Income Taxes
The Company is a Bermuda exempted company. Bermuda does not impose a corporate income tax. The Company is subject to taxation in certain foreign jurisdictions on a portion of its income attributable to such jurisdictions. The two main subsidiaries of Triton are TCIL and TAL. TCIL is a Bermuda exempted company and therefore no income tax is imposed. However, a portion of TCIL income is subject to taxation in the U.S. and certain other foreign jurisdictions. TAL is a U.S. company and therefore is subject to taxation in the U.S.
Effects of the Tax Cuts and Jobs Act
U.S. income tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. Though certain key aspects of the new law are effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for calendar year companies until January 1, 2018.
The Tax Act reduced the U.S. Corporate income tax rate from 35 percent to 21 percent which resulted in the Company recognizing a one-time income tax benefit of $139.4 million in the fourth quarter of 2017 to re-measure deferred tax assets and liabilities that will reverse at the new 21 percent rate.
Given the significance of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. The Company has recorded amounts for the effects of the change in the tax law pursuant to SAB 118.
Other significant provisions that are not yet effective but may impact income taxes in future years include: limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, a limitation of net operating losses generated after fiscal year 2017 to 80 percent of taxable income, and an incremental tax (base erosion anti-abuse tax or BEAT) on excessive amounts paid to foreign related parties. If any of these or other provisions impact income taxes in future years, the impact will be recorded in the financial statements in the period incurred, which is consistent with the general principles of measurement and recognition of deferred taxes in accordance with ASC 740, Accounting for Income Taxes.
The following table summarizes the Company's income tax (benefit) expense as follows (in thousands):
|
| | | | | | | | | | | |
| December 31,
2017 | | December 31, 2016 | | December 31, 2015 |
Current taxes: | | | | | |
Bermuda | $ | — |
| | $ | — |
| | $ | — |
|
U.S. | 36 |
| | (80 | ) | | 487 |
|
Foreign | 839 |
| | 841 |
| | 208 |
|
| $ | 875 |
| | $ | 761 |
| | $ | 695 |
|
Deferred taxes: | | | | | |
Bermuda | $ | — |
| | $ | — |
| | $ | — |
|
U.S. | (94,079 | ) | | (709 | ) | | 3,327 |
|
Foreign | (70 | ) | | (100 | ) | | 26 |
|
| (94,149 | ) | | (809 | ) | | 3,353 |
|
Total income tax (benefit) expense | $ | (93,274 | ) | | $ | (48 | ) | | $ | 4,048 |
|
Note 12—Income Taxes (continued)
The following table summarizes the components of income (loss) before income taxes as follows (in thousands):
|
| | | | | | | | | | | |
| December 31,
2017 | | December 31, 2016 | | December 31, 2015 |
Bermuda sources | $ | (4,011 | ) | | $ | — |
| | $ | — |
|
U.S. sources | 125,799 |
| | (7,451 | ) | | 10,985 |
|
Foreign sources | 138,464 |
| | 1,618 |
| | 120,732 |
|
Income (loss) before income taxes | $ | 260,252 |
| | $ | (5,833 | ) | | $ | 131,717 |
|
The following table summarizes the difference between the Bermuda statutory income tax rate and the effective tax rate on the consolidated statements of operations as follows:
|
| | | | | | | | |
| December 31,
2017 | | December 31, 2016 | | December 31, 2015 |
Bermuda tax rate | — | % | | — | % | | — | % |
Change in enacted tax rate | (53.55 | )% | | — | % | | — | % |
U.S. income taxed at other than the statutory rate | 17.10 | % | | 41.68 | % | | 3.01 | % |
Effect of uncertain tax positions | 0.21 | % | | (10.16 | )% | | — | % |
Foreign income taxed at other than the statutory rate | 0.10 | % | | (4.15 | )% | | 0.23 | % |
Effect of permanent differences | 0.04 | % | | (1.58 | )% | | 0.05 | % |
Other discrete items | 0.26 | % | | (24.97 | )% | | (0.22 | )% |
Effective income tax rate | (35.84 | )% | | 0.82 | % | | 3.07 | % |
The following table summarizes the deferred income tax assets and liabilities as follows (in thousands):
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred income tax assets: | | | |
Net operating loss carryforwards | $ | 197,089 |
| | $ | 273,055 |
|
Passive activity loss carryforwards | 7 |
| | 12 |
|
Allowance for losses | 622 |
| | 4,250 |
|
Derivative instruments | 1,529 |
| | 5,514 |
|
Deferred income | 261 |
| | 35 |
|
Accrued liabilities and other payables | 631 |
| | 2,233 |
|
Total gross deferred tax assets | 200,139 |
| | 285,099 |
|
Less: Valuation allowance | — |
| | (286 | ) |
Net deferred tax assets | $ | 200,139 |
| | $ | 284,813 |
|
| | | |
Deferred income tax liabilities: | | | |
Accelerated depreciation | $ | 382,961 |
| | $ | 516,472 |
|
Goodwill and other intangible amortization | 2,141 |
| | 2,639 |
|
Derivative instruments | 790 |
| | 287 |
|
Deferred income | 27,347 |
| | 71,359 |
|
Deferred partnership income (TCI) | 1,134 |
| | 1,765 |
|
Other | 1,205 |
| | 9,607 |
|
Total gross deferred tax liability | 415,578 |
| | 602,129 |
|
Net deferred income tax liability | $ | 215,439 |
| | $ | 317,316 |
|
Note 12—Income Taxes (continued)
The Company has no valuation allowance for deferred tax assets as of December 31, 2017 and a valuation allowance of $0.3 million as of December 31, 2016. The net change in our total valuation allowance from December 31, 2016 to December 31, 2017 was related to net operating loss carryforwards that, in the judgment of the Company, are more likely than not to be utilized.
The Merger resulted in an ownership change under the Internal Revenue Code and certain state taxing authorities whereby federal net operating losses immediately prior to the Merger of $700 million will be subject to certain limitations. The Company does not expect such limitations to impact the ability to utilize net operating losses prior to their expiration.
In assessing the potential future realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, the Company believes it is more likely than not that the Company will realize the benefits of these deductible differences at December 31, 2017.
Certain income taxes on unremitted earnings have not been reflected on the consolidated financial statements because such earnings are intended to be permanently reinvested in those jurisdictions. Such earnings and withholding taxes are estimated to be approximately $47 million and $14 million, respectively, at December 31, 2017.
Net operating loss carryforwards for foreign income tax purposes of $926.7 million are available to offset future U.S. taxable income from 2018 through 2037.
The Company files income tax returns in several jurisdictions including the U.S. and certain U.S. states.
The following table summarizes unrecognized tax benefit amounts as follows (in thousands):
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Beginning balance at January 1 | $ | 7,777 |
| | $ | 7,345 |
|
Increase related to current year’s tax position | 1,315 |
| | 1,233 |
|
Lapse of statute of limitations | (898 | ) | | (791 | ) |
Foreign exchange adjustment | 56 |
| | (10 | ) |
Ending balance at December 31 | $ | 8,250 |
| | $ | 7,777 |
|
All unrecognized tax benefits as of December 31, 2017 will impact income tax expense when recognized, however, $6.9 million of the unrecognized tax benefit will have no net impact on after-tax income as a result of offsetting reimbursements from third parties. It is reasonably possible that the total amount of unrecognized tax benefit as of December 31, 2017 will decrease by $1.4 million within the next twelve months due to statute of limitations lapses. This reduction will impact income tax expense when recognized. The 2015, 2016, and 2017 tax years remain subject to examination by major tax jurisdictions.
The following table summarizes interest and penalty expense as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
Interest expense (benefit) | $ | 144 |
| | $ | 121 |
| | $ | 15 |
|
Penalty expense | $ | (64 | ) | | $ | (29 | ) | | $ | (98 | ) |
Note 12—Income Taxes (continued)
The following table summarizes the components of income taxes payable included in accounts payable and other accrued expenses on the consolidated balance sheets were as follows (in thousands):
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Corporate income taxes payable | $ | 56 |
| | $ | 32 |
|
Unrecognized tax benefits | 8,250 |
| | 7,777 |
|
Interest accrued | 824 |
| | 680 |
|
Penalties | 561 |
| | 625 |
|
Income taxes payable | $ | 9,691 |
| | $ | 9,114 |
|