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, 2017

Income Taxes

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 contains a number of provisions which impacted the tax position of the Company in 2017 and will impact the Company’s tax position in future years. These changes 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 has performed an evaluation of its earnings and profits of its foreign subsidiaries and has determined that deficits in some of the subsidiaries offset the surpluses in others so that no amount is subject to the mandatory repatriation provision of the Act. 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.

There are other provisions of the Act which, when they become effective, could impact the Company’s tax expense in future years. These 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 and other changes. The Company is in the process of analyzing the effects of these provisions and will reflect the impact as they become effective.

Income tax expense (benefit) consisted of the following:



	Years ended December 31,
(in millions)	2017			2016		2015
Current:
U.S. federal	$	361		326		384
State and local	28			29		20
Foreign jurisdictions	87			73		75
Total	476			428		479
Deferred:
U.S. federal	(317		)	(31	)	(86	)
State and local	(7		)	(8	)	3
Foreign jurisdictions	—			(4	)	(7	)
Total	(324		)	(43	)	(90	)
Total income tax expense	$	152		385		389

Pre-tax income was as follows:



	Years ended December 31,
(in millions)	2017		2016	2015
QVC-U.S.	$	915	859	909
QVC-International	209		168	142
Consolidated QVC	$	1,124	1,027	1,051

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



	Years ended December 31,
	2017		2016		2015
Provision at statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.0	%	1.3	%	1.4	%
Foreign taxes	—	%	(0.3	)%	0.2	%
Foreign earnings repatriation	—	%	0.2	%	0.2	%
Valuation allowance	1.0	%	1.0	%	0.9	%
Permanent differences	(2.1	)%	(0.6	)%	(0.2	)%
Impact of Tax Cuts and Jobs Act	(25.4	)%	—	%	—	%
Investment in subsidiary	3.9	%	—	%	—	%
Impact of foreign currency tax regulation	0.4	%	1.0	%	—	%
Other, net	(0.3	)%	(0.1	)%	(0.5	)%
Total income tax expense	13.5	%	37.5	%	37	%

The Company has remeasured its deferred tax assets and liabilities to reflect the reduced federal income tax rate of 21% which became effective on January 1, 2018. As a result of the remeasurement, the Company recorded an income tax benefit of $284.6 million through operations. This non-cash tax benefit is primarily attributed to the remeasurement at the new lower federal tax rate of deferred tax liabilities related to non-current intangible assets.

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)	2017			2016
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for the uncollectible accounts	$	21		38
Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986	25			36
Allowance for sales returns	24			36
Deferred revenue	29			41
Deferred compensation	20			30
Unrecognized federal and state tax benefits	11			23
Net operating loss carryforwards	33			22
Accrued liabilities	30			38
Other	—			6
Subtotal	193			270
Valuation allowance	(33		)	(22	)
Total deferred tax assets	160			248
Deferred tax liabilities:
Depreciation and amortization	(584		)	(1,009	)
Cumulative translation of foreign currencies	(17		)	(13	)
Investment in subsidiary	(28		)	(4	)
Other	(4		)	—
Total deferred tax liabilities	(633		)	(1,026	)
Net deferred tax liability	$	(473	)	(778	)

In the above table, valuation allowances exist due to the uncertainty of whether or not the benefit of certain net operating losses will ultimately be utilized for income tax purposes.

The Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718); Improvements to Employee Share-Based Payment Accounting, in the third quarter of 2016. In accordance with this guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. Pursuant to the adoption of ASU No. 2016-09, the Company recognized a tax benefit reflected in income tax of $9 million and $7 million for 2017 and 2016, respectively. The amount of the tax benefit for 2015 reflected in additional paid-in capital is reported in the consolidated statement of equity.

The Company is party to a Tax Liability Allocation and Indemnification Agreement (the "Tax Agreement") with Liberty. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Liberty for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Liberty 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 Liberty, 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 Liberty’s consolidated tax return. The differences recorded during the years ended December 31, 2017 and 2015, were $31 million and $18 million, respectively, in capital contributions and related primarily to foreign tax credit carryovers being utilized in Liberty's consolidated tax return in excess of those recognized by QVC during the respective tax years. The differences recorded during the year ended December 31, 2016 was a $64 million dividend and related primarily to foreign tax credits recognized by QVC and not utilized in Liberty’s tax return during the tax year. The amounts of the tax-related balance due to Liberty at December 31, 2017 and 2016 were $60 million and $75 million, respectively, and are included in accrued liabilities in the consolidated balance sheets.

A reconciliation of the 2017 beginning and ending amount of the liability for unrecognized tax benefits is as follows:



(in millions)
Balance at January 1, 2017	$	55
Increases related to prior year tax positions	1
Decreases related to prior year tax positions	(8		)
Decreases related to settlements with taxing authorities	(4		)
Increases related to current year tax positions	6
Balance at December 31, 2017	$	50

Included in the balance of unrecognized tax benefits at December 31, 2017 are potential benefits of $39 million (net of an $11 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.

The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2018. These consist of nonfederal tax issues. The amount of unrecognized tax benefits related to these issues could have a net decrease of $1 million in 2018 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 Liberty. As of December 31, 2017, the Company's tax years through 2013 are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2014, 2015 and 2016 tax years. The Company's 2017 tax year is being examined currently as part of the Liberty 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, 2017, certain of the Company’s subsidiaries were under examination in Germany for 2012 through 2014. As of December 31, 2017, the Company, or one of its subsidiaries was under examination in the states of California, Delaware, New York and Pennsylvania. No material assessments have resulted from these audits as of that date.