INCOME TAXES |
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES | INCOME TAXES The Company files tax returns in the U.S., Canada, Brazil and the U.K. at the federal and local taxing jurisdictional levels. The Company’s U.S. federal tax returns for tax years 2012 forward remain open and subject to examination. Generally, the Company’s state, local and foreign tax returns for years as early as 2002 forward remain open and subject to examination, depending on the jurisdiction. Tax Cuts and Jobs Act On December 22, 2017, the U.S. enacted the Act (which is commonly referred to as “U.S. tax reform”). The Act significantly changes U.S. corporate income tax laws by reducing the U.S. corporate income tax rate to 21% beginning in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings. In connection with the Act, the Company recorded a net charge of $46.8 million during the fourth quarter of 2017. This amount is included in income tax expense in the Company’s consolidated statements of operations and consists of $55.2 million related to the one-time mandatory tax on unremitted foreign earnings, offset by a $8.4 million benefit related to the remeasurement of the Company’s deferred tax liabilities at the new income tax rate. The Company believes the $46.8 million net charge represents a reasonable estimate of the impact on the income effects of the Act. However, this amount is provisional and additional work is necessary to do a more detailed analysis of historical foreign earnings as well as any potential corresponding adjustments. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the period in which any adjustment is determined, which the Company expects will be no later than the fourth quarter of 2018. The following table summarizes the Company’s income tax provision related to earnings for the years ended December 31 (in millions):
The following table summarizes components of earnings before taxes and shows the tax effects of significant adjustments from the expected tax expense computed at the federal statutory rate for the years ended December 31 (in millions):
Under U.S. GAAP, deferred tax assets and liabilities are recognized for the estimated future tax effects, based on enacted tax law, of temporary differences between the values of assets and liabilities recorded for financial reporting and tax purposes, and of net operating losses and other carryforwards. The significant components of the Company’s deferred tax assets and liabilities were as follows at December 31 (in millions):
At December 31, 2017, the Company had $46.1 million of gross foreign federal net operating loss (“NOL”) carryforwards that have no expiration date, $5.7 million of gross foreign federal NOL carryforwards which expire in 2033 and $0.7 million of net operating tax-effected state NOL carryforwards which expire in 2033. The Company has recorded a valuation allowance for a portion of its deferred tax asset relating to various tax attributes that it does not believe are, more likely than not to be realized. During the third quarter of 2017, the Company determined it is more likely than not that a portion of its Brazilian deferred tax assets acquired in connection with the acquisition of Produquímica will be used to reduce taxable income. As a result, the Company released approximately $25 million of valuation allowances during the year ending December 31, 2017. As of December 31, 2017 and 2016, the Company’s valuation allowance was $10.2 million and $33.6 million, respectively. In the future, if the Company determines, based on existence of sufficient evidence, that it should realize more or less of its deferred tax assets, an adjustment to the valuation allowance will be made in the period such a determination is made. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple jurisdictions. The Company recognizes potential liabilities for unrecognized tax benefits in the U.S. and other tax jurisdictions in accordance with applicable U.S. GAAP, which requires uncertain tax positions to be recognized only if they are more likely than not to be upheld based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more likely than not (determined on a cumulative probability basis) to be realized upon settlement of the matter. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense may result. The Company’s uncertain tax positions primarily relate to transactions and deductions involving U.S., Canadian and Brazilian operations. If favorably resolved, $17.4 million of unrecognized tax benefits would decrease the Company’s effective tax rate. Management believes that it is reasonably possible that unrecognized tax benefits will decrease by approximately $0.3 million in the next twelve months largely as a result of tax returns being closed to future audits. In the fourth quarter of 2017, the Company’s income tax expense included a benefit of approximately $0.4 million related to the release of uncertain tax positions due to the expiration of statutes of limitations. The following table shows a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
The Company accrues interest and penalties related to its uncertain tax positions within its tax provision. During the years ended December 31, 2017, 2016 and 2015, the Company accrued interest and penalties, net of reversals, of $11.9 million, $0.9 million and $0.2 million, respectively. As of December 31, 2017 and 2016, accrued interest and penalties included in the Consolidated Balance Sheets totaled $18.0 million and $6.3 million, respectively. The Company considers all non-U.S. earnings to be indefinitely reinvested outside of the U.S. to the extent these earnings are not subject to U.S. income tax under an anti-deferral tax regime. As of December 31, 2017, all non-U.S. undistributed earnings were subject to a one-time mandatory tax in the U.S. due to the Act with the exception of $59.3 million of outside basis differences related to Brazilian entities. The Company is currently analyzing its global working capital requirements and the potential tax liabilities that would be incurred if its non-U.S. subsidiaries distribute cash to CMI, including local country withholding taxes. The Company expects to complete its analysis of the accounting guidance related to the Act and its evaluation of the impacts of the Act in the fourth quarter of 2018. Canadian provincial tax authorities have challenged tax positions claimed by one of the Company’s Canadian subsidiaries and have issued tax reassessments for years 2002-2012. The reassessments are a result of ongoing audits and total approximately $106 million, including interest through December 31, 2017. The Company disputes these reassessments and plans to continue to work with the appropriate authorities in Canada to resolve the dispute. There is a reasonable possibility that the ultimate resolution of this dispute, and any related disputes for other open tax years, may be materially higher or lower than the amounts the Company has reserved for such disputes. In connection with this dispute, local regulations require the Company to post security with the tax authority until the dispute is resolved. The Company has posted collateral in the form of a $66.9 million performance bond and has paid $39.1 million (most of which is recorded in other assets in the Consolidated Balance Sheets), which is necessary to proceed with future appeals or litigation. The Company expects that it will be required by local regulations to provide security for additional interest on the above unresolved disputed amounts and for any future reassessments issued by these Canadian tax authorities in the form of cash, letters of credit, performance bonds, asset liens or other arrangements agreeable with the tax authorities until the disputes are resolved. The Company expects that the ultimate outcome of these matters will not have a material impact on its results of operations or financial condition. However, the Company can provide no assurance as to the ultimate outcome of these matters and the impact could be material if they are not resolved in the Company’s favor. As of December 31, 2017, the Company believes it has adequately reserved for these reassessments. Additionally, the Company has other uncertain tax positions as well as assessments and disputed positions with taxing authorities in its various jurisdictions. Settlements Canadian federal and provincial taxing authorities had reassessed the Company for years 2004-2006, which had been previously settled by agreement among the Company, the Canada Revenue Agency (“CRA”) and the U.S. Internal Revenue Service (“IRS”). The Company sought to enforce the agreement, which provided the basis upon which the returns were previously filed and settled. In July 2016, a trial commenced in the Tax Court of Canada with respect to the Canadian federal tax issues for these matters, and in March 2017, the Tax Court of Canada ruled in favor of the Company. The decision of the Tax Court of Canada was not appealed by the CRA. As a result, the reassessed Canadian tax, penalties and interest for the Company for years 2004-2006 of approximately $94.7 million are effectively resolved. The Company is in the process of having certain posted collateral returned in connection with the resolution of the dispute. In the fourth quarter of 2017, the Company, the CRA and the IRS reached a settlement agreement on transfer pricing issues for its 2007-2012 tax years. As a result of this settlement, the Company recognized $13.8 million of tax expense in its 2017 consolidated statements of operations related to the Company’s Canadian tax positions for the years 2007-2016. The agreement will result in intercompany cash payments from the Company’s U.S. subsidiary to its Canadian subsidiary of $85.7 million and tax payments to Canadian taxing authorities of $23.4 million with a corresponding tax refund due from U.S. taxing authorities of $21.8 million. The timing of the refund is expected to lag the payment to the Canadian tax authorities by a year or more. Additionally, the reassessed Canadian tax, penalties and interest for the Company for years 2007 and 2008 of approximately $34.2 million are effectively resolved. |