XML 46 R29.htm IDEA: XBRL DOCUMENT v3.22.0.1
Income Tax
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Tax Income TaxEVERTEC Group and Holdings are Puerto Rico limited liability companies that are treated as partnerships that are pass-through entities for Puerto Rico tax purposes, therefore, taxable income flows through to EVERTEC, Inc.
EVERTEC Group, Holdings and EVERTEC, Inc. entered into a Tax Payment Agreement pursuant to which EVERTEC Group is required to make certain payments to Holdings or EVERTEC, Inc. for taxable periods or portions thereof occurring on or after April 17, 2012 (the “Effective Date”). Under the Tax Payment Agreement, EVERTEC Group will make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on EVERTEC Group if EVERTEC Group had been a corporation for tax purposes of that jurisdiction, together with all interest and penalties with respect thereto (“Taxes”), reduced by taking into account any applicable net operating losses or other tax attributes of Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period required to be made by EVERTEC Group to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the amount of the payment EVERTEC Group already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings or EVERTEC, Inc. shall promptly make a payment to EVERTEC Group in the amount of such difference.
The components of income tax expense consisted of the following:
 Years ended December 31,
(In thousands)202120202019
Current tax provision $23,388 $22,907 $19,366 
Deferred tax benefit(2,826)(3,905)(6,391)
Income tax expense$20,562 $19,002 $12,975 
  
The Company conducts operations in Puerto Rico and certain countries in Latin America. As a result, the income tax expense includes the effect of taxes paid to the government of Puerto Rico as well as foreign jurisdictions. The following table presents the components of income tax expense and its segregation based on location of operations:
 Years ended December 31,
(In thousands)202120202019
Income before income tax provision
Puerto Rico$148,331 $98,608 $89,667 
United States622 3,953 4,047 
Foreign countries32,752 21,292 22,961 
Total income before income tax provision$181,705 $123,853 $116,675 
Current tax provision
Puerto Rico$6,792 $7,260 $7,550 
United States137 612 339 
Foreign countries16,459 15,035 11,477 
Total current tax provision$23,388 $22,907 $19,366 
Deferred tax (benefit) provision
Puerto Rico$(2,428)$(2,087)$(4,109)
United States109 1,041 (216)
Foreign countries(507)(2,859)(2,066)
Total deferred tax benefit$(2,826)$(3,905)$(6,391)

Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements.

As of December 31, 2021 and 2020, the Company had $99.1 million and $80.2 million of unremitted earnings from foreign subsidiaries, respectively. The Company has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries because these earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions. EVERTEC believes it is not practicable at this time to reliably determine the
amount of unrecognized deferred tax liability related to the Company’s undistributed earnings. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted, and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.

On October 19, 2012, EVERTEC Group was granted a tax exemption under the Tax Incentive Act No. 73 of 2008. Under this grant, EVERTEC Group will benefit from a preferential income tax rate on industrial development income, as well as from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to income tax obligations and January 1, 2013 with respect to municipal and property tax obligations. Industrial development income under this grant is subject to a preferential rate of 4%.

The grant contains customary commitments, conditions, and representations that EVERTEC Group will be required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 700 employees in EVERTEC Group's Puerto Rico data processing operations, (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made over four-year capital investment cycles in $50.0 million increments); and (iii) 80% of EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result, among other things, in reductions of the benefits of the grant or revocation of the grant in its entirety, which could result in EVERTEC, Inc. paying additional taxes or other payments relative to what would be required to pay to other municipal agencies if the full benefits of the grant are not available.

On October 11, 2011, Evertec Group was granted a tax exemption under Tax Incentive Law No. 73 of 2008, retroactively to December 1, 2009. Under this grant, activities derived from consulting and data processing services provided outside Puerto Rico are subject to a preferred rate that declines gradually from 7% to 4% by December 1, 2013. After this date, the rate remains at 4% until its expiration on November 30, 2024.

In addition, in August 2018, the Puerto Rico Industrial Development Company approved the requested extension of a grant under Tax Incentive Law No. 135 of 1997 for EVERTEC Group. Under this grant, activities derived from certain development and installation service in excess of a determined income are subject to a fixed tax rate of 10% for a 10-year period from January 1, 2018.
The following table presents the components of the Company’s deferred tax assets and liabilities:
 December 31,
(In thousands)20212020
Deferred tax assets (“DTA”)
Allowance for doubtful accounts$175 $223 
Unearned income10,475 11,058 
Lease liability2,655 3,410 
Share-based compensation1,181 1,163 
Debt issuance costs132 189 
Accrued liabilities3,263 1,828 
Derivative liability1,036 2,070 
Accrual of contract maintenance cost84 110 
Impairment of asset290 310 
Other1,596 1,649 
Total gross deferred tax assets20,887 22,010 
Deferred tax liabilities (“DTL”)
Capitalized salaries2,193 2,095 
Difference between the assigned values and the tax basis of assets and liabilities recognized in business combinations7,978 10,507 
Right of use asset2,707 3,340 
Other3,468 3,086 
Total gross deferred tax liabilities16,346 19,028 
Deferred tax asset (liability), net$4,541 $2,982 

As of December 31, 2021 and 2020, the net deferred tax asset amounted to $5.9 million and $3.9 million, respectively, with a valuation allowance of approximately $1.4 million and $0.9 million, respectively, included as part of other deferred tax assets, for a net deferred tax asset after valuation allowance of approximately $4.5 million and $3.0 million, respectively.

Pursuant to the provision of the PR Code, net operating losses (“NOL”) can be carried forward for a period of seven, ten or twelve taxable years, depending on the taxable year generated. Act 72 of May 29, 2015, limited the amount of NOLs deduction to 80% for regular tax and 70% for alternative minimum tax (“AMT”) for taxable years commencing after December 31, 2014. However, Act 257 of 2018 limits the deduction of NOLs to 90% for regular tax for tax years commencing after December 31, 2018. At December 31, 2021, the Company has $6.8 million, $0.6 million and $4.0 million in NOL carryforwards related to Puerto Rico industrial development income, United States and foreign countries, respectively, available to offset future eligible income. The NOL balance as of December 31, 2021 expires as follows:
(In thousands)
2026$51 
2028688 
20291,558 
20304,112 
20313,737 
2033178 
Indefinitely1,072 

The Company recognizes the benefit of uncertain tax positions ("UTPs") only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The following is a tabular reconciliation of the total amounts of UTPs:
 Years ended December 31,
(In thousands)202120202019
Balance, beginning of year$5,908 $9,146 $9,238 
Gross increases—tax positions in prior period431 1,335 — 
Gross decreases—tax positions in prior period(101)(192)(92)
Lapse of statute of limitations(2,287)(4,381)— 
Balance, end of year$3,951 $5,908 $9,146 

As of December 31, 2021, 2020 and 2019, approximately $4.0 million, $5.9 million and $9.1 million, respectively, would have affected the Company’s effective income tax rate, if recognized.

The Company recognizes interest and penalties related to UTB as part of income tax expense. During the years ended December 31, 2021, 2020 and 2019, the Company recognized an income tax expense of $0.4 million, $0.3 million and $0.4 million, respectively, related to interest and penalties. The amount accrued for interest and penalties at December 31, 2021 and 2020 was $1.6 million and $2.6 million, respectively. The Company estimates that it is reasonably possible that the Puerto Rico liability for uncertain tax position relating to the net operating loss created by transaction cost will decrease by approximately $3.6 million in the next 12 months as a result of the statute of limitations. The Company believes it has sufficient accruals for contingent tax liabilities.

In connection with tax return examinations, contingencies can arise that generally result from different interpretations of tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the Company’s Puerto Rico and foreign tax examinations or the statute of limitations for specific jurisdictions, that the liability for UTBs may increase or decrease within the next twelve months, the Company does not expect any such change would have a material effect on our financial condition, results of operations or cash flow.

The Company and its subsidiaries are subject to Puerto Rico income tax as well as income tax of multiple foreign jurisdictions. A significant majority of the income tax is from Puerto Rico and Costa Rica. The income tax returns for 2017, 2018, 2019, and 2020 are currently open for examination for both jurisdictions, while 2014 and 2015 are also open for examination for Costa Rica.

The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate of 37.5% to the income before income taxes as a result of the following:
 Years ended December 31,
(In thousands)202120202019
Computed income tax at statutory rates$68,139 $46,445 $43,753 
Differences in tax rates due to multiple jurisdictions2,003 839 1,058 
Excess tax benefits on share-based compensation(1,023)(1,094)(1,779)
Effect of income subject to tax-exemption grant(46,762)(31,347)(31,424)
Unrecognized tax (benefit) expense (3,388)1,322 (32)
Other, net1,593 2,837 1,399 
Income tax expense$20,562 $19,002 $12,975