Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Taxes  
Income Taxes

(9) Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, the most significant of which was a reduction to the U.S. federal corporate tax rate from 35 percent to 21 percent. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting was known as of December 31, 2017 and made immaterial revisions to such amounts during the allowed one year measurement period. As of December 31, 2018, the Company had completed its analysis of the tax effects of the Tax Act.

The corporate tax rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities, which resulted in the net tax benefit in the period ending December 31, 2017. Additionally, we are subject to the one-time transition tax on certain unrepatriated earnings on previously untaxed accumulated and current earnings and profits.

Income tax benefit (expense) consists of:

Years ended

 

December 31,

 

    

2019

    

2018

    

2017

 

amounts in millions

 

Current:

Federal

$

(31)

 

(39)

 

(92)

State and local

 

(6)

 

(12)

 

(2)

Foreign

 

(26)

 

(14)

 

(6)

$

(63)

 

(65)

 

(100)

Deferred:

Federal

$

27

 

14

 

288

State and local

 

20

 

(5)

 

30

Foreign

 

32

 

(1)

 

11

 

79

 

8

 

329

Income tax benefit (expense)

$

16

 

(57)

 

229

The following table presents a summary of our domestic and foreign earnings (losses) from continuing operations before income taxes:

Years ended

 

December 31,

 

    

2019

    

2018

    

2017

 

amounts in millions

 

Domestic

$

(178)

 

3

 

(1,720)

Foreign

 

46

 

45

 

(90)

Total

$

(132)

 

48

 

(1,810)

Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 as a result of the following:

Years ended

 

December 31,

 

    

2019

    

2018

    

2017

 

amounts in millions

 

Computed expected tax benefits (expense)

$

28

 

(10)

 

634

State and local taxes, net of federal income taxes

 

2

 

(14)

 

17

Foreign taxes, net of foreign tax credits

 

13

 

11

 

2

Transition tax

(67)

Change in tax rate due to Tax Act

 

 

 

139

Taxable dividend net of dividends received deduction

(13)

Basis difference in consolidated subsidiary

22

(17)

(8)

Change in valuation allowance

 

(11)

 

(4)

 

(27)

Change in unrecognized tax benefits

 

(25)

 

(12)

 

(11)

Federal tax credits

11

9

8

Stock-based compensation

(4)

(8)

(12)

Impairment of nondeductible goodwill

(445)

Other

 

(7)

 

(12)

 

(1)

Income tax (expense) benefit

$

16

 

(57)

 

229

During 2019, the Company recognized additional tax expense for changes in unrecognized tax benefits and dividends from Tripadvisor not recognized for book purposes, net of a dividends received deduction.  These expense items were partially offset by a net income tax benefit from earnings in foreign jurisdictions taxed at rates other than the 21% U.S. federal tax rate and federal income tax credits.

During 2018, the Company recognized additional tax expense related to the recognition of deferred tax liabilities for basis differences in the stock of a consolidated subsidiary and changes in unrecognized tax benefits. These expense items were partially offset by a net income tax benefit from earnings in foreign jurisdictions taxed at rates other than the 21% U.S. federal tax rate.

During 2017, the Company recognized an impairment loss on its goodwill that is not deductible for tax purposes. In connection with the initial analysis of the impact of the Tax Act, the Company estimated a one-time increase in tax expense of $67 million on the deemed repatriation of undistributed earnings of non-U.S. shareholders as a result of the Tax Act. In addition, the Company recorded a discrete net tax benefit of $139 million in the period ending December 31, 2017.  This net benefit primarily consists of a net benefit for the corporate rate reduction.

The tax effects of temporary differences and tax attributes that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:

December 31,

 

    

2019

    

2018

 

amounts in millions

 

Deferred tax assets:

Tax loss and credit carryforwards

$

89

 

77

Stock-based compensation

 

53

 

48

Lease financing obligation

24

22

Other

 

(23)

 

78

Total deferred tax assets

 

143

 

225

Less: valuation allowance

 

(80)

 

(60)

Net deferred tax assets

 

63

 

165

Deferred tax liabilities:

Intangible assets

 

(297)

 

(387)

Investments

 

(17)

 

(41)

Other

 

3

 

(62)

Total deferred tax liabilities

 

(311)

 

(490)

Net deferred tax liability

$

(248)

 

(325)

During the year ended December 31, 2019, there was an $11 million increase in the Company’s valuation allowance that affected tax expense and a $9 million increase related to acquisitions in 2019.  

As a result of the Tax Act, foreign earnings may now generally be repatriated back to the U.S. without incurring U.S. federal income tax.  Historically, Tripadvisor had asserted its intention to indefinitely reinvest the cumulative undistributed earnings of its foreign subsidiaries.  In response to increased cash requirements in the U.S. related to Tripadvisor’s declaration of a special cash dividend and other strategic initiatives during the fourth quarter of 2019, Tripadvisor determined it no longer considers $501 million of these foreign earnings to be indefinitely reinvested. During the year ended December 31, 2019, Tripadvisor has recorded a deferred tax liability of $1 million for the U.S. state income tax and foreign withholding tax liabilities on the cumulative undistributed foreign earnings that are not indefinitely invested.  Tripadvisor intends to indefinitely reinvest $118 million of its foreign earnings in its non-U.S. subsidiaries.  Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

At December 31, 2019, the Company has a deferred tax asset of $89 million for federal, state, and foreign net operating losses (“NOLs”), interest expense carryforwards and tax credit carryforwards. Of this amount, $72 million is recorded at Tripadvisor.  If not utilized to reduce income tax liabilities at Tripadvisor in future periods, these loss carryforwards and tax credits will expire at various times between 2020 and 2038.  The remaining deferred tax asset of $17 million relates to federal and state net operating loss carryforwards recorded at TripCo. If not utilized to reduce income tax liabilities at TripCo in future periods, these net operating loss carryforwards will expire at various times between 2023 and 2037. These carryforwards recorded at Tripadvisor and TripCo are expected to be utilized prior to expiration, except for $80 million of NOLs, interest expense carryforwards, and tax credit carryforwards, which based on current projections may expire unused.

A reconciliation of unrecognized tax benefits is as follows (amounts in millions):

Years ended

December 31,

    

2019

    

2018

2017

Balance at beginning of year

$

136

 

123

 

105

Additions based on tax positions related to the current year

 

11

 

11

 

17

Additions for tax positions of prior years

 

1

 

2

 

1

Reductions for tax positions of prior years

 

(8)

 

 

Balance at end of year

$

140

 

136

 

123

As of December 31, 2019, 2018 and 2017, the Company had recorded tax reserves of $140 million, $136 million and $123 million, respectively, related to unrecognized tax benefits for uncertain tax positions, which is classified as long-term and included in other long-term liabilities on the consolidated balance sheets. Prior to the acquisition of a controlling interest in Tripadvisor in December 2012, the Company did not have any unrecognized tax benefits for uncertain tax positions. If the unrecognized tax benefits were to be recognized for financial statement purposes, approximately $82 million, $87 million and $78 million for the years ended December 31, 2019, 2018 and 2017, respectively, would be reflected in the Company’s tax expense and affect its effective tax rate. The Company’s estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment. The Company anticipates that the liability for unrecognized tax benefits could decrease by up to $12 million within the next twelve months due to the settlement of examinations of issues with tax authorities.

As of December 31, 2019 and 2018, the Company had recorded approximately $29 million and $20 million, respectively, of accrued interest and penalties related to uncertain tax positions.

As of December 31, 2019, TripCo’s tax years prior to 2015 are closed for federal income tax purposes, and the Internal Revenue Service (“IRS”) has completed its examination of TripCo’s 2016 and 2017 tax years. TripCo’s 2018 and 2019 tax years are being examined currently as part of the IRS’s Compliance Assurance Process program. Because TripCo’s ownership of Tripadvisor is less than the required 80%, Tripadvisor does not consolidate with TripCo for federal income tax purposes.

Prior to December 2011, Tripadvisor was included in the consolidated federal income tax returns filed by Expedia. Expedia’s 2009, 2010 and short-period 2011 tax years are currently being audited by the IRS. Tripadvisor and Expedia are parties to a tax sharing agreement whereby Tripadvisor is generally required to indemnify Expedia for any taxes resulting from the Expedia spin-off (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts resulted from (i) any act or failure to act by Tripadvisor described in the covenants in the tax sharing agreement, (ii) any acquisition of Tripadvisor’s equity securities or assets or those of a member of its group, or (iii) any failure of the representations with respect to Tripadvisor or any member of its group to be true or any breach by Tripadvisor or any member of its group of any covenant, in each case, which is contained in the separation documents or in the documents relating to the IRS private letter ruling and/or the opinion of counsel.

Tripadvisor is undergoing an audit by the IRS for the short-period 2011, 2012-2016 tax years under an employment tax audit by the IRS for the 2013 and 2014 tax years. Various states are currently examining Tripadvisor’s prior year’s state income tax returns. Tripadvisor is no longer subject to tax examinations by tax authorities for years prior to 2009.  As of December 31, 2019, no material assessments have resulted, except as noted below.

In January 2017 and April 2019, as part of Expedia’s IRS audit, Tripadvisor received Notices of Proposed Adjustment from the IRS for the 2009, 2010 and 2011 tax years. Subsequently, in September 2019, as part of Tripadvisor’s standalone audit, Tripadvisor received Notices of Proposed Adjustment from the IRS for the 2012 and 2013 tax years.  These proposed adjustments are related to certain transfer pricing arrangements with Tripadvisor’s foreign subsidiaries, and would result in an increase to Tripadvisor’s worldwide income tax expense in an estimated range of $35 million to $40 million at the close of the audit if the IRS prevails, after consideration of competent authority relief and transition tax, exclusive of interest and penalties. Tripadvisor disagrees with the proposed adjustments and intends to defend its position through applicable administrative and, if necessary, judicial remedies. Tripadvisor’s policy is to review and update tax reserves as facts and circumstances change. Based on Tripadvisor’s interpretation of the regulations and available case law, it believes the position taken with regard to transfer pricing with its foreign subsidiaries is sustainable.  In addition to the risk of additional tax for 2009 through 2013 transactions, if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, Tripadvisor would be subject to significant additional tax liabilities.