Wyndham Hotels & Resorts, 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

8. INCOME TAXES

In December 2017, the United States enacted the Tax Cuts and Jobs Act (‘‘U.S. tax reform’’) and significantly changed U.S. corporate income tax laws by reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018, and imposing a one-time mandatory deemed repatriation tax on undistributed historical earnings of foreign subsidiaries. Other provisions of the law were not effective until January 1, 2018 and include, but are not limited to, creating a territorial tax system which generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, eliminating or limiting the deduction of certain expenses, and imposing a minimum tax on earnings generated by foreign subsidiaries.

As of December 31, 2017, the Company had made a reasonable estimate for (i) the remeasurement of its net deferred income tax and uncertain tax liabilities based on the new reduced U.S. corporate income tax rate and (ii) the one-time deemed repatriation tax on the Company's undistributed historical earnings of foreign subsidiaries. With respect to certain other items, the Company had not yet been able to make a reasonable estimate and continued to account for those items based on its existing accounting under GAAP and the provisions of the tax laws that were in effect prior to enactment of the U.S. tax reform. One such case was the Company’s intent regarding whether to continue to assert indefinite reinvestment on a part or all the undistributed foreign earnings. During the fourth quarter of 2018, the Company completed its accounting for the tax effects of the U.S. tax reform recorded for 2017. The following table presents the impact of the accounting for the enactment of U.S. tax reform on the Company's provision for (benefit from) income taxes:



	Year Ended December 31,
	2018			2017
Remeasurement of net deferred income tax and uncertain tax liabilities	$	(2	)	$	(87	)
One-time deemed repatriation tax on undistributed historical earnings of foreign subsidiaries	(2		)	2
Total provision for (benefit from) income taxes impact	$	(4	)	$	(85	)

Although the one-time mandatory deemed repatriation tax during 2017 and the territorial tax system created as a result of U.S. tax reform generally eliminate U.S. federal income taxes on dividends from foreign subsidiaries, the Company continues to assert that all of the undistributed foreign earnings of $55 million will be reinvested indefinitely as of December 31, 2019. In the event the Company determines not to continue to assert that all or part of its undistributed foreign earnings are permanently reinvested, such a determination in the future could result in the accrual and payment of additional foreign withholding taxes and U.S. taxes on currency transaction gains and losses, the determination of which is not practicable.

The income tax provision consists of the following:



		Year Ended December 31,
		2019			2018			2017
Current
	Federal	$	40		$	34		$	84
	State	3			13			13
	Foreign	21			14			7
		64			61			104
Deferred
	Federal	(3		)	2			(89		)
	State	(10		)	(2		)	(1		)
	Foreign	(1		)	—			(1		)
		(14		)	—			(91		)
Provision for income taxes		$	50		$	61		$	13

Pretax income for domestic and foreign operations consisted of the following:



	Year Ended December 31,
	2019		2018		2017
Domestic	$	175	$	190	$	234
Foreign	32		33		9
Pretax income	$	207	$	223	$	243

Deferred taxes

Deferred income tax assets and liabilities are comprised of the following:



		As of December 31,
		2019			2018
Deferred income tax assets:
	Accrued liabilities and deferred revenues	$	97		$	87
	Tax credits ^(a)	6			12
	Provision for doubtful accounts	17			20
	Net operating loss carryforward ^(b)	18			14
	Other	20			14
	Valuation allowance ^(c)	(19		)	(15		)
Deferred income tax assets		139			132

Deferred income tax liabilities:
	Depreciation and amortization	508			517
	Other	15			12
Deferred income tax liabilities		523			529
	Net deferred income tax liabilities	$	384		$	397

Reported in:
Other non-current assets		$	3		$	2
Deferred income taxes		387			399
	Net deferred income tax liabilities	$	384		$	397

_____________________


(a)	As of December 31, 2019, the Company had $6 million of foreign tax credits. The foreign tax credits expire no later than 2029.


(b)	As of December 31, 2019, the Company’s net operating loss carryforwards primarily relate to state net operating losses, which are due to expire at various dates, but no later than 2039.

(c)

The valuation allowance of $19 million at December 31, 2019 relates to net operating loss carryforwards, certain deferred tax assets and foreign tax credits of $14 million, $3 million and $2 million, respectively. The valuation allowance of $15 million at December 31, 2018 relates to net operating loss carryforwards, certain deferred tax assets and foreign tax credits of $11 million, $3 million, and $1 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized.

The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows for the years ended December 31:



	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net of federal tax benefits	(3.8	)	2.9		3.6
Taxes on foreign operations at rates different than U.S. federal statutory rates	5.0		1.9		0.8
Taxes on foreign income, net of tax credits	(0.5	)	0.3		0.4
Valuation allowances	1.9		1.4		(0.1	)
Impact of U.S. tax reform	—		(1.8	)	(34.9	)
Other	0.6		1.7		0.5
	24.2	%	27.4	%	5.3	%

The effective income tax rate for 2019 and 2018 differs from the U.S. Federal income tax rate of 21% primarily due to U.S. and foreign taxes on the Company’s international operations and state taxes. During 2019, the tax effect was partially offset by one-time state tax benefits resulting from a settlement with state taxing authorities and from a change in the Company's state income tax filing position due to its spin-off from Wyndham Worldwide. The effective income tax rate for 2017 differs from the U.S. Federal income tax rate of 35% primarily due to state taxes and the net tax benefit from the impact of U.S. tax reform.

The following table summarizes the activity related to the Company’s unrecognized tax benefits as of December 31:



	2019			2018			2017
Beginning Balance	$	13		$	12		$	13
Increases related to tax positions taken during a prior period	2			2			—
Increases related to tax positions taken during the current period	—			1			2
Decreases related to settlements with taxing authorities	(3		)	—			—
Decreases as a result of a lapse of the applicable statute of limitations	(1		)	(2		)	(2		)
Decreases related to tax positions taken during a prior period	—			—			(1		)
Ending Balance	$	11		$	13		$	12

The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $11 million, $13 million and $12 million as of December 31, 2019, 2018 and 2017, respectively. The Company recorded both accrued interest and penalties related to unrecognized tax benefits as a component of provision for income taxes on the Consolidated and Combined Statements of Income. The amount of potential penalties and interest related to these unrecognized tax benefits recorded in the provision for income taxes was a benefit of $1 million during 2019, an expense of $1 million during 2018, and an expense of less than $1 million during 2017. The Company had a liability for potential penalties of $2 million as of December 31, 2019, 2018 and 2017 and potential interest of $2 million as of December 31, 2019 and $3 million as of both December 31, 2018 and 2017. Such liabilities are reported as a component of accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.

The Company files income tax returns in the U.S. federal and state jurisdictions, as well as in foreign jurisdictions. Prior to our spin-off, the Company was part of a consolidated U.S. federal income tax return and consolidated and combined state returns with its former Parent and other subsidiaries that are not included in its Consolidated and Combined Financial Statements. Income taxes as presented in the Company's Consolidated and Combined Financial Statements prior to our spin-off presented current and deferred income taxes of the consolidated federal tax filing attributed to the Company using the separate return method. The separate return method applies the accounting guidance for income taxes to the financial statements as if the Company was a separate taxpayer. The 2015 through 2019 tax years generally remain subject to examination by federal tax authorities, the years 2015 through pre-spin off 2018 tax years as part of the Company’s former Parent filing. The 2010 through 2019 tax years generally remain subject to examination by many state tax authorities. In significant foreign jurisdictions, the 2012 through the 2019 tax years generally remain subject to examination by their respective tax authorities. The statute of limitations is scheduled to expire within 12 months of the reporting date in certain taxing jurisdictions, and the Company therefore believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $4 million to $5 million.

The Company made federal and state income tax payments, net of refunds, in the amount of $43 million for the twelve months ended December 31, 2019. These payments exclude $195 million of tax payments related to assumed liabilities in connection with the La Quinta acquisition. During the years 2018 and 2017, the former Parent paid $27 million and $93 million, respectively, of federal and state income tax liabilities related to the Company, which is reflected in its Consolidated and Combined Financial Statements as an increase in former Parent’s net investment. Following the Company’s spin-off in 2018, the Company made federal and state income tax payments, net of refunds, in the amount of $39 million. Additionally, the Company made foreign income tax payments, net of refunds, in the amount of $16 million in 2019 and $12 million in 2018 and 2017.