Catamaran Corp - 10-K filing on 2015-03-02

Income Taxes

12 Months Ended

Dec. 31, 2014

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows.



	December 31,
	2014		2013
	(In thousands)
Deferred income tax assets:
Non-capital loss carryforwards (“NOL”)	$	28,906	$	18,229
Lease inducements and deferred financing	15,826		12,528
Reserves and accruals	62,487		45,974
Stock-based compensation	17,889		12,763
Other	12,318		9,408
Total	137,426		98,902
Less valuation allowance - current	804		875
Less valuation allowance - long term	28,915		17,486
Total valuation allowance	29,719		18,361
Total deferred tax assets	$	107,707	$	80,541
Deferred tax assets — current	$	58,631	$	44,029
Deferred tax assets — long term	49,076		36,512
Total	$	107,707	$	80,541
Deferred income tax liabilities:
Property and equipment and intangible assets	$	297,978	$	329,842
Dividend withholding tax	5,675		5,675
Other	5,156		3,146
Total	$	308,809	$	338,663

At December 31, 2014, the Company had gross deferred tax assets (“DTAs”) totaling $137.4 million compared to $98.9 million at December 31, 2013. Of the $137.4 million, $30.8 million of DTAs related to its Canadian operations compared to $18.1 million at December 31, 2013. The Company also had deferred tax liabilities which decreased to $308.8 million at December 31, 2014 from $338.7 million at December 31, 2013.

The balance of the valuation allowance was $29.7 million at December 31, 2014 compared to $18.4 million at December 31, 2013. The valuation allowance arising from the Canadian operations was $28.4 million at December 31, 2014 and $17.1 million at December 31, 2013. The Canadian valuation allowance increased during the year as a result of a loss from operations. The amount of this valuation allowance is subject to adjustment by the Company in future periods based upon its assessment of evidence supporting the degree of probability that DTAs will be realized.

At December 31, 2014, the Company had a DTA of $28.9 million related to Canadian, US Federal and state NOLs. The NOLs are available to reduce future years’ taxable income and expire beginning in 2031. A valuation allowance of $26.7 million has been established against a portion of the NOLs not anticipated to be utilized.

The differences between the effective tax rate reflected in the provision for income taxes and the U.S. statutory income tax rate are as follows (dollars in thousands):



	Years Ended December 31,
	2014			2013			2012
Corporate statutory rate	35.0		%	35.0		%	35.0		%
Income tax expense on income before income taxes	$	177,768		$	140,751		$	66,618
Tax effect of:
State and local income taxes, net of federal benefit	13,527			10,726			4,281
Transaction costs and transaction related expenses	453			938			5,252
Dividend withholding tax	—			(65		)	13,074
Impact of foreign tax rates	(3,191		)	(3,693		)	(1,582		)
Non-controlling interest	(22,452		)	(13,670		)	(1,645		)
Cross-jurisdictional financing	(48,252		)	(44,659		)	(23,937		)
Other	3,662			4,479			3,763
Valuation allowance	12,671			8,596			3,492
	$	134,186		$	103,403		$	69,316

Income from U.S. operations before income taxes was $428.7 million, $319.8 million, and $158.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. Income from outside the U.S. before income taxes, including taxable income attributable to intercompany debt, was $79.2 million, $82.3 million, and $31.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The components of the provision for income taxes are as follows (in thousands):



	Years Ended December 31,
	2014			2013			2012
Current tax expense
United States	$	192,021		$	146,484		$	94,834
Foreign	212			1,255			12,407
Total current tax expense	192,233			147,739			107,241
Deferred tax expense (benefit)
United States	(57,889		)	(44,180		)	(38,441		)
Foreign	(158		)	(156		)	516
Total deferred tax expense	(58,047		)	(44,336		)	(37,925		)
Total tax expense	$	134,186		$	103,403		$	69,316

Uncertain Tax Positions

Accounting guidance for uncertain tax positions prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2014, the Company has an accrued liability in the consolidated balance sheet of $35.4 million. As of December 31, 2013 and 2012, the Company had an accrued liability of $28.9 million and $18.8 million, respectively. This liability related to various uncertain federal and state income tax matters, the resolution of all of which would not have a material impact on the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, including interest and penalties, for 2014, 2013 and 2012 , respectively are as follows (in millions):



	2014			2013			2012
Balance at January 1	$	28.9		$	18.8		$	0.6
Additions for tax positions related to prior years	9.0			26.5			10.3
Reductions for tax positions related to prior years	(0.9		)	(13.9		)	—
Additions based on tax positions related to the current year	3.8			0.4			7.9
Reductions due to lapse of the applicable statute of limitations	(4.7		)	—			—
Decrease related to settlements with taxing authorities	(0.7		)	(2.9		)	—
Balance at December 31	$	35.4		$	28.9		$	18.8

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties at December 31, 2014, 2013, and 2012 was $5.9 million, $4.7 million, and $0.5 million, respectively. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease within twelve months of December 31, 2014. The Company currently estimates that such increases or decreases will not be material.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions, including Canada. With few exceptions, the Company is no longer subject to tax examinations by tax authorities for years prior to 2010.