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Income taxes | 9 Months Ended
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Sep. 30, 2019
Income Tax Disclosure |
Income Taxes | Note 33 – 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, 2019 |  |  |  | September 30, 2018 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 77,508 | 38 | % |  | $ | 71,240 | 39 | %
Net benefit of tax exempt interest income |  | (38,103) | (18) |  |  |  | (24,941) | (14) |
Deferred tax asset valuation allowance |  | 3,170 | 1 |  |  |  | 5,606 | 3 |
Difference in tax rates due to multiple jurisdictions |  | (4,233) | (2) |  |  |  | (5,203) | (3) |
Effect of income subject to preferential tax rate |  | (2,243) | (1) |  |  |  | (2,031) | (1) |
Unrecognized tax benefits |  | - | - |  |  |  | (1,621) | (1) |
State and local taxes |  | 2,180 | 1 |  |  |  | 3,115 | 2 |
Others |  | 3,091 | 1 |  |  |  | (4,147) | (2) |
Income tax (benefit) expense | $ | 41,370 | 20 | % |  | $ | 42,018 | 23 | %
|  |  | Nine months ended |
|  |  | September 30, 2019 |  |  |  | September 30, 2018 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 238,602 | 38 | % |  | $ | 213,474 | 39 | %
Net benefit of tax exempt interest income |  | (95,986) | (15) |  |  |  | (70,341) | (13) |
Deferred tax asset valuation allowance |  | 9,915 | 2 |  |  |  | 17,018 | 3 |
Difference in tax rates due to multiple jurisdictions |  | (9,851) | (2) |  |  |  | (10,400) | (2) |
Effect of income subject to preferential tax rate[1] |  | (7,458) | (1) |  |  |  | (108,087) | (20) |
Unrecognized tax benefits |  | - | - |  |  |  | (1,621) | - |
State and local taxes |  | 5,535 | 1 |  |  |  | 6,196 | 1 |
Others |  | (8,834) | (2) |  |  |  | (10,626) | (2) |
Income tax (benefit) expense | $ | 131,923 | 21 | % |  | $ | 35,613 | 6 | %
[1] | For the nine months ended September 30, 2018, includes the impact of the Tax Closing Agreement entered into in connection with the FDIC Transaction.
Income tax expense of $35.6 million for the nine months ended September 30, 2018, reflects the impact of the Termination Agreement with the FDIC. As result of the termination Agreement the Corporation recognized 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 entered between the Puerto Rico Department of the Treasury and the Corporation. In addition, the Corporation recognized an income tax benefit of $158.7 million related 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 resulting 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. Effective for taxable years beginning after December 31, 2018, Act No. 257 of 2018, which amended the Puerto Rico Internal Revenue Code, reduced the Puerto Rico corporate income tax rate from 39% to 37.5%. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.
|  |  | September 30, 2019
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 16,442 | $ | 7,757 | $ | 24,199
Net operating loss and other carryforward available |  | 128,899 |  | 711,507 |  | 840,406
Postretirement and pension benefits |  | 74,833 |  | - |  | 74,833
Allowance for loan losses |  | 425,855 |  | 18,680 |  | 444,535
Deferred gains |  | - |  | 2,443 |  | 2,443
Accelerated depreciation |  | 1,963 |  | 5,626 |  | 7,589
FDIC-assisted transaction |  | 85,609 |  | - |  | 85,609
Intercompany deferred gains |  | 1,377 |  | - |  | 1,377
Difference in outside basis from pass-through entities |  | 18,570 |  | - |  | 18,570
Other temporary differences |  | 28,722 |  | 8,189 |  | 36,911
| Total gross deferred tax assets |  | 782,270 |  | 754,202 |  | 1,536,472
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 36,578 |  | 43,164 |  | 79,742
Unrealized net gain (loss) on trading and available-for-sale securities |  | 40,840 |  | 1,029 |  | 41,869
Deferred loan origination costs |  | (2,741) |  | 3,027 |  | 286
Other temporary differences |  | 12,432 |  | 1,109 |  | 13,541
| Total gross deferred tax liabilities |  | 87,109 |  | 48,329 |  | 135,438
Valuation allowance |  | 99,766 |  | 392,643 |  | 492,409
Net deferred tax asset | $ | 595,395 | $ | 313,230 | $ | 908,625
|  |  | December 31, 2018
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 15,900 | $ | 7,757 | $ | 23,657
Net operating loss and other carryforward available |  | 116,154 |  | 720,933 |  | 837,087
Postretirement and pension benefits |  | 83,390 |  | - |  | 83,390
Deferred loan origination fees |  | 3,216 |  | (1,280) |  | 1,936
Allowance for loan losses |  | 516,643 |  | 18,612 |  | 535,255
Deferred gains |  | - |  | 2,551 |  | 2,551
Accelerated depreciation |  | 1,963 |  | 5,786 |  | 7,749
FDIC-assisted transaction |  | 95,851 |  | - |  | 95,851
Intercompany deferred gains |  | 1,518 |  | - |  | 1,518
Difference in outside basis from pass-through entities |  | 20,209 |  | - |  | 20,209
Other temporary differences |  | 24,957 |  | 7,522 |  | 32,479
| Total gross deferred tax assets |  | 879,801 |  | 761,881 |  | 1,641,682
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 34,081 |  | 39,597 |  | 73,678
Unrealized net gain (loss) on trading and available-for-sale securities |  | 23,823 |  | (12,783) |  | 11,040
Other temporary differences |  | 10,579 |  | 1,109 |  | 11,688
| Total gross deferred tax liabilities |  | 68,483 |  | 27,923 |  | 96,406
Valuation allowance |  | 89,852 |  | 406,455 |  | 496,307
Net deferred tax asset | $ | 721,466 | $ | 327,503 | $ | 1,048,969
The net deferred tax asset shown in the table above at September 30, 2019 is reflected in the consolidated statements of financial condition as $0.9 billion in net deferred tax assets in the “Other assets” caption (December 31, 2018 - $1.0 billion) and $1.0 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2018 - $926 thousand), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation 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 taxable 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 taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies. At September 30, 2019 the net deferred tax asset of the U.S. operations amounted to $706 million with a valuation allowance of approximately $393 million, for a net deferred tax asset of approximately $313 million. As of September 30, 2019, 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 $313 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arises. At September 30, 2019, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $595 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, 2019. This is considered a strong piece of objectively verifiable positive evidence that outweights any negative evidence considered by management 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 Puerto 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, 2019. 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 the 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 assets, considering the criteria of ASC Topic 740. Accordingly, a valuation allowance is recorded on the deferred tax asset at the PIHC, which amounted to $99.8 million as of September 30, 2019. The reconciliation of unrecognized tax benefits, excluding interest, was as follows:
(In millions) |  | 2019 |  |  | 2018
Balance at January 1 | $ | 7.2 |  | $ | 7.3
Additions for tax positions - January through March |  | 0.3 |  |  | 0.2
Balance at March 31 | $ | 7.5 |  | $ | 7.5
Additions for tax positions - April through June |  | 0.2 |  |  | 0.3
Balance at June 30 | $ | 7.7 |  | $ | 7.8
Additions for tax positions - July through September |  | - |  |  | 0.3
Reduction as a result of lapse of statute of limitations - July through September |  | - |  |  | (1.2)
Balance at September 30 | $ | 7.7 |  | $ | 6.9
At September 30, 2019, the total amount of accrued interest recognized in the statement of financial condition approximated $3.1 million (December 31, 2018 - $2.8 million). The total interest expense recognized at September 30, 2019 was $317 thousand (September 30, 2018 - $477 thousand). Management determined that at September 30, 2019 and December 31, 2018 there was no need to accrue for the payment of penalties. The Corporation’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 $10.1 million at September 30, 2019 (December 31, 2018 - $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 judgment 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 federal jurisdiction, various states and political subdivisions, and foreign jurisdictions. At September 30, 2019, the following years remain subject to examination in the U.S. Federal jurisdiction: 2015 and thereafter; and in the Puerto Rico jurisdiction, 2014 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $3.2 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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