Income Taxes and Uncertain Tax Positions

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 11 – Income Taxes and Uncertain Income Tax Positions

The Company’s effective tax rate for the three and nine months ended September 30, 2020 was an expense of

8.1

% and a benefit

of

38.3

%, respectively, compared to a benefit of

27.6

% and an expense of

22.9

%, respectively, for the three and nine months ended

September 30, 2019. The Company’s effective tax rate for the three and nine months ended September 30, 2020 was impacted by the

pre-tax loss for the nine months ended September 30, 2020, the tax effect of certain one-time pre -tax costs as well as certain tax

charges and benefits in the current period related to the impact of recently issued tax regulations and other changes in foreign tax

credit valuation allowances, discussed below, tax law changes in foreign jurisdictions, and the tax impact of the Company’s

termination of its Legacy Quaker U.S. Pension Plan. Applying the recently issued tax regulations resulted in a $

5.0

 million discrete

benefit on the foreign tax credit valuation allowance and a $

2.1

 million benefit on the 2019 return to provision adjustment, both

recognized in the third quarter of 2020. Comparatively, the three and nine months ended September 30, 2019 effectiv e tax rates were

impacted by certain non-deductible costs associated with the Combination and withholding tax expense associated with the assumed

repatriation of previously untaxed current earnings and profits of certain of the Company’s foreign subsidiaries, partially offset by

favorable return to provision adjustments in the current year and certain share-based compensation-related tax benefits for deductions

in excess of compensation costs associated with stock option exercises. Additionally, in the third quarter of 2019, the Company

recorded a cumulative year-to-date tax benefit as a result of one of its subsidiaries receiving approval for the renewal of the

concessionary

15

% tax rate compared to its

25

% statutory tax rate.

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, the Coronavirus Aid, Relief and

Economic Security Act (the “CARES Act”) was enacted into law, providing a stimulus to the U.S. economy in the form of various

individual and business assistance programs as well as temporary changes to existing tax law. The changes include a postponement of

certain tax payments, deferral of the employer’s portion of the social security tax and certain other payroll-related incentives, and an

increase in the interest expense limitation under Section 163(j) of the Internal Revenue Code from

30

% to

50

% for the 2019 and 2020

tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. Under the

CARES Act, the Company has the option to use its 2019 adjusted taxable income in determining its interest expense limitation under

Section 163(j). While the Company is still considering whether to make this election for 2020, the current year tax provision takes

into account this potential election and associated tax benefit, which offsets an increase to the Company’s foreign tax credit valuation

allowance recognized during the current quarter primarily driven by changes in current year projected taxable income due to the

negative impacts from COVID-19. In addition, the Company reviewed its existing deferred tax assets in light of COVID-19 and

determined that, at this time, no change in valuation allowance is required except with regard to its foreign tax credits as noted below. 

While the ultimate impact of COVID-19 on the Company’s results of operations is still uncertain, the Company will continue to assess

future changes in projected taxable income to determine if they result in additional changes to any of the Company’s valuation

allowances. 

As previously disclosed in its 2019 Form 10-K, the Company had a deferred tax liability of $

8.2

 million at December 31, 2019,

which primarily represents the Company’s estimate of non-U.S. taxes it will incur to repatriate certain foreign earnings to the U.S. 

During the first nine months of 2020, the Company made certain adjustments to the deferred tax liability to take into account a tax law

change enacted in the first quarter in a certain foreign jurisdiction, the inclusion of other earnings to be repatriated, and the actual

repatriation of earnings, resulting in a deferred tax liability of $

6.4

 million as of September 30, 2020. 

As previously disclosed in its 2019 Form 10-K, in conjunction with the Combination, the Company acquired foreign tax credit

deferred tax assets of $41.8 million expiring between 2019 and 2028. Foreign tax credits may be carried forward for 10 years. The

Company analyzes the expected impact of the utilization of foreign tax credits based on projected U.S. taxable income, overall

domestic loss recapture, annual limitations due to the ownership change limitations provided by the Internal Revenue Code, and

enacted tax law amongst other factors.

 As of December 31, 2019, the Company had net realizable foreign tax credits of $

32.7

 million

on its balance sheet expected to be utilized between

2020 and 2026

. As of September 30, 2020, the Company had net realizable

foreign tax credits of $

26.0

 million on its balance sheet expected to be utilized between

2020 and 2026

. The change in net realizable

foreign tax credits during the first nine months of 2020 was primarily driven by the Company's update to its initial opening balance

sheet estimate with respect to acquired Houghton foreign tax credit deferred tax assets, described in Note 2 of Notes to Condensed

Consolidated Financial Statements, as well as approximately $

0.5

 million of tax benefit for the nine months ended September 30, 2020

based on revised taxable income projections and changes to the interest expense limitation under the CARES Act amongst other

factors.

The Company continues to recognize interest and penaltie s associated with uncertain tax positions as a component of taxes on

income (loss) before equity in net income of associated companies in its Condensed Consolidated Statements of Operations. The

Company recognized a credit for interest of $

0.2

 million and an expense of $

0.4

 million and an expense for penalties of less than $

0.1

million and $

0.5

 million in its Condensed Consolidated Statement of Operations for the three and nine months ended September 30,

2020, respectively. Comparatively, the Company recognized an expense for interest of $

0.1

 million and $

0.4

 million and an expense

for penalties of less than $

0.1

 million and $

0.1

 million for the three and nine months ended September 30, 2019, respectively. As of

September 30, 2020, the Company had accrued $

2.7

 million for cumulative interest and $

4.2

 million for cumulative penalties in its

Condensed Consolidated Balance Sheets, compared to $

2.3

 million for cumulative interest and $

3.1

 million for cumulative penalties

accrued at December 31, 2019.

As of September 30, 2020, the Company’s cumulative liability for gross unrecognized tax benefits was $

21.7

 million, an increase

of $

2.6

 million from the $

19.1

 million cumulative liability accrued as of December 31, 2019. 

During the nine months ended September 30, 2020 and 2019, the Company recognized a decrease of $

1.9

 million and $

1.5

million, respectively, in its cumulative liability for gross unrecognized tax benefits due to the expiration of the applicable statutes of

limitations for certain tax years.

The Company estimates that during the year ending December 31, 2020 it will reduce its cumulative liability for gross

unrecognized tax benefits by approximately $

2.3

 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, 2020.

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

2006

,

China from

2010

, Canada from

2011

, the Netherlands and the United Kingdom from

2014

, Spain from

2015

, Mexico, Germany, and

the U.S. from

2016

, India from fiscal year beginning April 1, 2017 and ending March 31,

2018

, and various U.S. state tax jurisdictions

from

2009

. 

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 2015

. The Company has filed for competent authority relief related to these assessments

under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development (“OECD”) for

all years except 2007. During the second quarter of 2020, the Company received notification that the Italian and Dutch competent

authorities reached an agreement as part of the MAP involving tax years 2008 through 2015. The Company has tentatively agreed to

the reduced tax assessments and has recorded $

1.3

 million of additional reserves for uncertain tax positions for the open tax years that

is consistent with the tentative agreement reached involving tax years 2008 through 2015. As of September 30, 2020, the Company

believes it has adequate reserves for uncertain tax positions with respect to this matter.

Houghton Italia, S.r.l is also currently involved in a corporate income tax audit with the Italian tax authorities covering tax years

2014 through 2018. As part of the purchase accounting related to the Combination, the Company has established a $

5.4

 million

reserve for uncertain tax positions relating to this audit. Since this reserve relates to tax periods prior to the Combination, the

Company has submitted an indemnification claim against funds held in escrow by Houghton’s former owners for certain tax liabilities

arising pre-Combination. As a result, a corresponding $

5.4

 million indemnification receivable has also been established through

purchase accounting that would offset the $

5.4

 million in tax liabilities booked through purchase accounting. These amounts relate to

the 2014 to 2018 audit periods as well as the seven-month period in 2019 prior to the Combination. As of September 30, 2020, the

Company believes it has adequate reserves for uncertain tax positions.