Herbalife Ltd. 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, 2020

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

The components of income before income taxes were as follows:


	Year Ended December 31,
	2020		2019		2018
	(in millions)
Domestic	$	152.5	$	48.6	$	(2.0	)
Foreign		363.9		402.8		466.2

Total	$	516.4	$	451.4	$	464.2

Income taxes were as follows:


	Year Ended December 31,
	2020			2019		2018
	(in millions)
Current
Foreign	$	122.0		$	100.6	$	150.7
Federal		13.7			22.1		24.9
State		6.1			2.3		0.1

		141.8			125.0		175.7

Deferred:
Foreign		(2.7	)		12.8		(13.7	)
Federal		3.9			1.3		8.0
State		0.8			1.3		(2.4	)

		2.0			15.4		(8.1	)

	$	143.8		$	140.4	$	167.6

The significant categories of temporary differences that gave rise to deferred tax assets and liabilities were as follows:


	December 31,
	2020			2019
	(in millions)
Deferred income tax assets:
Accruals not currently deductible	$	92.6		$	80.2
Tax loss and credit carryforwards of certain foreign subsidiaries		128.3			103.6
Tax loss and domestic tax credit carryforwards		208.7			215.2
Deferred compensation plan		39.6			40.9
Deferred interest expense		67.4			35.5
Accrued vacation		5.9			5.5
Inventory reserve		5.5			4.7
Operating lease liabilities		36.6			21.5
Other		6.6			6.0

Gross deferred income tax assets		591.2			513.1
Less: valuation allowance		(390.8	)		(330.3	)

Total deferred income tax assets	$	200.4		$	182.8

Deferred income tax liabilities:
Intangible assets	$	71.2		$	71.1
Depreciation/amortization		2.7			3.7
Unremitted foreign earnings		14.9			22.7
Operating lease assets		32.9			18.0
Other		22.0			9.4

Total deferred income tax liabilities		143.7			124.9

Total net deferred tax assets	$	56.7		$	57.9

Tax loss and credit carryforwards of certain foreign subsidiaries for 2020 and 2019 were $128.3

million and $103.6 million, respectively. If unused, tax loss and credit carryforwards of certain foreign subsidiaries of

$102.7 million will expire between 2021 and 2037 and $25.6 million can be carried forward indefinitely. U.S.

foreign tax credit carryforwards for 2020 and 2019 were $202.1 million and $208.9 million, respectively, which are included in Tax loss and domestic tax credit carryforwards in the table above. If unused, U.S. foreign tax credit carryforwards will expire between 2023 and 2030. Domestic research and development tax credit carryforwards for 2020 and 2019 were $9.0 million and $8.4

million, respectively

. If unused, domestic research and development tax credit carryforwards begin expiring in 2036. The deferred interest expense can be carried forward indefinitely. State tax loss carryforwards for 2020

were fully utilized and for

2019 were $0.9 million.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017, or the Act. The Act, which is also commonly referred to as “U.S. Tax Reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a modified territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. During the fourth quarter of 2017, in accordance with the SEC Staff Accounting Bulletin (“SAB”) No. 118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act

(“SAB 118”), the Company recorded a provisional net expense of $153.3 million. This amount, which is included in tax expense, predominantly consists of three components: (i) a $163.4 million charge caused by the establishment of a valuation allowance on deferred tax assets due to the Act’s changes in the sourcing and calculation of foreign income, which thereby limited the expected utilization of foreign tax credit carryforwards, (ii) a $5.5 million benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate, and (iii) a non-recurring benefit of $4.6 million related to additional foreign tax credits (a result of the impact of a one-time mandatory repatriation on previously unremitted earnings of certain non-U.S. subsidiaries that are owned either directly or indirectly by the U.S. parent).

Although the $153.3 million provisional net expense represented what the Company believed was a reasonable estimate of the impact of the income tax effects of the Act on the Company’s consolidated financial statements as of December 31, 2017, it was considered provisional. Provisional items include, but are not limited to, foreign tax credits and associated valuation allowance, limitations on executive compensation, and the one-time tax on previously unremitted foreign earnings of U.S. subsidiaries. The Company continued to analyze regulatory guidance, including proposed regulations relating to foreign tax credits that were issued during the fourth quarter of 2018, and other information, including a continued inability to fully utilize foreign tax credits generated. Accordingly, the Company recorded an additional $29.5 million of expense during the fourth quarter of 2018, which was caused by the establishment of a valuation allowance on deferred tax assets relating to foreign tax credit carryforwards. As a result, the Company’s accounting for the ultimate tax effects of the Act was finalized under SAB 118 as of December 31, 2018.

The Company recognizes valuation allowances on deferred tax assets reported if, based on the weight of the evidence it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2020 and 2019, the Company held valuation allowances against net deferred tax assets of certain subsidiaries, primarily related to tax loss carryforwards and U.S. foreign tax credits, in the amount of $390.8 million and $330.3 million, respectively. The change in the Company’s valuation allowance during 2020 of $60.5 million was primarily attributable to foreign deferred interest expense and tax loss carryforwards. The change in the Company’s valuation allowance during 2019 of $11.2 million was primarily attributable to foreign deferred interest expense and tax loss carryforwards. The change in the Company’s valuation allowance during 2018 of $52.5 million was primarily related to the valuation allowance established for U.S. foreign tax credits described above.

As of December 31, 2020, the Company’s U.S. consolidated group had approximately $147.7

million of unremitted earnings that were permanently reinvested relating to certain foreign subsidiaries. As of December 31, 2020, Herbalife Nutrition Ltd. had approximately $2.6

billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As a result of the Company’s decision to invest in the China Growth and

Impact Investment Program, approximately $

113.9

million of unremitted earnings were permanently reinvested as of December

2020

. Since Herbalife Nutrition Ltd.’s unremitted earnings have been permanently reinvested, deferred taxes were not provided on these unremitted earnings. Further, it is not practicable to

determine the amount of unrecognized deferred taxes with respect to these unremitted earnings. If the Company were to remit these unremitted earnings then it would be subject to income tax on these remittances. Deferred taxes have been accrued for earnings that are not considered indefinitely reinvested. The deferred tax on the unremitted foreign earnings as of December 31, 2020 and 2019 was a deferred tax liability of $22.3 million and $28.2 million, respectively.

The applicable statutory income tax rate in the Cayman Islands was zero for Herbalife Nutrition Ltd. for the years being reported. For purposes of the reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate, a notional 21% tax rate is applied for the years ended December 31, 2020, 2019, and 2018 as follows:


	Year Ended December 31,
	2020			2019			2018
	(in millions)
Tax expense at United States statutory rate	$	108.4		$	94.8		$	97.4
Increase (decrease) in tax resulting from:
Differences between U.S. and foreign tax rates on foreign income, including withholding taxes		(11.2	)		40.9			62.0
U.S. tax (benefit) on foreign income, net of foreign tax credits		(20.5	)		(10.1	)		(0.8	)
Increase in valuation allowances		60.6			11.4			52.7
State taxes, net of federal benefit		5.2			3.1			(1.5	)
Unrecognized tax benefits		3.9			(6.9	)		6.9
Unremitted earnings		(8.3	)		10.0			(9.2	)
Excess tax benefits on equity awards		(3.1	)		(5.8	)		(53.1	)
Other		8.8			3.0			13.2

Total	$	143.8		$	140.4		$	167.6

As of December 31, 2020, the total amount of unrecognized tax benefits, including related interest and penalties was $65.9 million. If the total amount of unrecognized tax benefits was recognized, $46.9 million of unrecognized tax benefits, $11.4 million of interest, and $1.8 million of penalties would impact the effective tax rate. As of December 31, 2019, the total amount of unrecognized tax benefits, including related interest and penalties was $59.9 million. If the total amount of unrecognized tax benefits was recognized, $40.3 million of unrecognized tax benefits, $9.1 million of interest, and $1.9 million of penalties would impact the effective tax rate.

The Company accounts for the interest and penalties generated by tax contingencies as a component of income tax expense. During the year ended December 31, 2020, the Company recorded an increase in interest expense related to uncertain tax positions of $2.4 million and a decrease in penalty expense related to uncertain tax positions of $0.1 million

During the year ended December 31, 2019, the Company recorded a decrease in interest expense related to uncertain tax positions of $0.7 million and an increase in penalty expense related to uncertain tax positions

$0.2

million

. During the year ended December 31, 2018, the Company recorded an increase in interest and penalty expense related to uncertain tax positions of $1.0 million and $0.4 million, respectively. As of December 31, 2020, the total amount of interest and penalties related to unrecognized tax benefits recognized in the consolidated balance sheet was $11.4 million and $1.8 millio

respectively. As of December 31, 2019, the total amount of interest and penalties related to unrecognized tax benefits recognized in the consolidated balance sheet was $9.1 million and $1.9

million, respectively. As of December 31, 2018, the total amount of interest and penalties related to unrecognized tax benefits recognized in the consolidated balance sheet was $10.0 million and $1.7 million, respectively.

The following changes occurred in the amount of unrecognized tax benefits during the years ended December 31, 2020, 2019, and 2018:


	Year Ended December 31,
	2020			2019			2018
	(in millions)
Beginning balance of unrecognized tax benefits	$	48.9		$	53.5		$	50.6
Additions for current year tax positions		9.7			8.4			12.8
Additions for prior year tax positions		1.3			6.1			0.7
Reductions for prior year tax positions		(0.6	)		(15.4	)		(2.1	)
Reductions for audit settlements		(4.7	)		(0.1	)		(0.5	)
Reductions for the expiration of statutes of limitations		(2.1	)		(3.6	)		(4.8	)
Changes due to foreign currency translation adjustments		0.2			—			(3.2	)

Ending balance of unrecognized tax benefits (excluding interest and penalties)		52.7			48.9			53.5
Interest and penalties associated with unrecognized tax benefits		13.2			11.0			11.7

Ending balance of unrecognized tax benefits (including interest and penalties)	$	65.9		$	59.9		$	65.2

The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate. As of December 31, 2020, the Company’s tax filings are generally subject to examination in major tax jurisdictions for years ending on or after December 31, 2015.

The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $10.6 million within the next twelve months. Of this possible decrease,

$5.7 million

would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $4.9

million would be due to the expiration of statute of limitations in various jurisdictions.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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