|12 Months Ended|
Dec. 31, 2017
|Income Tax Disclosure [Abstract]|
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA makes significant changes to the U.S. tax code effective for 2018, although certain provisions affected the Company’s 2017 financial results. The changes impacting 2017 include, but are not limited to, the write-down of net deferred tax assets resulting from the reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent, imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries, and bonus depreciation that will allow for immediate full expensing of qualified property. The TCJA also establishes new corporate tax laws that will be effective in 2018 but do not impact the Company’s 2017 financial results. These changes include, but are not limited to, lowering the U.S. federal corporate income tax rate, a general elimination of U.S. federal income taxes on income and dividends from foreign subsidiaries, a new tax on global intangible low-taxed income (GILTI) net of allowable foreign tax credits, a new deduction for foreign derived intangible income (FDII), the repeal of the domestic production activity deduction, new limitations on the deductibility of certain executive compensation and interest expense, and limitations on the use of foreign tax credits to reduce the U.S. federal income tax liability.
Due to the complexities involved in accounting for the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin (SAB) 118 which provides guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date to complete the accounting for the impact of the TCJA. SAB 118 allows the Company to provide provisional estimates of the impact of the TCJA in our financial statements for the year ended December 31, 2017. Accordingly, based on information and IRS guidance currently available, we have recorded a discrete net tax expense of $71.8 million for the year ended December 31, 2017. This consists primarily of a net charge of $56.5 million for the write down of our net deferred tax balances due to the U.S. corporate income tax rate reduction and a net expense of $15.3 million for the one-time deemed repatriation tax. The Company has not completed its accounting for the income tax effects of the TCJA and the provisional amounts will be refined as needed during the measurement period allowed by SAB 118. While the Company has made reasonable estimates of the impact of the U.S. corporate income tax rate reduction and the one-time deemed repatriation tax on unremitted earnings of foreign subsidiaries, these estimates could change as the Company continues to analyze the TCJA and refines its calculations which could potentially affect the remeasurement of deferred tax balances, refines its calculations of earnings and profits which could impact the repatriation tax calculation, and analyzes new IRS guidance related to the TCJA.
The TCJA creates a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (CFC’s) must be included currently in the gross income of the CFC’s U.S. shareholder. Because of the complexity of the new GILTI tax rules we are continuing to evaluate this provision of the TCJA. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends not only on our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the TCJA. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements for the period ended December 31, 2017, and we have not made a policy choice regarding whether to record deferred taxes on GILTI.
The Company will continue to analyze the effects of the TCJA on its financial statements. Additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period as allowed in SAB 118.
The sources of Earnings before income taxes were as follows:
The Income tax provision consisted of the following:
Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31, 2017 and 2016 are summarized in the table below:
The Company's total net deferred tax asset as of December 31, 2017 reflects the impact of the U.S. federal corporate tax rate reduction from 35 percent to 21 percent that was part of the TCJA. The Company was required to write down the value of its net deferred tax balance to reflect the new lower tax rate.
At December 31, 2017, the Company had a total valuation allowance against its deferred tax assets of $81.4 million. The remaining realizable value of deferred tax assets at December 31, 2017 was determined by evaluating the potential to recover the value of these assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences and carryforwards, certain tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. At December 31, 2017, the Company retained valuation allowance reserves of $53.7 million against deferred tax assets in the U.S. primarily related to non-amortizable intangibles and various state operating loss carryforwards and state tax credits that are subject to restrictive rules for future utilization, and valuation allowances of $27.7 million for deferred tax assets related to foreign jurisdictions, primarily Brazil.
At December 31, 2017, the tax benefit of loss carryforwards totaling $75.9 million was available to reduce future tax liabilities. This deferred tax asset was comprised of $2.1 million for the tax benefit of federal net operating loss (NOL) carryforwards, $45.8 million for the tax benefit of state NOL carryforwards and $28.0 million for the tax benefit of foreign NOL carryforwards. NOL carryforwards of $49.5 million expire at various intervals between the years 2018 and 2037, while $26.4 million have an unlimited life.
At December 31, 2017, tax credit carryforwards totaling $43.8 million were available to reduce future tax liabilities. This deferred tax asset was comprised of $2.4 million related to general business credits and other miscellaneous federal credits, and $41.4 million of various state tax credits related to research and development, capital investment and job incentives. Tax credit carryforwards of $43.6 million expire at various intervals between the years 2018 and 2037, while $0.2 million have an unlimited life.
The Company has historically provided deferred taxes for the presumed ultimate repatriation to the U.S. of earnings from certain of its non-U.S. subsidiaries and unconsolidated affiliates. Through December 31, 2014 the indefinite reinvestment criteria had been applied to certain entities and allowed the Company to overcome that presumption to the extent the earnings were to be indefinitely reinvested outside the United States. As a result of the Company's internal restructuring of its foreign entities that was initiated in 2015, the Company determined that the indefinite reinvestment assertion should be expanded to include additional non-U.S. subsidiaries. As a result of the 2015 actions, the Company recorded a discrete net tax benefit in 2015 which includes the benefit of applying the indefinite reinvestment assertion to the foreign entities reorganized under a new European holding company. As a result of the TCJA, specifically the imposition of a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries, the Company reevaluated its indefinite assertion as of December 31, 2017. The Company is considering remitting cash back to the U.S. in 2018 from non-U.S. subsidiaries and as such, the Company will no longer assert that it is permanently reinvested in any non-U.S. subsidiaries as of December 31, 2017. These remittances would be considered dividends and under changes made by the TCJA these dividends would be subject to a 100 percent dividend received deduction and would not result in any U.S. federal tax liability. As of December 31, 2017 the Company has provided deferred taxes for jurisdictions where dividends would be subject to withholding taxes. The Company is continuing to analyze the effects of the TCJA including the impact on future repatriations and any related withholding taxes from non-U.S. subsidiaries.
As of December 31, 2017, 2016 and 2015 the Company had $2.3 million, $3.5 million and $4.8 million of gross unrecognized tax benefits, including interest, respectively. Substantially all of these amounts, if recognized, would impact the Company's tax provision and the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2017, 2016 and 2015, the amounts accrued for interest and penalties were not significant.
The following is a reconciliation of the total amounts of unrecognized tax benefits excluding interest and penalties for the 2017, 2016 and 2015 annual reporting periods:
The Company believes it is reasonably possible that the total amount of gross unrecognized tax benefits as of December 31, 2017 could decrease by approximately $0.7 million in 2018 due to settlements with taxing authorities or lapses in applicable statutes of limitation. Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be significant changes in the amount of unrecognized tax benefits in 2018, but the amount cannot be estimated at this time.
The Company is regularly audited by federal, state and foreign tax authorities. The Internal Revenue Service (IRS) has completed its field examination and has issued its Revenue Agents Report through the 2012 tax year and all open issues have been resolved. The Company is currently open to tax examinations by the IRS for the 2014 through 2016 tax years and the IRS field examination of the 2014 tax year is completed. The Company is awaiting the Revenue Agents Report for 2014 and does not expect any material adjustments. Primarily as a result of filing amended returns, which were generated by the closing of federal income tax audits, the Company is still open to state and local tax audits in major tax jurisdictions dating back to the 2012 taxable year. The Company is no longer subject to income tax examinations by any major foreign tax jurisdiction for years prior to 2013.
The difference between the actual income tax provision (benefit) and the tax provision computed by applying the statutory Federal income tax rate to Earnings before income taxes is attributable to the following:
The Company's effective tax rate also reflects the benefit of having earnings from foreign entities that are in jurisdictions that have lower statutory tax rates than the U.S. This includes entities in Hungary, China, Poland and the United Kingdom which have applicable statutory tax rates of 9 percent, 15 percent, 19 percent and 19 percent, respectively.
In addition, the Company's effective tax rate includes the utilization of excess foreign tax credits in connection with the repatriation of foreign earnings.
Income tax provision allocated to continuing operations and discontinued operations for the years ended December 31 was as follows:
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef