Columbia Sportswear Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

INCOME TAXES

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to:


•	reducing the U.S. federal corporate tax rate from 35% to 21%;


•	requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;


•	generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries;


•	requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations;


•	eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized;


•	creating the base erosion anti-abuse tax;


•	a new provision designed to tax global intangible low-taxed income ("GILTI");


•	creating a new limitation on deductible interest expense; and


•	changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

In conjunction with the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting for the effects of the TCJA. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it 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 apply its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.

In connection with the Company's initial analysis of the impact of the TCJA, the Company recorded an incremental provisional net tax expense of $95,610,000 during the year ended December 31, 2017. For various reasons that are discussed more fully below, the Company has not completed all of the accounting for the income tax effects of certain elements of the TCJA. In cases where the Company was able to make reasonable estimates of the effects of elements for which the analysis is not yet complete, it recorded provisional amounts for those specific tax affects. The Company has not recorded any adjustments related to those elements for which a reasonable estimate of the tax affects cannot be made, and has continued accounting for those elements on the basis of the tax laws in effect before the TCJA.

The Company's accounting for the following elements of the TCJA is incomplete. However, the Company was able to determine reasonable estimates of certain effects and, therefore, recorded provisional amounts as follows:

Reduction of U.S. federal corporate tax rate:

The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018. For certain of the Company's deferred tax assets and liabilities, the Company has recorded a provisional decrease to net deferred tax assets of $15,017,000, with a corresponding charge to deferred income tax expense of $15,017,000 for the year ended December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in the U.S. corporate rate, it may be affected by other analyses related to the TCJA, including, but not limited to, the Company's calculation of deemed repatriation of foreign income and the state tax effect of adjustments made to federal temporary differences.

Transition tax on foreign earnings:

The Deemed Repatriation Transition Tax ("Transition Tax") is a U.S. 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 post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $49,947,000. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax, including a detailed analysis of E&P data of relevant subsidiaries. The Transition Tax will be paid over an eight year period.

Deferred tax liability associated with future repatriations:

The Company has recorded a provisional estimate of $23,690,000 related to potential withholding tax on future repatriations of foreign earnings. The amount is provisional until additional analysis of the effect of the TCJA has been completed and the Company has further analyzed its applicable foreign earnings.

Disallowance of foreign tax credits:

The Company recorded dividends in 2017 from its foreign subsidiaries for which certain foreign tax credits are no longer allowable under the TCJA. As a result, the Company recorded an additional provisional $6,956,000 of income tax expense, which could be affected by further analysis of the TCJA.

The Company's accounting for the following elements of the TCJA is incomplete and the Company was not able to determine reasonable estimates of certain effects and, therefore, did not record any provisional adjustments:

Global intangible low-taxed income tax:

An estimate has not been recorded related to the new GILTI tax under the TCJA because of the complexity of the new tax rules and the lack of clarity surrounding the application of the relevant accounting guidance. The Company's selection of an accounting policy with respect to the GILTI tax rules will depend, in part, on analyzing the Company's global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. As a result, the Company is not yet able to reasonably estimate the effect of this provision of the TCJA and has not made an accounting policy election or recorded any amounts related to potential GILTI tax in the Company's financial statements.

Consolidated income from continuing operations before income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2017		2016		2015
U.S. operations	$	167,380	$	173,798	$	173,966
Foreign operations	99,354		83,100		73,353
Income before income tax	$	266,734	$	256,898	$	247,319

The components of the provision (benefit) for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	87,386		$	53,840		$	61,211
State and local	443			6,370			6,520
Non-U.S.	28,708			18,708			21,014
	116,537			78,918			88,745
Deferred:
Federal	47,087			(12,921		)	(8,883		)
State and local	4,990			(2,166		)	(906		)
Non-U.S.	(14,195		)	(5,372		)	(11,488		)
	37,882			(20,459		)	(21,277		)
Income tax expense	$	154,419		$	58,459		$	67,468

The following is a reconciliation of the statutory federal income tax rate to the effective rate reported in the financial statements:



	Year Ended December 31,
	2017		2016		2015
	(percent of income)
Provision for federal income taxes at the statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	0.4		1.5		2.2
Non-U.S. income taxed at different rates	(7.8	)	(5.8	)	(3.9	)
Foreign tax credits	(0.1	)	(3.0	)	(1.7	)
Foreign deferred tax asset	(3.0	)	(2.5	)	—
Reduction of unrecognized tax benefits	—		—		(0.8	)
Research credits	(0.7	)	(0.8	)	(0.9	)
Reduction of valuation allowance	—		—		(2.7	)
Excess tax benefits from stock plans	(2.3	)	(2.1	)	—
Other	0.5		0.5		0.1
Actual provision for income taxes, pre-TCJA	22.0		22.8		27.3

Effects of the TCJA:
Reduction of U.S. federal corporate tax rate	5.6		—		—
Transition tax on foreign earnings	18.7		—		—
Deferred tax liability associated with future repatriations	8.9		—		—
Foreign tax credits	2.7		—		—
Provision for income taxes related to the TCJA	35.9		—		—

Actual provision for income taxes	57.9	%	22.8	%	27.3	%

Significant components of the Company's deferred taxes consisted of the following (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Accruals and allowances	$	37,971		$	51,724
Capitalized inventory costs	21,625			39,661
Stock compensation	3,867			6,476
Net operating loss carryforwards	20,085			3,637
Depreciation and amortization	25,020			19,313
Tax credits	31			443
Foreign currency gain	5,657			—
Other	276			263
Gross deferred tax assets	114,532			121,517
Valuation allowance	(16,428		)	(1,323		)
Net deferred tax assets	98,104			120,194
Deferred tax liabilities:
Depreciation and amortization	(15,395		)	(25,703		)
Prepaid expenses	(2,383		)	—
Deferred tax liability associated with future repatriations	(23,690		)	—
Foreign currency loss	—			(667		)
Other	—			(1,477		)
Gross deferred tax liabilities	(41,468		)	(27,847		)
Total net deferred taxes	$	56,636		$	92,347

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company has foreign net operating loss carryforwards of $72,297,000 as of December 31, 2017, of which $59,943,000 have an unlimited carryforward period and $15,354,000 expire between 2025 and 2027. The net operating losses result in deferred tax assets of $20,085,000 and $3,637,000 at December 31, 2017 and 2016, respectively. These deferred tax assets were subject to a valuation allowance of $16,152,000 and $1,060,000 at December 31, 2017 and 2016, respectively.

At December 31, 2016, the unremitted earnings of foreign subsidiaries outside of the United States for which deferred taxes had not been provided were approximately $422,940,000. Under the transition tax described above, a provisional estimate of $49,947,000 has been recorded for the amount of the tax due on untaxed foreign earnings and profits as of December 31, 2017. While the provisional transition tax may eliminate, in part or in whole, the need for U.S. federal deferred taxes on previously untaxed net foreign earnings and profits, it has not eliminated the potential need for deferred taxes related to the associated future foreign withholding and state taxes. As of December 31, 2017, the Company has recorded provisional deferred tax liabilities of $23,690,000 related to estimated foreign withholding taxes on future repatriations of previously untaxed net foreign earnings and profits.

The Company conducts business globally, and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Japan, South Korea, Switzerland, and the United States. The Company has effectively settled Canadian tax examinations of all years through 2012, U.S. tax examinations of all years through 2013, Japanese tax examinations of all years through 2012, France tax examinations of all years through 2014, and Swiss tax examinations of all years through 2013. The Company's transfer pricing policies are currently under review by the Chinese tax authorities for all tax years after 2013. The Korean National Tax Service concluded an audit of the Company's 2009 through 2013 corporate income tax returns in 2014, and an audit of the Company's 2014 corporate income tax return in 2016. Due to the nature of the findings in both of these audits, the Company has invoked the Mutual Agreement Procedures outlined in the U.S.-Korean income tax treaty. The Company does not anticipate that adjustments relative to this dispute, or any other ongoing tax audits, will result in material changes to its financial condition, results of operations or cash flows. Other than the dispute previously noted, the Company is not currently under examination in any major jurisdiction.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



	December 31,
	2017			2016			2015
Balance at beginning of year	$	9,998		$	11,187		$	6,630
Increases related to prior year tax positions	858			2,514			365
Decreases related to prior year tax positions	(2,895		)	(5,119		)	(2,019		)
Increases related to current year tax positions	2,714			1,599			6,564
Expiration of statute of limitations	(163		)	(183		)	(353		)
Balance at end of year	$	10,512		$	9,998		$	11,187

Due to the potential for resolution of income tax audits currently in progress, and the expiration of various statutes of limitation, it is reasonably possible that the unrecognized tax benefits balance may change within the twelve months following December 31, 2017 by a range of zero to $2,066,000. Open tax years, including those previously mentioned, contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenue and expenses or the sustainability of income tax credits for a given examination cycle.

Unrecognized tax benefits of $6,892,000 and $7,723,000 would affect the effective tax rate if recognized at December 31, 2017 and 2016, respectively.

The Company recognizes interest expense and penalties related to income tax matters in income tax expense. The Company recognized a net reversal of accrued interest and penalties of $1,402,000 in 2017, and a net increase of accrued interest and penalties of $637,000 in 2016 and a net reversal of accrued interest and penalties of $356,000 in 2015, all of which related to uncertain tax positions. The Company had $1,640,000 and $3,042,000 of accrued interest and penalties related to uncertain tax positions at December 31, 2017 and 2016, respectively.