19.INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
(In millions) |
|
Income Before Taxes | | | | | |
United States | $ | 28.8 |
| | $ | 61.6 |
| | $ | 41.7 |
|
Foreign | 223.9 |
| | 217.1 |
| | 181.2 |
|
Total | $ | 252.7 |
| | $ | 278.7 |
| | $ | 222.9 |
|
The following table shows the components of the provision for income taxes:
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
(In millions) | |
Current Tax Provision | | | | | |
Federal | $ | 2.4 |
| | $ | — |
| | $ | — |
|
State | 0.6 |
| | 0.6 |
| | 0.5 |
|
Foreign | 47.0 |
| | 58.3 |
| | 31.6 |
|
| 50.0 |
| | 58.9 |
| | 32.1 |
|
Deferred Tax Provision | | | | | |
Federal | 1.1 |
| | 1.3 |
| | 1.4 |
|
State | 0.1 |
| | 0.1 |
| | 0.1 |
|
Foreign | 1.6 |
| | (1.5 | ) | | (1.9 | ) |
| 2.8 |
| | (0.1 | ) | | (0.4 | ) |
Income Tax Provision | $ | 52.8 |
| | $ | 58.8 |
| | $ | 31.7 |
|
Income tax expense (benefit) differs from the expected amounts based on the statutory U.S. federal tax rate for the years ended September 30, 2017, 2016 and 2015 as follows:
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
(In millions) | |
U.S. federal tax | $ | 88.4 |
| | $ | 97.5 |
| | $ | 78.0 |
|
State taxes, net of federal benefit | 0.5 |
| | 2.2 |
| | 1.3 |
|
Foreign tax differentials | (34.7 | ) | | (30.7 | ) | | (37.4 | ) |
U.S. taxes on foreign earnings | (0.3 | ) | | 4.7 |
| | (2.0 | ) |
Other credit and incentives | (0.8 | ) | | (0.8 | ) | | (0.7 | ) |
Valuation allowance | 0.9 |
| | (19.2 | ) | | (6.2 | ) |
Other | (1.2 | ) | | 5.1 |
| | (1.3 | ) |
Income Tax Expense (Benefit) | $ | 52.8 |
| | $ | 58.8 |
| | $ | 31.7 |
|
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate of 35.0%. Foreign earnings are subject to local country tax rates that are generally below the 35.0% U.S. federal statutory rate. As a result, our effective non-U.S. tax rate is typically lower than the U.S. statutory rate. If foreign pre-tax earnings increase relative to U.S. pre-tax earnings, this rate difference could increase. The primary jurisdictions in which we earn pre-tax earnings subject to lower foreign taxes than the U.S. statutory rate include South Korea, China, Taiwan, and Singapore. As substantially all of our undistributed earnings are in countries with a statutory tax rate of 17% or higher, we do not generate a disproportionate amount of taxable income in countries with very low tax rates. U.S. taxes on foreign earnings include the cost of foreign withholding taxes imposed on dividends paid to U.S. shareholders.
We have certain foreign subsidiaries that were granted seven-year tax holidays, the majority of which expired during the year ending September 30, 2017. The tax benefit of the holidays is reduced by 50% in the last two years of the holiday period. The net benefit of the tax holidays was $8.0 million, $7.1 million, and $9.6 million in 2017, 2016 and 2015, respectively.
We maintained a valuation allowance in 2015 and 2016 against U.S. deferred tax accounts resulting primarily from restructuring charges taken in prior periods, as we determined that it was more likely than not that U.S. deferred tax assets would not be realized. These deferred tax assets related primarily to net operating loss and tax credit carryforwards derived from the stand-alone basis calculation. The valuation allowance benefits in 2015 and 2016 shown in the table above relate to the utilization of federal net operating losses as a result of favorable operations. These net operating losses and tax credit carryforwards were utilized against Air Products’ income and are not available as future deductions on Versum tax returns. The current period effective tax rate, therefore, includes no valuation allowance benefit related to U.S. deferred tax assets. The valuation allowance cost for 2017 relates to certain foreign tax credits accrued outside the U.S.
The significant components of deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| September 30, |
| 2017 | | 2016 |
(In millions) |
| | |
Gross Deferred Tax Assets | | | |
Tax loss carryforwards | $ | 0.5 |
| | $ | 13.2 |
|
Tax credit carryforwards | 0.9 |
| | 64.2 |
|
Retirement benefits and compensation accruals | 10.9 |
| | 7.6 |
|
Reserves and accruals | 1.6 |
| | 8.4 |
|
Other | 1.5 |
| | 3.3 |
|
Valuation allowance | (0.9 | ) | | (55.6 | ) |
Deferred Tax Assets | 14.5 |
| | 41.1 |
|
Gross Deferred Tax Liabilities | | | |
Intangible assets | 9.1 |
| | 41.0 |
|
Plant and equipment | 22.9 |
| | 22.2 |
|
Unremitted earnings of foreign entities | 0.7 |
| | 2.3 |
|
Partnership investments | 0.8 |
| | 1.3 |
|
Other | 0.2 |
| | 6.3 |
|
Deferred Tax Liabilities | 33.7 |
| | 73.1 |
|
Net Deferred Income Tax Liability | $ | 19.2 |
| | $ | 32.0 |
|
Deferred tax assets and liabilities are included within the Annual Consolidated Financial Statements as follows:
|
| | | | | | | |
| September 30, |
| 2017 | | 2016 |
(In millions) |
|
Other non-current assets | $ | 18.1 |
| | $ | 10.8 |
|
Deferred tax liabilities | 37.3 |
| | 42.8 |
|
Net Deferred Income Tax Liability | $ | 19.2 |
| | $ | 32.0 |
|
As discussed in Note 1, the Separation of Versum from Air Products was completed on October 1, 2016. In connection with the Separation and as a result of the change from the separate return method under the carve-out financial statements, Versum adjusted certain current and deferred tax accounts, including a net decrease in deferred tax liabilities of approximately $17.5 million and a net increase in tax payable of approximately $13.0 million. The federal and state tax carryforwards and credits resulting from the stand-alone basis calculation were utilized against Air Products’ income and are not available as future deductions on tax returns. As such they were not transferred as part of the Separation from Air Products, and the related deferred tax assets and valuation allowance were removed. The decrease in net deferred tax liabilities was related primarily to deferred tax assets created in the Separation that were not recorded in the carve-out financial statements. The increase in tax payable was related primarily to taxes payable in entities shared with Air Products prior to the Separation, the liability for which was not included in the carve-out financial statements. The Company paid $42.9 million of cash income taxes during the fiscal year ended September 30, 2017.
We have no federal foreign tax credit and research credit carryforwards as of September 30, 2017. Gross foreign loss carryforwards as of September 30, 2017 were $1.5 million, and expire in 2026.
The valuation allowance as of September 30, 2017 is related to the tax benefit of foreign tax credits accrued in jurisdictions outside the U.S. The $54.7 million decrease in the valuation allowance was primarily due to change from the separate return method under the carve-out financial statements. As of September 30, 2017, we believed it would be more likely than not that future earnings and reversal of deferred tax liabilities would be sufficient to utilize the deferred tax asset reflected on the financial statements, net of existing valuation allowance.
We record U.S. income and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. These cumulative undistributed earnings that were considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures is estimated to be $1,070.8 million as of September 30, 2017. An estimated $196.2 million in U.S. income and foreign withholding taxes would be due if these earnings were remitted as dividends.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| Year Ended September 30, |
(In millions) | 2017 | | 2016 | | 2015 |
Unrecognized Tax Benefits | | | | | |
Balance at beginning of year | $ | 12.9 |
| | $ | 10.3 |
| | $ | 16.0 |
|
Additions for tax positions for the current year | 2.1 |
| | 1.9 |
| | 1.6 |
|
Additions for tax positions of prior years | 5.2 |
| | 1.0 |
| | 0.1 |
|
Reductions for tax positions of prior years | (0.2 | ) | | (0.1 | ) | | (4.7 | ) |
Statute of limitations expiration | (0.1 | ) | | (0.2 | ) | | (2.7 | ) |
Balance at End of Year | $ | 19.9 |
| | $ | 12.9 |
| | $ | 10.3 |
|
At September 30, 2017 and 2016, we had $19.9 million and $12.9 million of unrecognized tax benefits of which $19.9 million and $12.6 million, respectively, would impact the tax rate, if recognized. Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made at this time.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below: |
| |
| Open Tax Years |
Major Tax Jurisdiction | |
United States | 2017 |
China | 2007-2017 |
South Korea | 2010-2017 |
Taiwan | 2012-2017 |