Qurate Retail, Inc. 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, 2019

Income Tax Disclosure [Abstract]

Income taxes

Income Taxes

Income tax expense (benefit) consisted of the following:



	Years ended December 31,
(in millions)	2019			2018		2017
Current:
U.S. federal	$	141		239		352
State and local	37			37		27
Foreign jurisdictions	93			84		87
Total	271			360		466
Deferred:
U.S. federal	(11		)	(27	)	(320	)
State and local	3			(2	)	(7	)
Foreign jurisdictions	(1		)	3		—
Total	(9		)	(26	)	(327	)
Total income tax expense	$	262		334		139

Pre-tax income (loss) was as follows:



	Years ended December 31,
(in millions)	2019		2018	2017
QxH	$	843	1,062	877
QVC-International	236		200	209
Consolidated QVC	$	1,079	1,262	1,086

Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 21% in 2019 and 2018 and 35% in 2017, as a result of the following:



	Years ended December 31,
	2019		2018		2017
Provision at statutory rate	21.0	%	21.0	%	35.0	%
State income taxes, net of federal benefit	2.9		2.2		1.0
Foreign taxes	1.0		0.8		—
Write-off of investment and notes of foreign subsidiary	(3.1	)	—		—
Valuation allowance	3.2		2.6		1.0
Permanent differences	(0.2	)	(0.2	)	(2.2	)
Impact of Tax Cuts and Jobs Act	—		—		(26	)
Investment in subsidiary	0.9		0.6		4.0
Impact of foreign currency tax regulation	(0.7	)	(0.6	)	0.4
Other, net	(0.7	)	0.1		(0.4	)
Total income tax expense	24.3	%	26.5	%	12.8	%

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



	December 31,
(in millions)	2019			2018
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for the uncollectible accounts	$	31		29
Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986	38			33
Allowance for sales returns	30			31
Deferred revenue	6			15
Deferred compensation	38			39
Unrecognized federal and state tax benefits	13			10
Net operating loss carryforwards	57			49
Foreign tax credits carryforward	43			17
Lease obligations	68			—
Accrued liabilities	15			33
Other	8			5
Subtotal	347			261
Valuation allowance	(99		)	(64	)
Total deferred tax assets	248			197
Deferred tax liabilities:
Depreciation and amortization	(823		)	(840	)
Lease assets	(66		)	—
Cumulative translation of foreign currencies	(22		)	(16	)
Investment in subsidiary	(26		)	(41	)
Total deferred tax liabilities	(937		)	(897	)
Net deferred tax liability	$	(689	)	(700	)

In the above table, valuation allowances exist due to the uncertainty of whether or not the benefit of certain U.S. federal and foreign tax credits and losses will ultimately be utilized for income tax purposes. The 2019 net deferred tax liability above includes deferred tax assets of $35 million relating to foreign jurisdictions which are included within other noncurrent assets in the consolidated balance sheet and deferred tax liabilities of $724 million in domestic jurisdictions which are included within deferred income taxes in the consolidated balance sheet.

On December 22, 2017, new U.S. federal tax legislation, the Tax Cuts and Jobs Act (the “Act”) was enacted. The new legislation was a significant modification of existing U.S. federal tax law and contained several provisions which impacted the tax position of the Company in 2017, 2018, and 2019, and will impact the Company’s tax position in future years. Changes which became effective in 2017 include the reduction of the federal corporate tax rate from 35% to 21%, the rules related to a one-time tax on unremitted foreign earnings in 2017, and an increase in the bonus depreciation allowance on certain qualified property. In connection with unremitted foreign earnings, the Company performed an evaluation of its earnings and profits of its foreign subsidiaries and determined that deficits in some of the subsidiaries offset the surpluses in others so that no amount was subject to the mandatory repatriation provision of the Act in 2017. Entities are required under ASC 740, Accounting for Income Taxes, to record the effect of the change in the period of enactment and to recognize the change as a discrete item in income tax expense from continuing operations. The Company recorded an income tax benefit of $282 million through operations to reflect the impact of the law changes included in the Act. This non-cash tax benefit was primarily attributed to the remeasurement at the new lower federal tax rate of deferred tax liabilities related to non-current intangible assets.

Other provisions of the Act which impact the Company’s tax position and which became effective in 2018 include changes in how foreign earnings are taxed in the U.S., specifically, the participation exemption for certain foreign earnings, the inclusion and related deduction for global intangible low-taxed income (“GILTI”), the limitation on the deduction of net interest expense, the deduction for foreign derived intangible income (“FDII”), and new rules regarding the usage of foreign tax credits in the U.S. Specifically, due to the rules relating to the categorization of income for foreign tax credit purposes, the Company recognized a foreign tax credit carryover in the branch income basket, for which a deferred tax asset and full valuation allowance have been established.

The Company is party to a Tax Liability Allocation and Indemnification Agreement (the "Tax Agreement") with Qurate Retail. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Qurate Retail for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Qurate Retail an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Qurate Retail, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution. These differences are related primarily to foreign tax credits recognized by QVC that are creditable under the Tax Agreement when and if utilized in Qurate Retail’s consolidated tax return. The difference recorded during the year ended December 31, 2019 was an $11 million dividend which was primarily related to foreign tax credits recognized by QVC and not utilized in Qurate Retail’s tax return during the tax year. The differences recorded during the years ended December 31, 2018, and 2017 were $2 million, and $31 million, respectively, in capital contributions and were primarily related to foreign tax credit carryovers being utilized in Qurate's consolidated tax return in excess of those recognized by QVC during the respective tax years. The amounts of the tax-related (receivable) balance due (from) to Qurate Retail as of December 31, 2019 and 2018 were $(7) million and $26 million, respectively, and are included in accrued liabilities in the consolidated balance sheets.

A reconciliation of the 2018 and 2019 beginning and ending amount of the liability for unrecognized tax benefits is as follows:



(in millions)
Balance at January 1, 2018	$	53
Increases related to prior year tax positions	1
Decreases related to prior year tax positions	(9		)
Decreases related to settlements with taxing authorities	—
Increases related to current year tax positions	9
Balance at December 31, 2018	54
Increases related to prior year tax positions	9
Decreases related to prior year tax positions	(7		)
Decreases related to settlements with taxing authorities	(4		)
Increases related to current year tax positions	8
Balance at December 31, 2019	$	60

Included in the balance of unrecognized tax benefits as of December 31, 2019 are potential benefits of $48 million (net of an $12 million federal tax effect) that, if recognized, would affect the effective rate on income from continuing operations.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other (expense) income in the consolidated statements of operations. The Company did not have a material amount of interest accrued related to unrecognized tax benefits or tax penalties for the years ended December 31, 2019, 2018 or 2017.

The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2020. These consist of nonfederal transfer pricing and other tax issues. The amount of unrecognized tax benefits related to these issues could have an impact of $2 million in 2020 as a result of potential settlements, lapsing of statute of limitations and revisions of settlement estimates.

The Company participates in a consolidated federal return filing with Qurate Retail. As of December 31, 2019, the Company's tax years through 2015 are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2016 and 2017 tax years. The Company's 2018 and 2019 tax years are being examined currently as part of the Qurate Retail consolidated return under the IRS's Compliance Assurance Process program. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of December 31, 2019, certain of the Company’s subsidiaries were under examination in Germany for 2015 through 2017. As of December 31, 2019, the Company, or one of its subsidiaries was under examination in the state of Pennsylvania.