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Income taxes | 9 Months Ended
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Sep. 30, 2018
Income Tax Disclosure |
Income Taxes | Note 32 – Income taxes The reason for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:
|  | Quarters ended |
|  | September 30, 2018 |  |  |  | September 30, 2017 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 71,240 | 39 | % |  | $ | 272 | 39 | %
Net benefit of tax exempt interest income |  | (24,941) | (14) |  |  |  | (19,563) | (2,803) |
Deferred tax asset valuation allowance |  | 5,606 | 3 |  |  |  | 5,142 | 737 |
Difference in tax rates due to multiple jurisdictions |  | (5,203) | (3) |  |  |  | 189 | 27 |
Effect of income subject to preferential tax rate |  | (2,031) | (1) |  |  |  | (3,313) | (475) |
Unrecognized tax benefits |  | (1,621) | (1) |  |  |  | (1,185) | (170) |
State and local taxes |  | 3,115 | 2 |  |  |  | (64) | (9) |
Others |  | (4,147) | (2) |  |  |  | (1,444) | (207) |
Income tax (benefit) expense | $ | 42,018 | 23 | % |  | $ | (19,966) | (2,861) | %
|  | Nine months ended |
|  | September 30, 2018 |  |  |  | September 30, 2017 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 213,474 | 39 | % |  | $ | 100,857 | 39 | %
Net benefit of tax exempt interest income |  | (70,341) | (13) |  |  |  | (56,408) | (22) |
Deferred tax asset valuation allowance |  | 17,018 | 3 |  |  |  | 15,262 | 6 |
Difference in tax rates due to multiple jurisdictions |  | (10,400) | (2) |  |  |  | (1,601) | (1) |
Effect of income subject to preferential tax rate[1] |  | (108,087) | (20) |  |  |  | (9,825) | (4) |
Unrecognized tax benefits |  | (1,621) | - |  |  |  | (1,185) | - |
State and local taxes |  | 6,196 | 1 |  |  |  | 2,800 | 1 |
Others |  | (10,626) | (2) |  |  |  | (1,128) | - |
Income tax (benefit) expense | $ | 35,613 | 6 | % |  | $ | 48,772 | 19 | %
[1] For the nine months ended September 30, 2018, includes the impact of the Tax Closing Agreement entered into in connection with the Westernbank FDIC-assisted Transaction.
I ncome tax expense of $35.6 million for the nine months ended September 30, 2018 reflects the impact of the Termination Agreement with the FDIC, discussed in Note 10. In June 2012, the Puerto Rico Department of the Treasury and the Corporation entered into a Tax Closing Agreement (the “Tax Closing Agreement”) to clarify the tax treatment related to the loans acquired in the FDIC Transaction in accordance with the provi sions of the Puerto Rico Tax Code. The Tax Closing Agreement provides that these loans are capital assets and any principal amount collected in excess of the amount paid for such loans will be taxed as a capital gain. The Tax Closing Agreement further prov ides that the Corporation’s tax liability upon the termination of the Shared-Loss Agreements be calculated based on the “deemed sale” of the underlying loans. As a result, in connection with the T ermination Agreement with the FDIC, the Corporation recogniz ed an additional income tax expense of $49.8 million associated with the “deemed sale” incremental tax liability at the capital gains rate per the Tax Closing Agreement. In addition, the Corporation recognize d an income tax benefit of $158.7 million relate d to the increase in deferred tax assets due to increase in the tax basis of the loans as a result of the “deemed sale” for a net tax benefit of $108.9 million. Also, the Corporation recorded an income tax expense of $45.0 million related to the gain resul ting from the Termination Agreement, mainly related to the reversal of net deferred tax liability of the true-up payment obligation and the FDIC Loss Share Asset. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.
|  |  | September 30, 2018
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 16,500 | $ | 7,859 | $ | 24,359
Net operating loss and other carryforward available |  | 114,193 |  | 734,822 |  | 849,015
Postretirement and pension benefits |  | 81,525 |  | - |  | 81,525
Deferred loan origination fees |  | 3,258 |  | (996) |  | 2,262
Allowance for loan losses |  | 569,336 |  | 21,922 |  | 591,258
Deferred gains |  | - |  | 2,653 |  | 2,653
Accelerated depreciation |  | 1,300 |  | 7,076 |  | 8,376
FDIC-assisted transaction |  | 105,249 |  | - |  | 105,249
Intercompany deferred (loss) gains |  | 1,284 |  | - |  | 1,284
Difference in outside basis from pass-through entities |  | 25,495 |  | - |  | 25,495
Other temporary differences |  | 28,387 |  | 7,513 |  | 35,900
| Total gross deferred tax assets |  | 946,527 |  | 780,849 |  | 1,727,376
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 34,579 |  | 39,419 |  | 73,998
Unrealized net gain (loss) on trading and available-for-sale securities |  | 11,609 |  | (18,615) |  | (7,006)
Other temporary differences |  | 11,302 |  | 845 |  | 12,147
| Total gross deferred tax liabilities |  | 57,490 |  | 21,649 |  | 79,139
Valuation allowance |  | 84,282 |  | 421,162 |  | 505,444
Net deferred tax asset | $ | 804,755 | $ | 338,038 | $ | 1,142,793
|  |  | December 31, 2017
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 16,069 | $ | 7,979 | $ | 24,048
Net operating loss and other carryforward available |  | 115,512 |  | 708,158 |  | 823,670
Postretirement and pension benefits |  | 85,488 |  | - |  | 85,488
Deferred loan origination fees |  | 3,669 |  | 958 |  | 4,627
Allowance for loan losses |  | 603,462 |  | 20,708 |  | 624,170
Deferred gains |  | - |  | 2,670 |  | 2,670
Accelerated depreciation |  | 1,300 |  | 7,083 |  | 8,383
Intercompany deferred (loss) gains |  | 224 |  | - |  | 224
Difference in outside basis from pass-through entities |  | 30,424 |  | - |  | 30,424
Other temporary differences |  | 25,084 |  | 6,901 |  | 31,985
| Total gross deferred tax assets |  | 881,232 |  | 754,457 |  | 1,635,689
Deferred tax liabilities: |  |  |  |  |  |
FDIC-assisted transaction |  | 60,402 |  | - |  | 60,402
Indefinite-lived intangibles |  | 31,973 |  | 33,009 |  | 64,982
Unrealized net gain (loss) on trading and available-for-sale securities |  | 26,364 |  | (7,961) |  | 18,403
Other temporary differences |  | 9,876 |  | 386 |  | 10,262
| Total gross deferred tax liabilities |  | 128,615 |  | 25,434 |  | 154,049
Valuation allowance |  | 67,263 |  | 380,561 |  | 447,824
Net deferred tax asset | $ | 685,354 | $ | 348,462 | $ | 1,033,816
The net deferred tax asset shown in the table above at September 30, 2018 is reflected in the consolidated statements of financial condition as $1.1 billion in net deferred tax assets in the “Other assets” caption (December 31, 2017 - $1.0 billion) and $1.6 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2017 - $1.3 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corpora tion in their respective tax jurisdiction, Puerto Rico or the United States. A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxabl e income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future ta xable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies. At September 30, 2018 the net deferred tax asset of the U.S. operations amounted to $759 million with a valuati on allowance of approximately $421 million, for a net deferred tax asset of approximately $338 million. As of September 30, 2018, management estimated that the U.S. operations would earn enough pre-tax Income during the carryover period to realize the total amount of net deferred tax asset after valuation allowance. After weighting all available positive and negative evidence, management concluded that is more likely than not that a portion of the deferred tax asset from the U.S. operation, amounting to approximately $338 million, will be realized. Management will continue to evaluate the realization of the d eferred tax asset each quarter and adjust as any changes arises. At September 30, 2018, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $805 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position and has sustained profitability for the three year period ended September 30, 2018. This is considered a strong piece of objectively verifiable positive evidence that outweights any negative evidence considered by ma nagement in the evaluation of the realization of the deferred tax asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puert o Rico Banking operations will be realized. The Popular, Inc., holding company (“PIHC”) operation is in a cumulative loss position taking into account taxable income exclusive of reversing temporary differences, for the three year period ended September 30, 2018. Management expects these losses will be a trend in future years. This objectively verifiable negative evidence is considered by management as strong negative evidence that will suggest that income in future years will be insufficient to support th e realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the PIHC will not be able to realize any portion of the deferred tax asse ts, considering the criteria of ASC Topic 740. Accordingly, a valuation allowance is recorded on the deferred tax asset at the PIHC, which amounted to $84 million as of September 30, 2018. The reconciliation of unrecognized tax benefits, excluding interest, was as follows:
(In millions) |  | 2018 |  |  | 2017
Balance at January 1 | $ | 7.3 |  | $ | 7.4
Additions for tax positions - January through March |  | 0.2 |  |  | 0.2
Balance at March 31 | $ | 7.5 |  | $ | 7.6
Additions for tax positions - April through June |  | 0.3 |  |  | 0.3
Reduction as a result of settlements - April through June |  | - |  |  | (0.3)
Balance at June 30 | $ | 7.8 |  | $ | 7.6
Additions for tax positions - July through September |  | 0.3 |  |  | 0.3
Reduction as a result of lapse of statute of limitations - July through September |  | (1.2) |  |  | (0.9)
Balance at September 30 | $ | 6.9 |  | $ | 7.0
At September 30, 2018, the total amount of accrued interest recognized in the statement of financial condition approximated $2.7 million (December 31, 2017 - $2.7 million). The total interest expense recognized at September 30, 2018 was $477 thousand net of a reduction of $483 thousand due to the expiration of the statute of limitations (September 30, 2017 - $458 thousand). Management determined that at September 30, 2018 and December 31, 2017 there was no need to accrue for the payment of penalties. The Cor poration’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating expenses in the consolidated statements of operations. After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation’s effective tax rate, was approximately $8.9 million at September 30, 2018 (December 31, 2017 - $9.0 million). The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgme nt about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdi ction, various U.S. states and political subdivisions, and foreign jurisdictions. At September 30, 2018, the following years remain subject to examination in the U.S. Federal jurisdiction: 2015 and thereafter; and in the Puerto Rico jurisdiction, 2014 and th ereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.6 million.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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