At May 31, 2017, we had U.S. federal foreign tax credit carryforwards of approximately $33.4 million, which
expire in various years ending in 2027. Additionally, at May 31, 2017, we had approximately $68.8 million of state net operating loss carryforwards that expire at various dates beginning in 2018 and foreign net operating loss carryforwards
of approximately $170.0 million, of which approximately $22.2 million will expire at various dates beginning in 2018 and approximately $147.8 million that have an indefinite carryforward period. Also, as of May 31, 2017, we had
foreign capital loss carryforwards of approximately $14.2 million that can be carried forward indefinitely. These net operating loss, capital loss and foreign tax credit carryforwards may be used to offset a portion of future taxable income
and, thereby, reduce or eliminate our U.S. federal, state or foreign income taxes otherwise payable.
When evaluating the realizability of deferred income tax
assets, we consider, among other items, whether a jurisdiction has experienced cumulative pretax losses and whether a jurisdiction will generate the appropriate character of income to recognize a deferred income tax asset. More specifically, if a
jurisdiction experiences cumulative pretax losses for a period of three years, including the current fiscal year, or if a jurisdiction does not have sufficient income of the appropriate character in the relevant carryback or projected carryforward
periods, we generally conclude that it is more likely than not that the respective deferred tax asset will not be realized unless factors such as expected operational changes, availability of prudent and feasible tax planning strategies, reversal of
taxable temporary differences or other information exists that would lead us to conclude otherwise. If, after we have evaluated these factors, the deferred income tax assets are not expected to be realized within the carryforward or carryback
periods allowed for that jurisdiction, we would conclude that a valuation allowance is required. To the extent that the deferred income tax asset is expected to be utilized within the carryback or carryforward periods, we would conclude that a
valuation allowance would not be required.
In applying the above, we determined, based on the available evidence that future taxable income from certain of our
foreign subsidiaries will be sufficient to recognize corresponding deferred tax asset that were previously subject to valuation allowances. As a result, during this fiscal year, we recorded income tax expense of $0.9 million in connection with
a net increase in valuation allowances associated with the estimated utilization of foreign net operating loss carryforwards and other foreign deferred tax assets. For the year ended May 31, 2016, we recorded net reduction in valuation
allowances associated with the estimated utilization of foreign net operating loss carryforwards of $5.8 million. This benefit was partially offset by $2.4 million of additions to valuation allowances for other foreign deferred tax assets.
For the year ended May 31, 2015, we determined that future U.S. taxable income along with anticipated foreign source income, will be sufficient to recognize foreign tax and other credit carryforwards of approximately $12.0 million that
were previously subject to valuation allowances. The benefit was partially offset by approximately $1.5 million of other incremental adjustments to the valuation allowances. Further, we believe it is uncertain whether future taxable income of
certain of our foreign subsidiaries and future taxable income of the appropriate character will be sufficient to recognize the remaining corresponding deferred tax assets. Accordingly, we intend to maintain the recorded valuation allowances until
sufficient positive evidence exists to support a reversal of the tax valuation allowances.
Total valuation allowances of approximately $63.7 million and
$60.1 million have been recorded as of May 31, 2017 and 2016, respectively. The recorded valuation allowances relate to foreign capital loss carryforwards, certain foreign net operating losses, net foreign deferred tax assets and
unrealized losses on securities.
The following table reconciles income tax expense (benefit) computed by applying the U.S. statutory federal income tax rate against
income (loss) before income taxes to the provision (benefit) for income taxes:
Income tax expense at the U.S. statutory federal income tax rate
Impact of foreign operations
State and local income taxes, net of federal income tax benefit
Tax benefits from the domestic manufacturing deduction
Nondeductible business expense
Unremitted foreign earnings
Non-taxable gain from joint venture remeasurement
Tax Benefits from Employee Share-Based Payments
Provision for Income Tax Expense
Effective Income Tax Rate
Uncertain income tax positions are accounted for in accordance with ASC 740. The following table summarizes the activity
related to unrecognized tax benefits:
Balance at June 1
Additions based on tax positions related to current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Foreign currency translation
Balance at May 31
The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was
$4.6 million at May 31, 2017, $2.5 million at May 31, 2016 and $3.9 million at May 31, 2015. We do not anticipate any significant changes to the above total unrecognized tax benefits within the next 12 months.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. At May 31, 2017, 2016 and 2015, the accrual for interest and
penalties was $3.1 million, $2.8 million and $3.8 million, respectively. Unrecognized tax benefits, including interest and penalties, have been classified as other long-term liabilities unless expected to be paid in one year.
We, or our subsidiaries, file income tax returns in the U.S. and in various state, local and foreign jurisdictions. The Internal Revenue Service (IRS) has
notified us of an examination of our 2015 federal income tax return and the statutory audit period has expired for all years through 2013. Further, with limited
RPM International Inc. and Subsidiaries 49
RPM International Inc. (NYSE: RPM) owns subsidiaries that are world leaders in coatings, sealants, building materials and related services. From homes to precious landmarks worldwide, their brands are trusted by consumers and professionals alike to protect, improve and beautify. Among its leading consumer brands are Rust-Oleum, DAP and Zinsser. Learn more about RPM brands >>
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