Income taxes
Net income before tax is summarized below ($ in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (6,066 | ) | | $ | (4,759 | ) | | $ | (3,136 | ) |
Foreign | 14,876 |
| | 29,207 |
| | 11,092 |
|
Total net income before tax | $ | 8,810 |
| | $ | 24,448 |
| | $ | 7,956 |
|
The components of our income tax (provision) benefit for the years ended December 31, 2017, 2016 and 2015 are as follows ($ in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Domestic | $ | (67 | ) | | $ | (3 | ) | | $ | (87 | ) |
Foreign | (7,967 | ) | | (17,500 | ) | | (10,664 | ) |
Total current income tax provision | (8,034 | ) | | (17,503 | ) | | (10,751 | ) |
Deferred: | | | | | |
Domestic | — |
| | — |
| | — |
|
Foreign | (1,017 | ) | | 13,271 |
| | 12,506 |
|
Total deferred income tax (provision) benefit | (1,017 | ) | | 13,271 |
| | 12,506 |
|
Total income tax (provision) benefit for the period | $ | (9,051 | ) | | $ | (4,232 | ) | | $ | 1,755 |
|
Reconciliation of Netherlands statutory income tax rate to actual income tax rate
A reconciliation of the Netherlands statutory income tax rate to our effective income tax rate from continuing operations is as follows ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Effective tax rate | 2017 | | 2016 | | 2015 |
Income tax provision at statutory rate | $ | (2,203 | ) | | 25.0 | % | | $ | (6,112 | ) | | 25.0 | % | | $ | (1,989 | ) | | 25.0 | % |
Differences between statutory rate and foreign rate | 16,277 |
| | (184.8 | )% | | 11,732 |
| | (48.0 | )% | | 11,875 |
| | (149.3 | )% |
Inflation adjustments | 5,009 |
| | (56.9 | )% | | 1,939 |
| | (7.9 | )% | | 1,468 |
| | (18.4 | )% |
Nondeductible interest and expenses | (6,975 | ) | | 79.2 | % | | (3,912 | ) | | 16.0 | % | | (1,815 | ) | | 22.8 | % |
Debt extinguishment and other | 536 |
| | (6.1 | )% | | (5 | ) | | — | % | | — |
| | — | % |
Business interruption proceeds | (164 | ) | | 1.9 | % | | 41 |
| | (0.2 | )% | | 39 |
| | (0.5 | )% |
Other | 229 |
| | (2.6 | )% | | (1,218 | ) | | 5.0 | % | | 946 |
| | (11.9 | )% |
Foreign exchange rate differences | (3,183 | ) | | 36.1 | % | | 7,212 |
| | (29.5 | )% | | 8,585 |
| | (107.9 | )% |
Dominican Republic tax classification | 3,994 |
| | (45.3 | )% | | (3,470 | ) | | 14.2 | % | | — |
| | — | % |
U.S. rate change | (2,590 | ) | | 29.4 | % | | — |
| | — | % | | — |
| | — | % |
Change in valuation allowance | (19,981 | ) | | 226.8 | % | | (10,949 | ) | | 44.8 | % | | (17,307 | ) | | 217.5 | % |
Accrual for uncertain tax positions | — |
| | — | % | | 510 |
| | (2.1 | )% | | (47 | ) | | 0.6 | % |
Income tax (provision) benefit | $ | (9,051 | ) | | 102.7 | % | | $ | (4,232 | ) | | 17.3 | % | | $ | 1,755 |
| | (22.1 | )% |
We are domiciled in The Netherlands and are taxed in The Netherlands with our other Dutch subsidiaries. Dutch companies are subject to Dutch corporate income tax at a general tax rate of 25%.
For the year ended December 31, 2017, we recognized an income tax provision of $9.1 million, resulting in an effective tax rate for the year of 102.7%. The 2017 income tax provision was driven primarily by $20.0 million tax expense due to additional valuation allowance established on our deferred tax assets, $3.2 million tax expense associated with foreign exchange rate fluctuations, and a $7.0 million tax expense on non-deductible interest and other expenses. The net income tax expense was partially offset by the tax benefit of $16.3 million from the rate-favorable jurisdictions and a $5.0 million tax benefit associated with inflation adjustments, and a $4.0 million tax benefit on the reversal of the 2016 tax expense for one of our Dominican Republic entities pursuant to the Advanced Pricing Agreement ("APA") signed with Dominican Republic tax authorities in December 2017. This agreement is retroactive to 2016.
For the year ended December 31, 2016, we recognized an income tax expense of $4.2 million, resulting in an effective tax rate for the year of 17.3%. The 2016 income tax expense was driven primarily by $3.5 million of deferred income tax expense in the Dominican Republic, $3.9 million tax expense on non-deductible expenses, as well as $10.9 million tax expense due to additional valuation allowance established on our deferred tax assets. The net income tax expense was partially offset by the tax benefit of $11.7 million from the rate-favorable jurisdictions, a $1.9 million tax benefit associated with inflation adjustments and a $7.2 million tax benefit associated with foreign exchange rate fluctuation.
For the year ended December 31, 2015, we recognized an income tax benefit of $1.8 million, resulting in an effective tax rate for the year of (22.1)%. The 2015 income tax benefit was driven primarily by the tax benefit of $11.9 million from the rate-favorable jurisdictions, a $8.6 million tax benefit associated with foreign exchange rate fluctuation, and a $1.5 million tax benefit associated with inflation adjustments. The net 2015 income tax benefit was partially offset by a $17.3 million increased tax expense in the valuation allowance and a $1.8 million tax expense on non-deductible expenses.
We have a taxable presence in a variety of jurisdictions worldwide, most significantly in Mexico, the Netherlands, the Dominican Republic and Jamaica. We have been granted certain “tax holidays,” providing us with temporary income tax exemptions. Specifically, two of our entities in the Dominican Republic are under a tax holiday. Inversiones Vilazul, S.A.S, has a tax exemption through December 31, 2019 and Playa Dominican Resorts B.V. is tax exempt for fifteen years following the completion of the Hyatt Zilara Cap Cana and Hyatt Ziva Cap Cana.
Effect of the Tax Cuts and Jobs Act
On December 22, 2017 President Donald Trump signed into U.S. law an act generally known as the "Tax Cuts and Jobs Act" (“Tax Reform”). ASC Topic 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 of the law, January 1, 2018.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin ("SAB") 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 when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
The notable impact to Playa is that Tax Reform reduces the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The carrying value of our deferred tax assets and liabilities in the United States is determined by the enacted U.S. corporate income tax rate. Consequently, any changes in the U.S. corporate income tax rate will cause an impact on the carrying value of our deferred tax assets and liabilities. However, we have decided to continue to maintain a full valuation allowance against the net U.S. deferred tax assets. Under the new corporate income tax rate, our U.S. deferred tax assets decrease $2.6 million and valuation allowance decreases $2.6 million. As a result, there is no financial impact of this U.S. tax rate change. We have completed our accounting for income tax effects on our deferred tax assets.
Tax Reform includes a one-time mandatory repatriation transition tax imposed on certain U.S. shareholders of a foreign corporation with regard to their pro rata share of the foreign corporation's net accumulated earnings and profits. Our Company is domiciled in the Netherlands and we do not expect that any of its U.S. subsidiaries are subject to this tax with respect to foreign subsidiaries. We do not expect a material U.S. tax impact of other provisions of Tax Reform, such as the exemption from U.S. tax on dividends of future foreign earnings, the limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, the limitation of net operating losses generated after fiscal 2018 to 80 percent of taxable income and the incremental tax (base erosion anti-abuse tax or “BEAT”) on excessive amounts paid to foreign related parties. Since Tax Reform was enacted so late in 2017, we will continue to monitor the developments in Tax Reform to ensure that any changes are captured in subsequent periods. Our accounting for these items is incomplete and we have not yet been able to make reasonable estimates of the effects of these items. Therefore, no provisional amounts were recorded.
Tax Reform also created a new requirement that certain income (i.e., global intangible low-taxed income or "GILTI") earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, we will continue to evaluate this provision of Tax Reform and the application of ASC 740. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. Since we do not have any foreign subsidiaries within our U.S. consolidated group, we would not expect this to have a significant impact on the Company. Therefore, we have not recorded any amounts related to potential GILTI tax in our financial statements and have not yet made a policy decision regarding whether to record deferred taxes on GILTI, if applicable.
Dominican Republic
Taxes in the Dominican Republic are determined based upon APAs approved by the Ministry of Finance of the Dominican Republic. As the associated APAs had not been finalized as of December 31, 2016, our 2016 income tax provision contemplated the existing Dominican statutory law, without consideration of an associated APA, and we recorded $0.6 million current tax expense and $3.4 million deferred tax expense for one of our Dominican Republic entities, Playa Cana B.V., as of December 31, 2016.
We finalized the APAs in December 2017, which will remain in effect until 2019. Pursuant to the signed APAs, our Dominican Republic entities are subject to the greater of an income tax, asset tax or gross receipts tax. In 2017, our tax paying Dominican Republic entities were not income tax payers and we project the same trend for the foreseeable future; therefore, our Dominican Republic entities are not subject to income tax accounting under U.S. GAAP. As such, the deferred tax liability recorded as of December 31, 2016 was reversed at December 31, 2017.
Deferred income taxes
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as net operating losses and tax credit carryforwards. We measure those balances using the enacted tax rates we expect will be in effect when we pay or recover taxes. Deferred income tax assets represent amounts available to reduce income taxes we will pay on taxable income in future years. We evaluate our ability to realize these future tax deductions and credits by assessing whether we expect to have sufficient future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies to utilize these future deductions and credits. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized.
The tax effect of each type of temporary difference and carry-forward that gives rise to a significant portion of our deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows ($ in thousands):
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Advance customer deposits | $ | 6,010 |
| | $ | 6,557 |
|
Trade payables and other accruals | 5,072 |
| | 4,531 |
|
Labor liability accrual | 688 |
| | 555 |
|
Property, plant and equipment | 45 |
| | 12 |
|
Net operating losses | 101,003 |
| | 82,356 |
|
Total deferred tax asset | 112,818 |
| | 94,011 |
|
Valuation allowance | (98,755 | ) | | (81,738 | ) |
Net deferred tax asset | 14,063 |
| | 12,273 |
|
| | | |
Deferred tax liabilities: | | | |
Accounts receivable and prepayments to vendors | 928 |
| | 617 |
|
Property, plant and equipment | 89,080 |
| | 86,620 |
|
Insurance recoverable | 73 |
| | 50 |
|
Total deferred tax liability | 90,081 |
| | 87,287 |
|
Net deferred tax liability | $ | (76,018 | ) | | $ | (75,014 | ) |
As of December 31, 2017 and 2016, we had $17.4 million and $18.9 million, respectively, of net operating loss carryforwards in our Mexican subsidiaries. These carryforwards expire in varying amounts from 2018 to 2027.
As of December 31, 2017 and 2016, we had $318.1 million and $258.3 million, respectively, of net operating loss carryforwards in our Dutch subsidiaries that expire in varying amounts from 2018 to 2026.
As of December 31, 2017 and 2016, we had $49.4 million and $34.0 million, respectively, of net operating loss carryforwards in our Jamaica subsidiary that can be carried forward indefinitely, however, the amount that can be utilized annually is limited to 50% of taxable income before the net operating loss deduction each year.
As of December 31, 2017 and 2016, we had $15.2 million and $9.3 million, respectively, of net operating loss carryforwards in our U.S. subsidiary. These carryforwards expire in varying amounts from 2034 to 2037.
As of December 31, 2017 and 2016, we had zero and $0.8 million, respectively, of net operating loss carryforwards in our Dominican Republic subsidiary. The carryforwards expired in 2017.
The ability to utilize the tax net operating losses in any single year ultimately depends upon our ability to generate sufficient taxable income.
We have made no provision for foreign or domestic income taxes on the cumulative unremitted earnings of our subsidiaries. We believe that the earnings of our foreign subsidiaries can be repatriated without incurring additional income taxes, as a result of the applicable local statutory tax laws.
The change in the valuation allowance established against our deferred tax assets for the years ended December 31, 2017, 2016 and 2015 is summarized in the following table ($ in thousands): |
| | | | | | | | | | | | | | | |
| Balance at January 1 | | Additions | | Deductions | | Balance at December 31 |
Deferred tax asset valuation allowance for the year ended | | | | | | | |
December 31, 2017 | $ | (81,738 | ) | | $ | (19,469 | ) | | $ | 2,452 |
| | $ | (98,755 | ) |
December 31, 2016 | $ | (71,847 | ) | | $ | (19,333 | ) | | $ | 9,442 |
| | $ | (81,738 | ) |
December 31, 2015 | $ | (54,637 | ) | | $ | (19,307 | ) | | $ | 2,097 |
| | $ | (71,847 | ) |
The valuation allowance for each period is used to reduce the deferred tax asset to a more likely than not realizable value. As of December 31, 2017, our valuation allowance relates primarily to net operating loss carryforwards, which we do not expect to utilize, most notably in Netherlands, Jamaica, the United States and certain legal entities in Mexico.
We are subject to income taxes in a variety of jurisdictions worldwide. For our significant jurisdictions, the earliest years that remain subject to examination are 2009 for Mexico, 2012 for Netherlands and 2014 for the Dominican Republic, Jamaica and the United States. We consider the potential outcome of current and future examinations in our assessment of our reserve for uncertain tax positions.
The following table reconciles our uncertain tax positions, as of December 31, 2017, 2016 and 2015: ($ in thousands): |
| | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 |
Uncertain tax positions at January 1 | $ | — |
| | $ | 510 |
| | $ | 557 |
|
Additions for prior year tax positions | — |
| | — |
| | 36 |
|
Settlements with Taxing Authorities | — |
| | — |
| | (83 | ) |
Expiration of statue limitation | — |
| | (510 | ) | | — |
|
Uncertain tax positions at December 31 | $ | — |
| | $ | — |
| | $ | 510 |
|
ASC 740-10 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We concluded that all of our tax positions meet the more likely than not standard. Therefore, we have no uncertain tax positions as of December 31, 2017 and 2016.