NII HOLDINGS INC - 10-K filing on 2015-03-10

Income Taxes

12 Months Ended

Dec. 31, 2014

The components of (loss) income from continuing operations before income taxes and the related income tax provision are as follows (in thousands):



	Year Ended December 31,
	2014			2013			2012
U.S.	$	(368,667	)	$	(377,502	)	$	(311,575	)
Non-U.S.	(1,334,554		)	(610,534		)	387,880
Total	$	(1,703,221	)	$	(988,036	)	$	76,305



	Year Ended December 31,
	2014			2013			2012
Current:
Federal	$	—		$	—		$	727
State, net of Federal tax benefit	—			—			—
Foreign	(25,638		)	(63,982		)	(176,748		)
Total current income tax provision	(25,638		)	(63,982		)	(176,021		)
Deferred:
Federal	(1,846		)	(1,310		)	895
State, net of Federal tax benefit	(205		)	(146		)	100
Foreign	(46,402		)	(380,614		)	16,882
Total deferred income tax (provision) benefit	(48,453		)	(382,070		)	17,877
Total income tax provision	$	(74,091	)	$	(446,052	)	$	(158,144	)

A reconciliation of the U.S. statutory Federal income tax rate to our effective tax rate as a percentage of (loss) income from continuing operations before reorganization items and income tax provision is as follows:



	Year Ended December 31,
	2014	2013	2012
Statutory Federal tax rate	35%	35%	35%
Effect of foreign operations	(3)	(3)	7
Change in deferred tax asset valuation allowance	(36)	(81)	160
Intercompany transactions	(1)	(3)	9
Tax on subpart F income	—	—	11
Withholding tax	—	(2)	42
Deductible dividends	—	3	(42)
Inflation adjustments	1	1	(17)
Income tax credits	—	—	(3)
Local statutory investment loss	—	6	—
Other nondeductible expenses	(1)	—	6
Other	1	(1)	(1)
Effective tax rate	(4)%	(45)%	207%

The components of our deferred tax assets and liabilities consist of the following:



	December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Net operating losses and capital loss carryforwards	$	4,354,474		$	3,922,944
Allowance for doubtful accounts	41,724			34,587
Accrued expenses	193,251			151,131
Accrual for contingent liabilities	21,944			22,117
Property, plant and equipment	153,036			36,784
Capital lease obligations	175,498			300,141
Deferred revenue	37,730			35,179
Equity compensation	69,172			71,171
Inventory reserve	25,642			22,548
Debt discount	16,511			—
Other	52,016			41,116
	5,140,998			4,637,718
Valuation allowance	(4,868,504		)	(4,335,913		)
Total deferred tax asset	272,494			301,805
Deferred tax liabilities:
Intangible assets	42,036			48,162
Unremitted foreign earnings	54,386			54,386
Deferred revenue	39,492			44,126
Property, plant and equipment	33,915			96,613
Capital lease obligation	107,491			—
Other	2,773			15,123
Total deferred tax liability	280,093			258,410
Net deferred tax (liability) asset	$	(7,599	)	$	43,395

We have not recorded a deferred tax liability on Nextel Brazil’s unrealized foreign currency gain on the intercompany loan from NII Holdings as it is our intention to not subject that unrealized gain to Brazilian tax. If this gain is subject to tax, it could result in an additional income tax liability. As of December 31, 2014 and 2013, the cumulative amount of additional tax liability would have been approximately $35.8 million and $41.4 million, respectively.

As of December 31, 2014, we included $54.4 million in deferred tax liabilities for U.S. federal, state and foreign taxes with respect to future remittances of certain undistributed earnings (other than income that has been previously taxed in the U.S. under the subpart F rules) of certain of our foreign subsidiaries. Except for the earnings associated with this accrual and income that has been previously taxed in the U.S. under the subpart F rules and can be remitted to the U.S. without incurring additional income taxes, we currently have no intention to remit any additional undistributed earnings of our foreign subsidiaries in a taxable manner. Should additional amounts of our foreign subsidiaries’ undistributed earnings be remitted to the U.S. as taxable dividends, we may be subject to additional U.S. income taxes (net of allowable foreign tax credits) and foreign withholding taxes. It is not practicable to estimate the amount of any additional taxes that may be payable on the remaining undistributed earnings.

As of December 31, 2014, we had $1.3 billion of net operating loss carryforwards for U.S. Federal and state income tax purposes, which expire in various amounts beginning in 2019 through 2034. The timing and manner in which we will utilize the net operating loss carryforwards in any year, or in total, may be limited in the future under the provisions of Internal Revenue Code Section 382 relating to changes in our ownership. We excluded $210.3 million of U.S. net operating loss carryforwards from the calculation of the deferred tax asset presented above because it represents excess stock option deductions that did not reduce taxes payable in the U.S. The tax effect of these unrealized excess stock option deductions, if realized in the future, will result in an increase to paid-in capital.

As of December 31, 2014, we had $764.0 million of net operating loss carryforwards in our Mexican subsidiaries. These carryforwards expire in various amounts and at various periods from 2015 to 2024. Our Brazilian subsidiaries had $816.4 million of net operating loss carryforwards that can be carried forward indefinitely, but the amount that we can utilize annually is limited to 30% of Brazilian taxable income before the net operating loss deduction. Our foreign subsidiaries' ability to utilize the foreign tax net operating losses in any single year ultimately depends upon their ability to generate sufficient taxable income.

As of December 31, 2014, we had $10.8 billion of net operating loss carryforwards in our holding companies in Luxembourg that can be carried forward indefinitely. Our holding companies in Spain had $844.0 million of net operating loss carryforwards that can be carried forward 18 years, and our holding company in the Netherlands had $0.3 million of net operating loss carryforwards that can be carried forward nine years. Given the nature of activities that are considered taxable in these jurisdictions and the activities engaged in by the holding companies, these net operating loss carryforwards will never be utilized by our holding companies and add no value to the company.

The deferred tax asset valuation allowances that our subsidiaries and holding companies had as of December 31, 2014 and 2013 are as follows:



	2014		2013
	(in millions)
Argentina	$	49.1	$	—
Brazil	584.1		419.1
U.S.	480.3		363.8
Luxembourg	3,169.2		3,131.4
Mexico	318.2		190.7
Spain	267.6		230.9
Total	$	4,868.5	$	4,335.9

Of the $4.9 billion valuation allowance as of December 31, 2014, $281.5 million was classified as current and $4.6 billion was classified as non-current in our consolidated financial statements.

The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. Valuation allowances are required to be recognized on deferred tax assets unless it is determined that it is “more-likely-than-not” that the asset will be realized. As of December 31, 2014, we recorded full valuation allowances on the deferred tax assets of our foreign operating companies, our U.S. parent company and subsidiaries and our foreign holding companies due to substantial negative evidence, including the recent history of cumulative losses and the projected losses for 2015 and subsequent years. As a result, the valuation allowance on our deferred tax assets increased by $532.6 million during 2014. We do not anticipate that we will recognize significant tax benefits with respect to our deferred tax assets.

We are subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which we operate. Certain of our entities are under examination by the relevant taxing authorities for various tax years. The earliest years that remain subject to examination by jurisdiction are: U.S. - 1999; Argentina and Mexico - 2006; Brazil, Luxembourg, Netherlands and Spain - 2009. We regularly assess the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of our provision for income taxes. We have only recorded financial statement benefits for tax positions which we believe reflect the “more-likely-than-not” criteria incorporated in the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax reserves in accordance with this authoritative guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax reserve is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the amounts of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on the financial statements or may exceed the current income tax reserves in amounts that could be material.

Unrecognized tax benefits are classified as non-current liabilities. The following table shows a reconciliation of our beginning and ending unrecognized tax benefits for 2014, 2013 and 2012 (in thousands):



	Year Ended December 31,
	2014			2013			2012
Unrecognized tax benefits at January 1	$	8,686		$	35,639		$	35,572
Additions for current year tax positions	—			—			3,118
Reductions for current year tax positions	—			—			(551		)
Reductions for prior year tax positions	—			(26,519		)	(2,197		)
Foreign currency translation adjustment	(350		)	(434		)	(303		)
Unrecognized tax benefits at December 31	$	8,336		$	8,686		$	35,639

As of December 31, 2014, 2013 and 2012, the unrecognized tax benefits that could potentially reduce our future effective tax rate, if recognized, were $1.8 million , $2.1 million and $4.8 million, respectively. In addition, unrecognized tax benefits will decrease by approximately $4.8 million over the next twelve months due to the expiration of certain statutes of limitations.

We record interest and penalties associated with uncertain tax positions as a component of our income tax provision. During the years ended December 31, 2014, 2013 and 2012, we recognized $0.2 million, $0.2 million and $0.3 million, respectively, of interest and penalties in our current income tax provision. Unrecognized tax benefits (including penalties and interest) were reduced by $26.5 million in 2013 due to the effective resolution of a tax position with the Internal Revenue Service and $2.7 million in 2012 due to a change in estimates. As of December 31, 2014 and 2013, we had accrued $2.4 million and $2.3 million, respectively for the payment of interest and penalties.

Effective January 1, 2014, the Mexican government passed legislation to keep the corporate income tax rate fixed at 30%, which repealed the scheduled tax rate reduction previously approved in December 2012.