-deductible expenses | 4.6 |
| 2.4 |
| 4.7 |
| 5.7 |
| 5.5 |
| 3.5 |
|
Tax credits | (4.2 | ) | (2.2 | ) | (6.7 | ) | (8.1 | ) | (5.5 | ) | (3.5 | ) |
Excess tax benefits relating to share-based compensation | (13.1 | ) | (6.9 | ) | (13.4 | ) | (16.2 | ) | — |
| — |
|
Venezuela deconsolidation and impairment | (2.0 | ) | (1.1 | ) | 23.8 |
| 28.8 |
| 10.7 |
| 6.8 |
|
U.S. state and local taxes, net | 1.3 |
| 0.7 |
| 7.8 |
| 9.4 |
| 8.1 |
| 5.1 |
|
U.S. tax reform (2) | 107.8 |
| 56.9 |
| — |
| — |
| — |
| — |
|
Other - net | (7.3 | ) | (4.0 | ) | 7.5 |
| 9.2 |
| (5.5 | ) | (3.7 | ) |
Total income tax provision / effective tax rate | $ | 141.9 |
| 74.8 | % | $ | 38.1 |
| 46.1 | % | $ | 62.1 |
| 39.3 | % |
| |
(1) | The U.S. statutory rate has been used as management believes it is more meaningful to the Company. |
| |
(2) | Provisional net tax effect of the U.S. TCJA. |
|
| | | | | | |
Deferred Tax Balances | Year Ended December 31, |
| 2017 | 2016 |
Deferred tax asset | | |
Tax loss, credit and interest carryforwards | $ | 265.3 |
| $ | 263.7 |
|
Goodwill and intangibles | — |
| 48.1 |
|
Compensation and employee benefits | 86.0 |
| 92.8 |
|
Accruals and other reserves | 33.9 |
| 40.0 |
|
Research and development capitalization | 8.9 |
| 15.7 |
|
Equity investment and other securities | 26.4 |
| (0.7 | ) |
Other | 10.9 |
| 16.4 |
|
Total deferred tax assets | 431.4 |
| 476.0 |
|
Less: Valuation allowance | (214.2 | ) | (135.4 | ) |
Net deferred tax assets | 217.2 |
| 340.6 |
|
Deferred tax liabilities | | |
Goodwill and intangibles | (15.2 | ) | — |
|
Property, plant and equipment | (146.9 | ) | (168.4 | ) |
Unremitted earnings | (7.4 | ) | (5.8 | ) |
Long-term debt | (2.2 | ) | (4.2 | ) |
Total deferred tax liabilities | (171.7 | ) | (178.4 | ) |
Net deferred tax asset | $ | 45.5 |
| $ | 162.2 |
|
Non-current assets | 198.4 |
| 322.4 |
|
Non-current liability | (152.9 | ) | (160.2 | ) |
Net deferred tax asset | $ | 45.5 |
| $ | 162.2 |
|
At December 31, 2017, the Company had $176.4 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions, net of uncertain tax positions. Of these, $84.9 million have indefinite carryforward periods, and the remaining $91.5 million are subject to expiration between the years 2020 through 2026. Non-U.S. tax credit carryforwards at December 31, 2017 amounted to $1.8 million. Of these, $1.5 million have indefinite carryforward period, and the remaining are subject to expiration between the years 2020 and 2022.
In the U.S., there were approximately $37.2 million of federal net operating loss carryforwards (tax effected) subject to expiration in years beyond 2032, and $2.7 million of state net operating loss carryforwards (tax effected) subject to expiration between the years 2018 and 2037. U.S. tax credit carryforwards at December 31, 2017 amounted to $34.8 million subject to expiration between the years 2019 and 2037. U.S. interest carryforwards at December 31, 2017 of $12.4 million have an indefinite carryforward period. Utilization of our U.S. net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization.
At December 31, 2016, the Company had $152.8 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions, net of uncertain tax positions. Of these, $63.2 million have indefinite carryforward periods, and the remaining $89.6 million are subject to expiration between the years 2018 through 2026. Non-U.S. tax credit carryforwards at December 31, 2016 amounted to $1.9 million. Of these, $1.8 million have indefinite carryforward period, and the remaining are subject to expiration between the years 2018 and 2021.
In the U.S., there were approximately $62.8 million of federal net operating loss carryforwards (tax effected) subject to expiration in years beyond 2032, and $2.5 million of state net operating loss carryforwards (tax effected) subject to expiration between the years 2018 and 2036. U.S. tax credit carryforwards at December 31, 2016 amounted to $26.0 million subject to expiration between the years 2019 and 2036. U.S. interest carryforwards at December 31, 2015 of $17.7 million have an indefinite carryforward period. Utilization of our U.S. net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization.
Valuation allowances relate primarily to the increase in tax loss carryforwards and equity investment in foreign jurisdictions where the Company does not believe the associated net deferred tax assets will be realized, due to expiration, limitation or insufficient future taxable income. Of the $214.2 million valuation allowance at December 31, 2017, $188.1 million pertains to certain non-U.S. jurisdictions. A significant portion of the non-U.S. valuation allowance balance relates to the Company’s operations in Luxembourg and the Netherlands, which amount to $155.7 million and $113.8 million for years ended December 31, 2017 and December 31, 2016, respectively. In the Netherlands, the Company’s tax loss carryforwards have a nine-year carryforward period and are subject to expiration between years 2022 through 2026. In Luxembourg, the Company’s tax loss carryforwards have an indefinite carryforward period.
The remaining $26.1 million valuation allowance relates to certain U.S. interest and foreign tax credit carryforwards that were impacted by the enactment of the U.S. TCJA and discussed in more detail above.
Total Gross Unrecognized Tax Benefits |
| | | | | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
Balance at January 1 | $ | 12.3 |
| $ | 4.7 |
| $ | 5.3 |
|
Increases related to positions taken on items from prior years | 1.9 |
| — |
| — |
|
Decreases related to positions taken on items from prior years | — |
| (0.2 | ) | (0.6 | ) |
Increases related to positions taken in the current year | 3.0 |
| 7.8 |
| — |
|
Balance at December 31 | $ | 17.2 |
| $ | 12.3 |
| $ | 4.7 |
|
At December 31, 2017, 2016 and 2015, the total amount of gross unrecognized tax benefits was $17.2 million, $12.3 million and $4.7 million, of which $9.7 million, $8.5 million and $4.7 million would impact the effective tax rate, if recognized, respectively.
Interest and penalties associated with gross unrecognized tax benefits are included as components of the "Provision (benefit) for income taxes," and totaled an income tax expense of $0.1 million, $0.3 million and $0.4 million in 2017, 2016 and 2015, respectively. Accrued interest and penalties are included within the related tax liability line in the balance sheet. The Company’s accrual for interest and penalties at December 31, 2017, 2016 and 2015 was $1.2 million, $1.1 million and $0.7 million, respectively.
The Company is subject to income tax in approximately 47 jurisdictions outside the U.S. The Company’s significant operations outside the U.S. are located in Belgium, China, Germany and Mexico. The statute of limitations varies by jurisdiction with 2007 being the oldest tax year still open in the material jurisdictions. The Company is currently under audit in certain jurisdictions for tax years under responsibility of the predecessor, as well as tax periods under the Company's ownership. Pursuant to the acquisition agreement, all tax liabilities related to tax years prior to 2013 acquisition will be indemnified by DuPont.
As of December 31, 2017, 2016 and 2015, we had gross unrecognized tax benefits of $18.4 million, $13.4 million and $5.4 million, respectively, including interest and penalties. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.