INCOME TAXES
Prior to the Separation, our operating results were included in the Former Parent’s various consolidated and separate income tax returns. For periods prior to the Separation, the provision for income taxes and related balance sheet accounts of such entities have been prepared and presented in the consolidated financial statements based on a separate return basis. Therefore, cash tax payments and items of current and deferred taxes in prior periods may not be reflective of the actual tax balances of Delphi Technologies prior to or subsequent to the Separation.
The following table summarizes Delphi Technologies’ tax expense:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current income tax expense | $ | 113 |
| | $ | 62 |
| | $ | 96 |
|
Deferred income tax benefit, net | (7 | ) | | (12 | ) | | (4 | ) |
Total income tax provision | $ | 106 |
| | $ | 50 |
| | $ | 92 |
|
Cash paid or withheld for income taxes by Delphi Technologies was $46 million, $59 million and $61 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The applicable tax rate to determine Delphi Technologies theoretical income tax expense for 2017 was 19.25%, as compared to 20% in 2016 and 20.25% in 2015. The Company applies the weighted average rate in the United Kingdom (“U.K.”), the tax jurisdiction where Delphi Technologies is resident. A reconciliation of the provision for income taxes compared with the amounts at the theoretical rate:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Theoretical income taxes at the U.K. weighted average rate | $ | 81 |
| | $ | 64 |
| | $ | 81 |
|
Income taxed at other rates | (10 | ) | | (54 | ) | | (17 | ) |
Losses not benefitted | 28 |
| | 24 |
| | 9 |
|
Other change in tax reserves | 4 |
| | 5 |
| | 1 |
|
Valuation allowance releases | (12 | ) | | — |
| | — |
|
Withholding taxes | 11 |
| | 5 |
| | 7 |
|
Change in tax law | 7 |
| | 4 |
| | 9 |
|
Other adjustments | (3 | ) | | 2 |
| | 2 |
|
Total income tax expense | $ | 106 |
| | $ | 50 |
| | $ | 92 |
|
Effective tax rate | 25 | % | | 16 | % | | 23 | % |
The Company’s tax rate is affected by the fact that its parent entity is a U.K. resident taxpayer, the tax rates in the other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance. Included in the income taxed at other rates are tax incentives obtained in various countries, primarily the High and New Technology Enterprise (“HNTE”) status in China and the Special Economic Zone exemption in Turkey of $7 million in 2017, $13 million in 2016, and $16 million in 2015, as well as tax benefit for income earned in jurisdictions where a valuation allowance has been recorded. The Company currently benefits from tax holidays in various non-U.S. jurisdictions with expiration dates from 2016 through 2026. The income tax benefits attributable to these tax holidays are approximately $1 million in 2017, $1 million in 2016 and $2 million in 2015.
The effective tax rate in the year ended December 31, 2017 was impacted by the release of valuation allowances in the United States of $9 million and in Hungary of $3 million, in 2017 as compared to 2016, primarily due to changes in the underlying operations of the business. These benefits were partially offset by unfavorable geographic income mix and $4 million of reserve adjustments recorded for uncertain tax positions, which included reserves for ongoing audits in foreign jurisdictions, as well as for changes in estimates based on relevant new or additional evidence obtained related to certain of the Company’s tax positions.
Additionally, the Company’s tax rate was impacted by the enactment of the Tax Cuts and Jobs Act (the “Act”) in the United States on December 22, 2017, which provides for a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The income tax accounting effect, including any retroactive effect, of a tax law change is accounted for in the period of enactment. As a result, the effective tax rate was impacted by an increased tax expense of approximately $7 million for the year ended December 31, 2017 for the provisional effects of the Act pursuant to the guidance in SEC Staff Accounting Bulletin No. 118. We consider our calculation to be provisional due to lack of clarity at the balance sheet date related to state tax impacts of federal tax reform, which resulted in our use of estimates to compute our future blended tax rate. If we are required to change this amount based on further analysis and regulatory guidance at the federal and state level issued subsequent to the issuance of these statements, we will record such adjustments to income tax expense in the period that the amounts are determined. The Company was not affected by the Transition Tax provisions of the “Act”, which impose a U.S. tax upon unremitted earnings of non-U.S. subsidiaries which would have been subject to U.S. tax when remitted under the law in effect prior to the Act. The Company’s U.S. subsidiary does not hold any investments in non-U.S. operations. The Company was also impacted by the enactment of the French Finance (Budget) Law for 2018 (the “French Act”) which was enacted December 21, 2017, when it was definitively adopted by the French Parliament. The French Act provides for a maximum corporate rate of 33.33% in calendar year 2018, 31% in 2019, 28% in 2020, 26.5% in 2021 and 25% in 2022. As a result, the Company’s deferred tax asset balance and associated valuation allowance balance in France were both reduced $17 million for the year ended December 31, 2017.
The effective tax rate in the year ended December 31, 2016 was impacted by favorable geographic income mix in 2016 as compared to 2015, primarily due to changes in the underlying operations of the business. These benefits were partially offset by $5 million of reserve adjustments recorded for uncertain tax positions, which included reserves for ongoing audits in foreign jurisdictions, as well as for changes in estimates based on relevant new or additional evidence obtained related to certain of the Company’s tax positions. Additionally, the Company’s tax rate was impacted by the enactment of the U.K. Finance (No. 2) Act 2016 on September 15, 2016, which provides for a reduction of the corporate income tax rate from 18% to 17% effective April 1, 2020. The income tax accounting effect, including any retroactive effect, of a tax law change is accounted for in the period of enactment, which in this case was the third quarter of 2016. As a result, the effective tax rate was impacted by an increased tax expense of approximately $4 million for the year ended December 31, 2016 due to the resultant impact on the net deferred tax asset balances.
The effective tax rate in the year ended December 31, 2015 was impacted by the enactment of the U.K. Finance (No. 2) Act 2015 on November 18, 2015, which provides for a reduction of the corporate income tax rate from 20% to 19% effective April 1, 2017, with a further reduction to 18% effective April 1, 2020. The income tax accounting effect, including any retroactive effect, of a tax law change is accounted for in the period of enactment, which in this case was the fourth quarter of 2015. As a result, the effective tax rate was impacted by an increased tax expense of approximately $9 million for the year ended December 31, 2015 due to the resultant impact on the net deferred tax asset balances.
Deferred Income Taxes
The Company accounts for income taxes and the related accounts under the liability method. Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws. Significant components of the deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Deferred tax assets: | | | |
Pension | $ | 94 |
| | $ | 95 |
|
Employee benefits | 6 |
| | 1 |
|
Net operating loss carryforwards | 177 |
| | 54 |
|
Warranty and other liabilities | 44 |
| | 46 |
|
Intangible assets | 6 |
| | — |
|
Fixed assets | 1 |
| | — |
|
Other | 38 |
| | 20 |
|
Total gross deferred tax assets | 366 |
| | 216 |
|
Less: valuation allowances | (196 | ) | | (70 | ) |
Total deferred tax assets (1) | $ | 170 |
| | $ | 146 |
|
Deferred tax liabilities: | | | |
Fixed assets | $ | — |
| | $ | 1 |
|
Tax on unremitted profits of certain foreign subsidiaries | 6 |
| | 2 |
|
Intangible assets | — |
| | 14 |
|
Total gross deferred tax liabilities | 6 |
| | 17 |
|
Net deferred tax assets | $ | 164 |
| | $ | 129 |
|
| |
(1) | Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities. |
Deferred tax liabilities and assets are classified as long-term in the consolidated balance sheet. Net deferred tax assets and liabilities are included in the consolidated balance sheets as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Long-term assets | $ | 178 |
| | $ | 146 |
|
Long-term liabilities | (14 | ) | | (17 | ) |
Total deferred tax asset | $ | 164 |
| | $ | 129 |
|
The net deferred tax assets of $164 million as of December 31, 2017 are primarily comprised of deferred tax asset amounts in the United States, U.K. and China.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2017, the Company has gross deferred tax assets of approximately $177 million for net operating loss (“NOL”) carryforwards with recorded valuation allowances of $160 million. These NOL’s are available to offset future taxable income and realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The NOL’s primarily relate to France, China and Spain. The NOL carryforwards have expiration dates ranging from one year to an indefinite period.
Deferred tax assets include $2 million and $2 million of tax credit carryforwards with recorded valuation allowances of $2 million and $2 million at December 31, 2017 and 2016, respectively. These tax credit carryforwards expire in 2018 through 2021.
Cumulative Undistributed Foreign Earnings
As of December 31, 2017, deferred income tax liabilities of $6 million have been established with respect to the undistributed earnings of foreign subsidiaries whose parent entities are also included within the consolidated financial statements.
Uncertain Tax Positions
The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
A reconciliation of the gross change in the unrecognized tax benefits balance, excluding interest and penalties is as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Balance at beginning of year | $ | 9 |
| | $ | 16 |
| | $ | 18 |
|
Additions related to current year | 3 |
| | 3 |
| | 1 |
|
Additions (reductions) related to prior years | 2 |
| | (10 | ) | | (3 | ) |
Transfers to/from Former Parent | 8 |
| | — |
| | — |
|
Balance at end of year | $ | 22 |
| | $ | 9 |
| | $ | 16 |
|
A portion of the Company’s unrecognized tax benefits would, if recognized, reduce its effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of these tax benefits would reduce the Company’s effective tax rate only through a reduction of accrued interest and penalties. As of December 31, 2017 and 2016, the amounts of unrecognized tax benefit that would reduce the Company’s effective tax rate were $15 million and $13 million, respectively. In addition, $8 million and $2 million for 2017 and 2016, respectively, would be offset by the write-off of a related deferred tax asset, if recognized.
The Company recognizes interest and penalties relating to unrecognized tax benefits as part of income tax expense. Total accrued liabilities for interest and penalties were $2 million and $6 million at December 31, 2017 and 2016, respectively. Total interest and penalties recognized as part of income tax expense was $1 million, $2 million and $1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. Taxing jurisdictions significant to Delphi Technologies include China, Romania, Turkey, South Korea, Mexico, the U.K. the U.S., Luxembourg, Brazil, France, Singapore and Poland. Pursuant to the Tax Matters Agreement, the Former Parent is generally liable for all pre-distribution U.S. federal income taxes, foreign income taxes and certain non-income taxes attributable to our business required to be reported on combined, consolidated, unitary or similar returns that include one or more members of the Former Parent group and one or more members of our group. Delphi Technologies will generally be liable for all other taxes attributable to our business. Open tax years related to these taxing jurisdictions remain subject to examination and could result in additional tax liabilities. In general, our affiliates are no longer subject to income tax examinations by foreign tax authorities for years before 2007. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could impact the Delphi Technologies’ unrecognized tax benefits.