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, 2018

Income Tax Disclosure [Abstract]

Income taxes

Income Taxes

Income tax expense (benefit) consisted of the following:



	Years ended December 31,
(in millions)	2018			2017		2016
Current:
U.S. federal	$	239		352		326
State and local	37			27		29
Foreign jurisdictions	84			87		73
Total	360			466		428
Deferred:
U.S. federal	(27		)	(320	)	(31	)
State and local	(2		)	(7	)	(8	)
Foreign jurisdictions	3			—		(4	)
Total	(26		)	(327	)	(43	)
Total income tax expense	$	334		139		385

Pre-tax income (loss) was as follows:



	Years ended December 31,
(in millions)	2018		2017		2016
QVC-U.S.	$	1,033	915		859
QVC-International	200		209		168
HSN	29		(38	)	—
Consolidated QVC	$	1,262	1,086		1,027

Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 21% in 2018 and 35% in 2017 and 2016, as a result of the following:



	Years ended December 31,
	2018		2017		2016
Provision at statutory rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.2	%	1.0	%	1.3	%
Foreign taxes	0.8	%	—	%	(0.3	)%
Foreign earnings repatriation	—	%	—	%	0.2	%
Valuation allowance	2.6	%	1.0	%	1.0	%
Permanent differences	(0.2	)%	(2.2	)%	(0.6	)%
Impact of Tax Cuts and Jobs Act	—	%	(26.0	)%	—	%
Investment in subsidiary	0.6	%	4.0	%	—	%
Impact of foreign currency tax regulation	(0.6	)%	0.4	%	1	%
Other, net	0.1	%	(0.4	)%	(0.1	)%
Total income tax expense	26.5	%	12.8	%	37.5	%

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)	2018			2017
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for the uncollectible accounts	$	29		28
Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986	33			30
Allowance for sales returns	31			30
Deferred revenue	15			29
Deferred compensation	39			33
Unrecognized federal and state tax benefits	10			11
Net operating loss carryforwards	49			34
Foreign tax credits carryforward	17			—
Accrued liabilities	33			30
Other	5			1
Subtotal	261			226
Valuation allowance	(64		)	(33	)
Total deferred tax assets	197			193
Deferred tax liabilities:
Depreciation and amortization	(840		)	(876	)
Cumulative translation of foreign currencies	(16		)	(18	)
Investment in subsidiary	(41		)	(29	)
Total deferred tax liabilities	(897		)	(923	)
Net deferred tax liability	$	(700	)	(730	)

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 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 $1 million, $9 million and $7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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 a number of provisions which impacted the tax position of the Company in both 2017 and 2018, 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 differences recorded during the years ended December 31, 2018 and 2017, were $2 million and $31 million, respectively, in capital contributions and were related primarily 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 differences recorded during the year ended December 31, 2016 was a $64 million dividend and was related primarily to foreign tax credits recognized by QVC and not utilized in Qurate Retail’s tax return during the tax year. The amounts of the tax-related balance due to Qurate Retail at December 31, 2018 and 2017 were $26 million and $52 million, respectively, and are included in accrued liabilities in the consolidated balance sheets.

A reconciliation of the 2017 and 2018 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
Impact of transfer of HSN through common control transaction with Qurate Retail	3
Balance at December 31, 2017	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

Included in the balance of unrecognized tax benefits at December 31, 2018 are potential benefits of $43 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 for the years ended December 31, 2018, 2017 or 2016.

The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2019. 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 2019 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, 2018, the Company's tax years through 2014 are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2015 and 2016 tax years. The Company's 2017 and 2018 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, 2018, the Company, or one of its subsidiaries was under examination in the states of Pennsylvania and Wisconsin.