|12 Months Ended|
Dec. 31, 2017
|Income Tax Disclosure [Abstract]|
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (Tax Reform Act). The Tax Reform Act alters U.S. corporate income taxation in a number of significant ways including, lowering the corporate income tax rate from 35% to 21%, implementing a quasi-territorial tax regime by providing a 100% Dividends Received Deduction (“DRD”) of foreign dividends, imposing a one-time transition tax on deemed repatriated post-1986 undistributed earnings of foreign subsidiaries and revising or eliminating certain deductions.
As a result of the large number of changes and the complexity of the changes resulting from the Tax Reform Act and given the lack of guidance provided thus far regarding the tax law changes, the Company has not finalized the accounting for income tax effects of the Tax Reform Act. The Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), provides guidance on accounting for the impact of the Tax Reform Act. SAB 118 allows for a provisional estimate to be recognized in the financial statements relating to ASC 740 in instances where a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete, but can be reasonably estimated. If a company is unable to reasonably estimate a provisional amount to be included in the financial statements, SAB 118 provides that it should continue to apply ASC 740 based on the provisions of the tax laws in effect immediately prior to the enactment of the Tax Reform Act.
The Company has estimated it will not owe any transition tax; therefore, it has recorded no provisional amount related to the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. The company has recorded a provisional amount of $9.9 million related to the establishment of a valuation allowance on deferred tax assets for foreign tax credits. Utilization of the company’s foreign tax credit carryforwards is expected to be significantly limited due to changes made by the Tax Reform Act on the way that foreign income is calculated and sourced. A provisional amount of $3.8 million has also been recorded relating to re-measurement of U.S. deferred tax assets and liabilities based on the new lower corporate income tax rate at which deferred taxes are expected to reverse in the future. This amount is provisional because while it is possible to reasonably estimate the impact of the rate reduction, it may be impacted by additional analysis related to the Tax Reform Act, including, but not limited to, return to accrual adjustments and the state tax effect of adjustments made to federal temporary differences. The Company is also in the process of analyzing the potential effects of several new provisions resulting from the Tax Reform Act that take effect in 2018 including, the Global Intangible Low-taxed Income (GILTI) tax, the Foreign-derived Intangible Income (FDII) deduction, the Base-erosion Anti-abuse Tax (BEAT), interest expense deduction limitations, executive compensation deduction limits and various other provisions.
Due to the complexity of the new GILTI rules, the Company are continuing to evaluate the impact of this provision of the Tax Reform Act on the Company’s income tax reporting. U.S. accounting rules allow companies to adopt an accounting policy to recognize taxes due on future U.S. taxable income inclusions related to GILTI under either the period cost method or the deferred method. Under the period cost method, GILTI taxes are included as a current-period expense when incurred, whereas under the deferred method, these taxes would be included in the company’s measurement of its deferred taxes. The company is unable to reasonably estimate the effect of this provision of the Tax Reform Act at this time; therefore, no financial statement adjustments have been made with respect to potential GILTI taxes, nor has the Company made a policy decision regarding whether to record deferred taxes related to GILTI. Prior to enactment of the Tax Reform Act, the Company’s assertion has been that it does not reinvest undistributed foreign earnings indefinitely in its foreign subsidiaries. Again, due to the complexity of the many provisions of the Tax Reform Act, the Company has not made a policy decision with respect to its indefinite reinvestment assertion.
As stated above, the Company currently estimates that it will not owe additional cash taxes as a result of the transition tax. The provisions of the transition tax rules allow for earnings and profits deficit amounts in one jurisdiction to be netted with positive earnings and profit amounts in other jurisdictions as long as certain U.S. ownership requirements are met. Because of these rules, no transition tax will be paid based on current estimates. Estimates are based on the Company’s post-1986 earnings and profits in its U.S.-owned foreign subsidiaries for which the Company had unremitted earnings.
Income (loss) from continuing operations before provision (benefit) for income taxes are taxed under the following jurisdictions (dollar amounts in thousands):
Components of the provision (benefit) for income taxes from continuing operations for each of the three years in the period ended December 31, 2017 are as follows (dollar amounts in thousands):
The provision (benefit) for income taxes, as a percentage of income from continuing operations before provision (benefit) for income taxes, differs from the statutory U.S. federal income tax rate due to the following:
Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. Historically, the Company has asserted that it does not reinvest undistributed earnings indefinitely in the Company’s foreign subsidiaries; however, the Company is still assessing the impact of the Tax Reform Act and have not yet made a decision with respect to the Company's indefinite reinvestment assertion.
Adjustments relating to the U.S. impact of foreign operations increased the effective tax rate by 1.0 percentage points in 2017, decreased the effective tax rate by 53.4 percentage points in 2016, and increased the effective tax rate by 2.8 percentage points in 2015. The components of this calculation were:
The significant components of the deferred tax assets (liabilities) are as follows (dollar amounts in thousands):
The components of deferred tax assets (liabilities), net are as follows (dollar amounts in thousands):
At December 31, 2016, net deferred tax liabilities were included in other liabilities on the consolidated balance sheets.
Management has provided a valuation allowance of $24.0 million and $11.3 million as of December 31, 2017 and 2016, respectively, for certain deferred tax assets, including foreign net operating losses, for which management cannot conclude it is more likely than not that they will be realized. The Company reviewed its tax positions and increased its valuation allowance by approximately $12.8 million in 2017 primarily due to a domestic increase of $10.8 million and a foreign increase of $2.0 million. For financial reporting purposes, the release of these valuation allowances would reduce income tax expenses in the year released. At December 31, 2017, the Company had approximately $14.6 million of foreign tax and withholding credits. Of the $14.6 million credits, $14.2 million are foreign tax credits, most of which expire in 2024 and all of which are fully offset by a valuation allowance.
At December 31, 2017, the Company had unused operating loss carryovers for tax purposes of approximately $13.8 million with approximately $9.2 million relating to foreign subsidiaries and approximately $4.6 million relating to U.S. entities. The net operating losses will expire at various dates from 2018 through 2027, with the exception of those in some foreign jurisdictions where there is no expiration. The foreign net operating losses have a full valuation allowance recorded against them.
The Company is subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company believes it has appropriately provided for income taxes for all years. Several factors drive the calculation of its tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) the issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to the Company’s reserves, which would impact its reported financial results.
The Company’s U.S. federal income tax returns for 2014 through 2016 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2010 through 2017.
The total outstanding balance for liabilities related to unrecognized tax benefits at December 31, 2017 and 2016 was $4.6 million and $6.8 million, respectively, all of which would favorably impact the effective tax rate if recognized. Included in these amounts is approximately $1.7 million and $1.8 million, respectively, of combined interest and penalties. The Company decreased interest and penalties approximately $0.2 million and $0.1 million for the years ended December 31, 2017 and 2016, respectively. The Company accounts for interest expense and penalties for unrecognized tax benefits as part of its income tax provision.
During the years ended December 31, 2017, 2016 and 2015, the Company added approximately $0.9 million, $1.4 million and $1.6 million, respectively, to its liability for unrecognized tax benefits. Included in these amounts are approximately $0.1 million, $0.3 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively, related to interest expense and penalties. In addition, the Company recorded a benefit related to the lapse of applicable statute of limitations of approximately $2.3 million, $2.5 million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, all of which favorably impacted the Company’s effective tax rate.
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits, excluding interest and penalties, is as follows for the years (dollar amounts in thousands):
The Company anticipates that liabilities related to unrecognized tax benefits will increase approximately $0.2 million to $0.6 million within the next twelve months due to additional transactions related to commissions and transfer pricing.
The Company believes that it is reasonably possible that unrecognized tax benefits may change by $0 to $0.2 million within the next twelve months due to the expiration of statutes of limitations in various jurisdictions.
Although the Company believes its estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.
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