Capri Holdings Ltd - 10-K filing on 2020-07-08

Taxes

12 Months Ended

Mar. 28, 2020

TaxesThe Company is a United Kingdom tax resident and is incorporated in the British Virgin Islands. Capri’s subsidiaries are subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S.” information captioned below.

(Loss) income before provision for income taxes consisted of the following (in millions):


	Fiscal Years Ended
	March 28, 2020		March 30, 2019		March 31, 2018
U.S.	$	(28)	$	191	$	124
Non-U.S.	(187)		430		618
Total (loss) income before provision for income taxes	$	(215)	$	621	$	742

The provision for income taxes was as follows (in millions):


	Fiscal Years Ended
	March 28, 2020			March 30, 2019			March 31, 2018
Current
U.S. Federal	$	4	(3)	$	82	⁽²⁾	$	48
U.S. State	19			24			16
Non-U.S.	60			44			77
Total current	83			150			141
Deferred
U.S. Federal	(22)			(34)		⁽²⁾	24		⁽¹⁾
U.S. State	(3)			(4)			1
Non-U.S.	(48)			(33)			(16)
Total deferred	(73)			(71)			9
Total provision for income taxes	$	10		$	79		$	150

⁽¹⁾Includes an $18 million provision related to the U.S. Tax Act one time revaluation of deferred tax assets.

⁽²⁾Includes a $25 million current tax provision and equal deferred tax benefit related to the U.S. Tax Act impact to business interest disallowance provisions.

⁽³⁾Includes a $35 million current tax benefit due to a release of income tax reserves in the U.S.

The Company’s provision for income taxes for the years ended March 28, 2020, March 30, 2019 and March 31, 2018 was different from the amount computed by applying the statutory U.K. income tax rate to the underlying (loss) income from operations before income taxes as a result of the following:


	Fiscal Years Ended
	March 28, 2020			March 30, 2019			March 31, 2018
Provision for income taxes at the U.K. statutory tax rate	19.0	%		19.0	%		19.0	%
State and local income taxes, net of federal benefit	(1.9)	%		0.9	%		0.5	%
Effects of global financing arrangements	21.7	%	(4)	(8.1)	%		(15.6)	%
U.S. tax reform	—	%		—	%		2.0	%	⁽¹⁾
Differences in tax effects on foreign income	1.2	%		(1.8)	%	⁽²⁾	6.7	%
Liability for uncertain tax positions	5.7	%		1.3	%		6.6	%
Effect of changes in valuation allowances on deferred tax assets	(30.9)	%	(5)	2.8	%	⁽³⁾	0.3	%
Excess tax benefits related to stock-based compensation	(4.2)	%		(2.6)	%		(0.8)	%
Transaction costs	—	%		1.5	%		0.9	%
Withholding tax	(1.6)	%		0.6	%		1.2	%
Nondeductible goodwill impairment	(15.1)	%	(6)	—	%		—	%
Other	1.4	%		(0.9)	%		(0.6)	%
Effective tax rate	(4.7)	%		12.7	%		20.2	%

⁽¹⁾Includes an $18 million expense related to the re-measurement of certain net deferred tax assets in connection with U.S. Tax Act.

⁽²⁾Mainly attributable to the United States statutory federal income tax rate change from a blended rate for Fiscal 2018 of 31.54% to 21% in Fiscal 2019.

⁽³⁾Includes an $11 million provision related to a United Kingdom capital loss.

⁽⁴⁾Mainly attributable to pre-tax loss position in Fiscal 2020

⁽⁵⁾Mainly attributable to valuation allowances established on a portion of Non-US deferred tax assets

⁽⁶⁾Attributable to the Jimmy Choo brand intangible that was impaired in Fiscal 2020

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):


	Fiscal Years Ended
	March 28, 2020		March 30, 2019
Deferred tax assets
Operating lease liabilities	521		—
Net operating loss carryforwards	109		61
Accrued Interest	40		41
Sales allowances	37		26
Inventories	34		22
Depreciation	33		18
Stock compensation	13		13
Payroll related accruals	3		2
Deferred rent	—		34
Other	—		31
	790		248
Valuation allowance	(134)		(40)
Total deferred tax assets	656		208

Deferred tax liabilities
Goodwill and intangibles	(481)		(534)
Operating lease right-of-use-assets	(401)		—
Other	(14)		—
Total deferred tax liabilities	(896)		(534)
Net deferred tax liabilities	$	(240)	$	(326)

The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is not reasonably assured. Deferred tax valuation allowances increased approximately $94 million, $29 million and $8 million in Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. The Company established valuation allowances amounting to approximately $110 million in Fiscal 2020, as a result of the expected inability to realize deferred tax asset balances in certain countries comprising the Company’s North American, European, and Asian operations. Additionally, in certain jurisdictions the Company remeasured and increased the valuation allowance by approximately $3 million in Fiscal 2020. The Company also remeasured and reduced the valuation allowance by approximately $19 million in Fiscal 2020 and released valuation allowances of approximately $3 million and $1 million in Fiscal 2019 and Fiscal 2018, respectively.

At March 28, 2020, the Company had non-U.S. and U.S. net operating loss carryforwards of approximately $570 million, a portion of which will begin to expire in 2020.

As of March 28, 2020 and March 30, 2019, the Company had liabilities related to its uncertain tax positions, including accrued interest, of approximately $109 million and $203 million, respectively, which are included in other long-term liabilities in the Company’s consolidated balance sheets. The March 28, 2020 balance, compared to the March 30, 2019 balance, includes the release of income tax reserves in North America and Europe.

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately$82 million, $112 million and $101 million as of March 28, 2020, March 30, 2019 and March 31, 2018, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2020, Fiscal 2019 and Fiscal 2018, are presented below (in millions):


	Fiscal Years Ended
	March 28, 2020			March 30, 2019			March 31, 2018
Unrecognized tax benefits beginning balance	$	192		$	101		$	27
Additions related to prior period tax positions	29			81		⁽¹⁾	30
Additions related to current period tax positions	4			21			45
Decreases in prior period positions due to lapses in statute of limitations	(3)			(1)			(1)
Decreases related to prior period tax positions	(99)		(2)	(3)			—
Decreases related to audit settlements	(24)		(3)	(7)			—
Unrecognized tax benefits ending balance	$	99		$	192		$	101

⁽¹⁾Primarily relates to the Versace acquisition.

⁽²⁾Primarily relates to releases of North American and European tax reserves

⁽³⁾Primarily relates to US audit effective settlement

The Company classifies interest and penalties related to unrecognized tax benefits as components of the provision for income taxes. Interest expense recognized in the consolidated statements of operations and comprehensive income for Fiscal 2020, Fiscal 2019 and Fiscal 2018 was approximately $11 million, $11 million and $7 million, respectively.

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by approximately $8 million during the next 12 months, primarily due to the anticipated settlement of a tax examination as well as statute of limitation expirations. However, the outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate to change materially in the future.

The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 1, 2017.

Prior to the enactment of the Tax Cuts and Jobs Act, the Company's undistributed foreign earnings were considered permanently reinvested and, as such, United States federal and state income taxes were not previously recorded on these earnings. As a result of the Tax Act, substantially all of the Company’s earnings in foreign subsidiaries generated prior to the enactment of the Tax Act were deemed to have been repatriated. It remains the Company's intent to either reinvest indefinitely substantially all of its foreign earnings outside of the United States or repatriate them tax neutrally. However, if future earnings are repatriated, the potential exists that the Company may be required to accrue and pay additional taxes, including any applicable foreign withholding tax and income taxes. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.