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Income Taxes | 9 Months Ended
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Sep. 30, 2015
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company’s effective tax rate for the three months ended September 30, 2015 and 2014 was 37.9% and 37.4%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2015 and 2014 was 33.4% and 41.0%, respectively. The Company’s income tax rate for the three and nine months ended September 30, 2015 and 2014 differed from the U.S. federal statutory rate of 35.0% principally due to changes in the Company’s uncertain tax positions, certain foreign income tax rate differentials, state and local income taxes, the production activities deduction, the non-deductibility of the settlement costs related to the antitrust investigation by the German FCO, permanent differences on the goodwill write-off associated with the disposal of the component facilities, and certain other permanent differences. At September 30, 2015, the Company's tax basis in its top tier foreign subsidiary exceeded the Company’s book basis. Accordingly, no deferred tax has been recorded related to this basis difference. It is reasonably possible that the difference may reverse in the foreseeable future. As it relates to the book to tax basis difference with respect to the stock of each of the Company’s lower tier foreign subsidiaries, as a general matter, the book basis exceeds the tax basis in the hands of the foreign subsidiary shareholder. By operation of the tax laws of the various countries in which such subsidiaries are domiciled, in all material respects the earnings of lower tier foreign subsidiaries are not subject to tax when distributed to the foreign shareholder. It is the Company’s intent that the earnings of each lower tier foreign subsidiary, with the exception of its Danish subsidiary, will be permanently reinvested in its own operations. As it relates to the Danish subsidiary, its earnings may be distributed without any income tax impact in any case. Accordingly, no tax is provided for with respect to the book to tax basis difference of its stock. The Company has received income tax assessments from SKAT with respect to the tax years 2001 through 2008 relating to the royalty paid by a U.S. subsidiary of Tempur Sealy International to a Danish subsidiary. The royalty is paid by the U.S. subsidiary for the right to utilize certain intangible assets owned by the Danish subsidiary in the U.S. production processes. In its assessment, SKAT asserts that the amount of royalty rate paid by the U.S. subsidiary to the Danish subsidiary is not reflective of an arms-length transaction. Accordingly, the tax assessment received from SKAT is based, in part, on a 20% royalty rate, which is substantially higher than that historically used or deemed appropriate by the Company. The cumulative total tax assessment at September 30, 2015 for all years for which an assessment has been received (2001 - 2008) is approximately Danish Krone ("DKK") 1,349.9 million, including interest and penalties ($203.5 million, based on the DKK to USD exchange rate on September 30, 2015). The cumulative total tax assessment at December 31, 2014 for all years for which an assessment had been received up through that date (2001 - 2008) including interest and penalties was approximately DKK 1,317.2 million ($215.1 million, based on the DKK to USD exchange rate on December 31, 2014). The increase of DKK 32.7 million is due to additional interest for the period between December 31, 2014 and September 30, 2015. In 2013, the Company was notified by SKAT that SKAT had granted the deferral to 2017 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for the period 2001 through 2007. In addition, during the quarter ended June 30, 2014, the Company was granted a deferral to 2018 of the requirement to post a cash deposit or other form of security for taxes that have been assessed for 2008. SKAT has withheld refunds of VAT otherwise payable to the Company, pending resolution of this matter, and the total amount of withheld refunds at September 30, 2015 is approximately $23 million. This amount is included in other non-current assets on the condensed consolidated balance sheet. The Company filed timely protests with the Danish National Tax Tribunal (the "Tribunal") challenging the tax assessments. The Tribunal formally agreed to place the Danish tax litigation on hold pending the outcome of a Bilateral Advance Pricing Agreement ("Bilateral APA") between the United States and SKAT. A Bilateral APA involves an agreement between the Internal Revenue Service ("IRS") and the taxpayer, as well as a negotiated agreement with one or more foreign competent authorities under applicable income tax treaties. During the third quarter of 2008, the Company filed the Bilateral APA with the IRS and SKAT. U.S. and Danish competent authorities have met several times to discuss the Company’s Bilateral APA since 2011, most recently in February 2013. At the conclusion of the February 2013 meeting the IRS and SKAT concluded that a mutually acceptable agreement on the matter could not be reached and, as a result, the Bilateral APA process was terminated. The matter is now before the Tribunal. The Tribunal is a branch of SKAT that is independent of the discussions and negotiations that have taken place to date. If the Tribunal does not rule to the satisfaction of one or both parties, the party seeking redress may choose to litigate the issue in the Danish court system. The Company believes it has meritorious defenses to the proposed adjustments and plans to oppose the assessments before the Tribunal and in the Danish courts, as necessary. As part of the Tribunal process, the Company continues to collect and analyze additional information with the assistance of outside advisers to present before the Tribunal. As part of the Tribunal process, the Tribunal assigned an individual to serve as a case manager on the matter. It is the responsibility of the case manager to gather data from both SKAT and the Company and independently evaluate such data. Beginning in April 2014, the Company provided information to the case manager. The output of the case manager’s evaluation will be a non-binding recommendation made to the Tribunal on how the case manager believes the Tribunal should decide the issues. In the first half of 2015 the case manager issued a preliminary, non-binding recommendation in favor of each of SKAT’s annual assessments. In June 2015, at the request of the case manager, the Company submitted additional information to the case manager in response to the preliminary recommendation. In the submission, the Company reiterated its strong objection to SKAT’s position and SKAT’s assessments and reiterated the merits of the Company’s position. The Company expects the case manager will issue the non-binding recommendation to the Tribunal before the end of 2015 unless the issuance of the case manager's recommendation is postponed or deferred by the Tribunal. The Company will continue to monitor this matter closely and evaluate all options available to the Company to resolve this matter, including formal discussions with SKAT on a negotiated outcome or litigating the position until final resolution. In the fourth quarter of 2015, the Company expects to meet with SKAT to discuss this matter, including both the Company's and SKAT's evolving positions on this matter. To date, the Company has received an assessment every year for the next year in the examination cycle. In this regard, the Company expects to receive an assessment for the year 2009 in the second half of 2015 (and the Company would expect to receive the 2010 assessment in 2016, and so forth). The Company expects the aggregate assessments for the years 2009 - 2015 to be in excess of the amounts described above as assessed for the years 2001 - 2008. The Company maintains a liability for uncertain tax positions associated with this matter of approximately $19.4 million at September 30, 2015, which is based on a royalty methodology and royalty rates that the Company considers to be reflective of market transactions. This conclusion is based on the Company's evaluation of the facts and circumstances regarding this matter and applying the technical requirements applicable to U.S., Danish, and international transfer pricing standards as required by GAAP. As the Company continues to evaluate the options available to resolve this matter, whether in litigation or otherwise, it is reasonably possible the amount of unrecognized tax benefits may change in the next twelve months. An estimate of the amount of such change cannot be made at this time. In conjunction with this tax examination discussed above, during the year ended December 31, 2013 the Company received correspondence from SKAT requesting information regarding the royalty for the years 2009 through 2011. The correspondence indicated that SKAT would be evaluating the royalty paid for each of the years under examination. The Company has responded to SKAT’s request for information. During 2013, the Company and SKAT agreed that the examination of this issue for the years 2009 - 2011 would be placed on hold pending the outcome of the Tribunal process, although SKAT would continue to issue assessments as described above. If the Company is not successful in defending its position before the Tribunal or in the Danish courts, the Company could be required to pay significant amounts to SKAT in excess of any related reserve. In addition, the Company could choose to pursue a settlement with SKAT, which could also require the Company to pay significant amounts to SKAT in excess of any related reserve. Either of these outcomes could have a material adverse impact on the Company’s profitability and liquidity. In addition, prior to any ultimate resolution of this issue before the Tribunal or the Danish courts, based on a change in facts and circumstances, the Company may be required to increase its uncertain tax liability associated with this matter, which could have a material impact on the Company's reported earnings. As it relates to SKAT’s examination of other items, particularly transactions between the Company’s Danish subsidiary and its foreign distribution subsidiaries, during the quarter ended June 30, 2015, SKAT responded to the information provided to it by the Company. The Company and SKAT continue to discuss various matters. The Company believes it has meritorious defenses for all items reported in the Danish income tax returns. The aggregate benefit of uncertain tax positions for all matters (including the Danish royalty matter discussed above) as of September 30, 2015 and December 31, 2014 was $45.9 million and $47.6 million (exclusive of interest and penalties), respectively. Unrecognized tax benefits of $43.3 million and $44.6 million as of September 30, 2015 and December 31, 2014, respectively, would impact the effective tax rate if recognized. The Company had approximately $11.1 million and $10.3 million of accrued interest and penalties at September 30, 2015 and December 31, 2014, respectively. During 2014, the Company was advised by the IRS that the tax years 2010 and 2011 would not be examined but that 2012 would be examined. That examination was finalized in the second quarter of 2015 with no material adjustments. In the quarter ended September 30, 2015, the Company was advised by the IRS that federal income tax return for 2013 would be examined. The examination had not yet begun. With few exceptions, the Company is no longer subject to tax examinations by the U.S. state and local municipalities for periods prior to 2006, and in non-U.S. jurisdictions for periods prior to 2001. As it relates to Sealy for years prior to the Sealy Acquisition, Sealy or one of its subsidiaries was required to file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Sealy’s U.S. federal income tax returns and with few exceptions its foreign income tax returns are no longer subject to examination for years prior to 2006. Generally Sealy’s state and local jurisdiction income tax returns are no longer subject to examination for years prior to 2010. In addition to the Danish tax matter described above, the Company is currently under examination by various tax authorities around the world. The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months as a result of the statute of limitations expiring and/or the examinations being concluded on these returns. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits related to these other returns will be material to the consolidated financial statements.

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