Taxes on Income

12 Months Ended

Dec. 31, 2017

Taxes on Income and Uncertain Tax Positions [Abstract]

Note 8 – Taxes on Income and Uncertain Tax Positions

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“U.S. Tax Reform”). U.S. Tax Reform includes multiple changes to the U.S. tax code with varying effects on the Company’s 2017 results, including, but not limited to, (i) a revaluation of the Company’s domestic deferred tax assets and liabilities based upon the reduction of the U.S. federal statutory corporate income tax rate from 35% to 21% and (ii) implementing a new system of taxation for non-U.S. earnings which eliminates U.S. federal income taxes on dividends from certain foreign subsidiaries and imposes a one-time transition tax on the deemed repatriation of undistributed earnings of certain foreign subsidiaries that is payable over eight years. U.S. Tax Reform also makes changes to the U.S. tax code that will affect 2018 and future years, including, but not limited to, (i) reduction of the U.S. federal statutory corporate tax rate; (ii) elimination of the corporate alternative minimum tax; (iii) the creation of the base erosion anti-abuse tax, a new minimum tax; (iv) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (v) a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (vi) a new limitation on deductible interest expense; (vii) the repeal of the domestic production activity deduction; (viii) limitations on the deductibility of certain executive compensation; (ix) limitations on the use of FTCs to reduce the U.S. income tax liability; (x) a reduction in the dividends received deduction from 70% to 50% (in the case of less-than-20%-owned subsidiaries), and from 80% to 65% (in the case of less-than-80%-owned subsidiaries); and (xi) limitations on net operating losses (“NOLs”) generated after December 31, 2017, to 80 percent of taxable income.

The SEC staff issued guidance on accounting for the tax effects of U.S. Tax Reform and provided a one-year measurement period for companies to complete the accounting. Companies are required to reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform are incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to use the applicable accounting guidance on the basis of the provisions of the tax laws that were in effect immediately before the enactment of U.S. Tax Reform.

In connection with the Company’s initial analysis of the impact of U.S. Tax Reform, the Company has recorded incremental tax expense of $22.2 million for the year ended December 31, 2017, which includes deferred tax expense of approximately $4.5 million and current tax expense of approximately $17.8 million, net of the impact of eliminating U.S. federal income taxes on dividends from certain foreign subsidiaries in the current year, the details of which are described below. The Company has made reasonable interpretations and assumptions with regard to various uncertainties and ambiguities in the application of certain provisions of U.S. Tax Reform. It is possible that the Internal Revenue Service (“IRS”) could issue subsequent guidance or take positions on audit that differ from the Company’s interpretations and assumptions. The Company currently believes subsequent guidance issued or interpretations made by the IRS will not be materially different from the Company’s application of the provisions of U.S. Tax Reform.

U.S. Tax Reform reduced the U.S. federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018. Consequently, the Company has recorded a decrease in domestic net deferred tax assets of approximately $4.5 million with a corresponding net adjustment to deferred income tax expense for the year ended December 31, 2017. The deemed repatriation transition tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of the Company’s foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of E&P of its relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings after 1986. The Company made a reasonable estimate of its Transition Tax and recorded a gross provisional Transition Tax obligation of $18.4 million in its December 31, 2017 financial statements. The Company will elect to pay its Transition Tax in installments over eight years as provided for in U.S. Tax Reform.

In addition, U.S. Tax Reform creates a new requirement that GILTI earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (i) 10 percent of the aggregate of the U.S. shareholder’s pro-rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (ii) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Based upon the most recent information, the Company does not believe that it will be subject to the new GILTI tax rules. The Company is continuing to evaluate this provision of U.S. Tax Reform and expects to finalize its assessment during the one-year measurement period provided for by the SEC to complete the accounting for U.S. Tax Reform.

Taxes on income for the years ended December 31, 2017, 2016 and 2015 are as follows:

			2017		2016		2015
Current:
	Federal	$	21,265	$	4,680	$	8,924
	State		2,529		518		188
	Foreign		14,105		12,540		11,074
			37,899		17,738		20,186
Deferred:
	Federal		6,889		4,601		404
	State		(36)		104		(16)
	Foreign		(3,099)		783		(2,789)
Total		$	41,653	$	23,226	$	17,785

The components of earnings before income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:

		2017		2016		2015
Domestic	$	10,468	$	31,175	$	25,219
Foreign		50,200		52,834		45,011
Total	$	60,668	$	84,009	$	70,230

Total deferred tax assets and liabilities are composed of the following as of December 31, 2017 and 2016:

		2017		2016
Retirement benefits	$	5,472	$	8,236
Allowance for doubtful accounts		1,134		1,925
Insurance and litigation reserves		497		707
Postretirement benefits		1,056		1,623
Supplemental retirement benefits		2,679		3,670
Performance incentives		3,779		5,197
Equity-based compensation		1,071		2,088
Insurance settlement		4,581		7,755
Operating loss carryforward		8,602		7,343
Foreign tax credit and other credits		3,043		—
Uncertain tax positions		(410)		(101)
Restructuring		—		217
Other		2,816		2,834
		34,320		41,494
Valuation allowance		(7,401)		(6,344)
Total deferred tax assets, net	$	26,919	$	35,150
Depreciation		4,444		5,709
Europe pension and other		1,295		1,055
Amortization and other		15,373		16,012
Total deferred tax liabilities	$	21,112	$	22,776

The following are the changes in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2017, 2016 and 2015:

								Effect of
		Balance at		Additional		Allowance		Exchange		Balance
		Beginning		Valuation		Utilization		Rate		at End
		of Period		Allowance		and Other		Changes		of Period
Valuation Allowance
Year ended December 31, 2017	$	6,344	$	1,127	$	(61)	$	(9)	$	7,401
Year ended December 31, 2016	$	6,259	$	294	$	(187)	$	(22)	$	6,344
Year ended December 31, 2015	$	7,345	$	86	$	(802)	$	(370)	$	6,259

The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2017 and 2016 as follows:

	2017		2016
Non-current deferred tax assets	$	15,460	$	24,382
Non-current deferred tax liabilities		9,653		12,008
Net deferred tax asset	$	5,807	$	12,374

The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2017, 2016 and 2015:

		2017		2016		2015
Income tax provision at the Federal statutory tax rate	$	21,229	$	29,403	$	24,578
Transition Tax		18,388		—		—
Revaluation of U.S. deferred tax assets and liabilities		4,470		—		—
Non-deductible acquisition expenses		4,779		696		122
Share-based compensation		(1,419)		—		—
Differences in tax rates on foreign earnings and remittances		(2,663)		(2,862)		(5,097)
Foreign dividends		—		2,939		2,690
Excess foreign tax credit utilization		(2,761)		(5,493)		(4,141)
Research and development activities credit utilization		(235)		(238)		(245)
Uncertain tax positions		(651)		(833)		226
Domestic production activities deduction		(1,155)		(875)		(910)
State income tax provisions, net		569		357		133
Non-deductible entertainment and business meals expense		248		238		249
Miscellaneous items, net		854		(106)		180
Taxes on income	$	41,653	$	23,226	$	17,785

As of December 31, 2017, the Company domestically had a net deferred tax asset of $0.3 million. In addition, the Company has foreign tax loss carryforwards of $8.9 million of which $0.2 million expires in 2018, $0.3 million expires in 2019, $0.1 million expires in 2020, $0.2 million expires in 2021, $0.1 million expires in 2022, and $0.8 million expires thereafter. The remaining foreign tax losses have no expiration dates. A partial valuation allowance has been established with respect to the tax benefit of these losses for $0.8 million.

It is the Company’s intention to continue to reinvest its undistributed earnings of non-U.S. subsidiaries to support working capital needs and certain other growth initiatives. The amount of such undistributed earnings at December 31, 2017 was approximately $300.0 million. As a result of U.S. Tax Reform, specifically the Transition Tax, the Company has provided for U.S. income taxes on these undistributed earnings, however, the Company could be subject to other taxes, such as withholding taxes and dividend distribution taxes if these undistributed earnings were ultimately remitted to the U.S. It is currently impractical to estimate any such incremental tax expense.

As of December 31, 2017, the Company’s cumulative liability for gross unrecognized tax benefits was $6.8 million. The Company had accrued approximately $1.0 million for cumulative penalties and $0.6 million for cumulative interest as of December 31, 2017. As of December 31, 2016, the Company’s cumulative liability for gross unrecognized tax benefits was $6.2 million. The Company had accrued $1.6 million for cumulative penalties and $0.7 million for cumulative interest as of December 31, 2016.

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of tax expense on income before equity in net income of associated companies in its Consolidated Statements of Income. The Company recognized a credit of $0.7 million for penalties and a credit of $0.2 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2017, a credit of $0.2 million for penalties and a credit of $0.7 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2016, and $0.2 million for penalties and a credit of $0.2 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2015.

The Company estimates that during the year ending December 31, 2018, it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1.0 million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2018.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, respectively, is as follows:

			2017		2016		2015
Unrecognized tax benefits as of January 1		$	6,240	$	11,032	$	11,845
	Decrease in unrecognized tax benefits taken in prior periods		(308)		(869)		(416)
	Increase in unrecognized tax benefits taken in current period		2,347		1,921		2,512
	Decrease in unrecognized tax benefits due to lapse of statute of limitations		(2,116)		(5,744)		(1,924)
	Increase (decrease) due to foreign exchange rates		598		(100)		(985)
Unrecognized tax benefits as of December 31		$	6,761	$	6,240	$	11,032

The amount of unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax rate is $2.2 million, $1.8 million and $1.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from 2000, Italy from 2007, the Netherlands from 2011, the United Kingdom and Mexico from 2012, Spain and China from 2013, India from fiscal year beginning April 1, 2013 and ending March 31, 2014, the United States from 2014, and various domestic state tax jurisdictions from 2008.

As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013. The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures of the Organization for Economic Co-Operation and Development for all years except 2007. As of December 31, 2017, the Company believes it has adequate reserves, where merited, for uncertain tax positions with respect to these and all other audits.