Live Nation Entertainment 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

Significant components of the provision for income tax expense (benefit) are as follows:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Current:
Federal	$	(55	)	$	(702	)	$	564
Foreign	40,239			50,970			29,902
State	6,828			4,117			5,454
Total current	47,012			54,385			35,920
Deferred:
Federal	2,246			(56,442		)	5,113
Foreign	(8,697		)	(15,841		)	(11,703		)
State	204			744			(1,301		)
Total deferred	(6,247		)	(71,539		)	(7,891		)
Income tax expense (benefit)	$	40,765		$	(17,154	)	$	28,029

The domestic income (loss) before income taxes was $43.5 million, $(132.6) million and $1.1 million for 2018, 2017 and 2016, respectively. Foreign income before income taxes was $87.6 million, $123.2 million and $47.2 million for 2018, 2017 and 2016, respectively.

Significant components of the Company’s deferred tax liabilities and assets are as follows:



	December 31,
	2018			2017
	(in thousands)
Deferred tax liabilities:
Intangible assets	$	118,275		$	159,793
Prepaid expenses	2,534			7,882
Long-term debt	—			1,229
Other	5,865			7,533
Total deferred tax liabilities	126,674			176,437
Deferred tax assets:
Intangible assets	25,981			27,752
Accrued expenses	40,989			68,168
Net operating loss carryforwards	388,459			466,023
Foreign tax and other credit carryforwards	38,919			62,136
Equity compensation	24,211			20,549
Other	15,703			2,725
Total gross deferred tax assets	534,262			647,353
Valuation allowance	530,642			596,437
Total deferred tax assets	3,620			50,916
Net deferred tax liabilities	$	(123,054	)	$	(125,521	)

Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of December 31, 2018, the Company continued to maintain a full valuation allowance against its net deferred tax assets in certain jurisdictions due to cumulative pre-tax losses. As a result of the valuation allowances, no tax benefits have been recognized for losses incurred in those tax jurisdictions in 2018, 2017 and 2016. The reduction in accrued expenses deferred tax assets is primarily related to the 2018 United States tax deduction for the January 2018 payment related to the Songkick settlement accrued in 2017. The reduction in the net operating loss carryforwards is primarily related to 2018 taxable income in jurisdictions for which we can utilize these carryforwards, including the United States. The reduction in foreign tax and other credit carryforwards is primarily related to the utilization of United States foreign tax credits to offset transition tax liability incurred as a result of the provisions of the Tax Cuts and Jobs Act (“TCJA”). The valuation allowance balance reduction in 2018 is primarily a result of the noted reductions in fully valued deferred tax assets.

During 2018 and 2017, the Company recorded net deferred tax liabilities of $4.0 million and $9.0 million, respectively, due principally to differences in financial reporting and tax bases in assets acquired in business combinations.

As of December 31, 2018, the Company has United States federal, state and foreign deferred tax assets related to net operating loss carryforwards of $95.0 million, $47.8 million and $245.7 million, respectively. Based on current statutory carryforward periods, these losses will expire on various dates beginning in 2025. The Company’s federal net operating loss may be subject to statutory limitations on the amount that can be used in any given year.

The reconciliation of income tax computed at the United States federal statutory rates to income tax expense (benefit) is:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Income tax expense (benefit) at United States statutory rates (21%, 35% and 35%, respectively)	$	27,532		$	(3,283	)	$	16,914
State income taxes, net of federal tax benefits	4,860			1,544			3,264
Differences between foreign and United States statutory rates	2,650			(10,887		)	(11,116		)
United States tax reform rate change	—			(55,685		)	—
Non-United States income inclusions and exclusions	(3,425		)	3,826			(2,749		)
United States income inclusions and exclusions	(13,790		)	11,347			(1,317		)
Nondeductible items	26,376			11,380			3,210
Tax contingencies	389			1,955			2,390
Tax expense from acquired goodwill	4,353			4,489			5,936
Change in valuation allowance	(8,845		)	18,067			11,820
Other, net	665			93			(323		)
	$	40,765		$	(17,154	)	$	28,029

Income tax expense is principally attributable to the Company’s earnings in foreign tax jurisdictions along with state income taxes.

Amounts included in differences between foreign and United States statutory rates are impacted by changes in the mix of international earnings subject to various tax rates which can differ greatly in their proximity to the United States statutory rate. The differences between statutory rates is also impacted by the Company’s Luxembourg affiliates and tax rulings which include the application of a reduced Luxembourg effective rate to the net income before tax resulting from the Company’s financing activities in Luxembourg.

Amounts included in United States income inclusions and exclusions for 2018 include the favorable impact of tax deductions for vesting of restricted shares and exercises of stock options partially offset by unfavorable inclusions for global intangible low-taxed income (“GILTI”) under the provisions associated with the TCJA.

Nondeductible items in 2018 include the impact of increased nondeductible expenses pursuant to the provisions of the TCJA including nondeductible executive compensation and the Company’s goodwill impairment for Artist Services which was not deductible for income tax purposes. Nondeductible items in 2017 include the Company’s goodwill impairment for Artist Services. There were no impairments of goodwill in 2016.

The change in the valuation allowance in 2018 and 2017 resulted primarily from changes in the income within jurisdictions with full valuation allowances, including the United States.

On December 22, 2017, the TCJA was enacted, which amended the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the TCJA reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction was effective on January 1, 2018. The TCJA resulted in a revaluation of the Company’s United States deferred tax assets and liabilities. Deferred income taxes result from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. The provisional amount recorded to revalue our United States net deferred tax liability balance was a $55.7 million income tax benefit in the Company’s statements of operations for the year ended December 31, 2017. The international provisions of the TCJA, which generally establish a territorial-style system for taxing foreign-sourced income of domestic multinational corporations, includes the requirement that companies pay a one-time transition tax on earnings of certain foreign-sourced subsidiaries that were previously tax-deferred and creates new taxes on certain foreign-sourced earnings. During 2018, the Company recorded an update to the initial estimated amount recorded in 2017 for the one-time transition liability for its foreign subsidiaries which does not impact income tax expense for either period since the Company has reflected the transition tax liability as a reduction to existing fully-valued tax attribute carryforwards. The accounting guidance for income taxes requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC allowed companies to record provisional amounts during a measurement period not extending beyond one year from the TCJA enactment date. As of December 31, 2018, the Company has completed the accounting for all the provisional amounts recorded in 2017.

The TCJA also establishes new tax provisions affecting 2018, including, but not limited to, (1) creating a new provision designed to tax GILTI; (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax; (4) creating the base erosion anti-abuse tax; (5) establishing a deduction for foreign derived intangible income; (6) repealing the domestic production activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation. The TCJA subjects a United States corporation to tax on its GILTI. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in United States taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes. The Company has elected to use the period cost method. The Company’s financial statements for the current year reflect the effects of the TCJA based on current guidance. None of the TCJA provisions applicable to 2018 impact tax expense due to the existence of fully-valued tax attribute carryforwards.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Balance at January 1	$	30,630		$	15,117		$	14,022
Additions:
Increase for current year positions	1,531			807			—
Increase for prior year positions	2,995			15,498			1,978
Decrease for prior year positions	—			—			(3		)
Interest and penalties for prior years	106			2,745			546
Reductions:
Expiration of applicable statute of limitations	(730		)	(1,233		)	—
Settlements for prior year positions	(9		)	(2,033		)	(1,188		)
Foreign exchange	(452		)	(271		)	(238		)
Balance at December 31	$	34,071		$	30,630		$	15,117

If the Company were to prevail on all uncertain tax positions, the net effect would be a decrease to its income tax provision of approximately $16.7 million. The remaining $17.4 million is offset by deferred tax assets that represent tax benefits that would be received in the event that the Company did not prevail on all uncertain tax positions. As of December 31, 2018, it is not expected that the total amounts of unrecognized tax benefits will increase or decrease materially within the next year.

The Company regularly assesses the likelihood of additional assessments in each taxing jurisdiction resulting from current and subsequent years’ examinations. Liabilities for income taxes are established for future income tax assessments when it is probable there will be future assessments and the amount can be reasonably estimated. Once established, liabilities for uncertain tax positions are adjusted only when there is more information available or when an event occurs necessitating a change to the liabilities. As of December 31, 2018, the Company believes that the resolution of income tax matters for open years will not have a material effect on its consolidated financial statements although the resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.

The tax years 2009 through 2018 remain open to examination by the primary tax jurisdictions to which the company is subject.