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INCOME TAXES | 12 Months Ended
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Aug. 31, 2019
INCOME TAXES [Abstract] |
INCOME TAXES | NOTE 10 – INCOME TAXES ﻿ Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands): ﻿ ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Years Ended August 31,
﻿ |  | 2019 |  | 2018 |  | 2017
﻿United States |  | $ | 25,167 |  | $ | 19,723 |  | $ | 24,773
﻿Foreign |  |  | 85,943 |  |  | 102,865 |  |  | 107,970
﻿Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates |  | $ | 111,110 |  | $ | 122,588 |  | $ | 132,743
﻿ Significant components of the income tax provision are as follows (in thousands): ﻿ ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Years Ended August 31,
﻿ |  | 2019 |  | 2018 |  | 2017
﻿Current: |  |  |  |  |  |  |  |  |
﻿U.S. tax expense (benefit) |  | $ | 10,878 |  | $ | 10,827 |  | $ | 12,185
﻿Foreign tax expense (benefit) |  |  | 29,675 |  |  | 30,389 |  |  | 32,680
﻿Total |  | $ | 40,553 |  | $ | 41,216 |  | $ | 44,865
﻿Deferred: |  |  |  |  |  |  |  |  |
﻿U.S. tax expense (benefit) |  | $ | (5,978) |  | $ | 8,223 |  | $ | (2,420)
﻿U.S. valuation allowance change |  |  | 6,171 |  |  | 2 |  |  | (164)
﻿Foreign tax expense (benefit) |  |  | 966 |  |  | 3,516 |  |  | (1,750)
﻿Foreign valuation allowance change |  |  | (4,152) |  |  | (4,780) |  |  | 1,487
﻿Total |  | $ | (2,993) |  | $ | 6,961 |  | $ | (2,847)
﻿Provision for income taxes |  | $ | 37,560 |  | $ | 48,177 |  | $ | 42,018
﻿ The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages): ﻿ ﻿
﻿ |  |  |  |  |  |  |  |  |
﻿ |  | Years Ended August 31,
﻿ |  | 2019 |  | 2018 |  | 2017
﻿Federal tax provision at statutory rates |  | 21.0 | % |  | 25.7 | % |  | 35.0 | %
﻿State taxes, net of federal benefit |  | 0.3 |  |  | 0.2 |  |  | 0.3 |
﻿Differences in foreign tax rates |  | 10.6 |  |  | 3.9 |  |  | (5.2) |
﻿Permanent items and other adjustments |  | (2.1) |  |  | 10.8 |  |  | 1.5 |
﻿(Decrease)/increase in valuation allowance |  | 4.0 |  |  | (1.3) |  |  | 0.1 |
﻿Provision for income taxes |  | 33.8 | % |  | 39.3 | % |  | 31.7 | %
﻿ Significant components of the Company’s deferred tax assets as of August 31, 2019 and 2018 are shown below (in thousands): ﻿ ﻿
﻿ |  |  |  |  |  |
﻿ |  | August 31,
﻿ |  | 2019 |  | 2018
﻿Deferred tax assets: |  |  |  |  |  |
﻿U.S. net operating loss carryforward |  | $ | 3,763 |  | $ | 4,470
﻿Foreign tax credits |  |  | 7,170 |  |  | 126
﻿Deferred compensation |  |  | 927 |  |  | 907
﻿U.S. timing differences |  |  | 2,598 |  |  | 1,609
﻿Foreign net operating losses |  |  | 4,481 |  |  | 5,276
﻿Foreign timing differences: |  |  |  |  |  |
﻿Accrued expenses and other timing differences |  |  | 5,581 |  |  | 5,122
﻿Depreciation and amortization |  |  | 8,819 |  |  | 10,406
﻿Deferred income |  |  | 4,504 |  |  | 3,545
﻿Gross deferred tax assets |  |  | 37,843 |  |  | 31,461
﻿U.S. deferred tax liabilities (depreciation and other timing differences) |  |  | (5,286) |  |  | (5,844)
﻿Foreign deferred tax liabilities netted against deferred tax assets |  |  | (5,360) |  |  | (5,722)
﻿U.S. valuation allowance |  |  | (7,177) |  |  | (1,005)
﻿Foreign valuation allowance |  |  | (4,546) |  |  | (8,724)
﻿Net deferred tax assets |  | $ | 15,474 |  | $ | 10,166
﻿ For fiscal year 2019, the effective tax rate was 33.8%. The decrease in the effective rate versus the prior year was primarily attributable to the following factors: ﻿
| 1. |  | The comparably favorable impact of 10.2% resulting from nonrecurrence of the U.S. Tax Reform Transition Tax.
﻿
| 2. |  | The comparab ly unfavorable net impact of 3.5%, resulting from the unfavorable impact of 6.1% from valuation allowances on deferred tax assets from foreign tax credits that, incidental to U.S. Tax Reform, ar e no longer deemed recoverable; and the favorable impact of 2.6% resulting from new export-related sale s and service tax incentives.
﻿
| 3. |  | The comparably unfavorable impact of 1.0% resulting from the effective tax rate impact of costs incurred to expand our omni-channel capabilities and the net operating results of our marketplace and casillero business.
﻿
| 4. |  | The comparably favorable impact of 1.3% resulting from the reversal of valuation allowances on net deferred tax assets in the Company’s Colombia subsidiary, due to the ongoing improvement in our business in Colombia.
﻿
| 5. |  | The comparatively unfavorable impact on the effective tax rate of 0.9% resulting from a decrease in fiscal year 2019 in the magnitude of an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia compared to the prior year. The Company does not expect these intercompany transactions to continue in the future.
﻿
| 6. |  | The comparably unfavorable impact of 0.7% resulting from severance compensation of one of our officers.
﻿ For fiscal year 2019, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax assets, primarily because of the existence of negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. The Company had net foreign deferred tax assets of $13.5 million and $9.9 million as of August 31, 2019 and 2018, respectively. ﻿ The Company had U.S. federal and state tax NOLs at August 31, 2019 of approximately $14.5 million and $17.1 million, respectively. Substantially all of the federal and state NOLs expire during periods ranging from 2020 through 2036 unless previously utilized. In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating sufficient taxable income during the carry-forward period. Further, based on current projections and using current apportionment factors, the Company maintains a partial valuation allowance on its Florida state NOLs ($17.1 million in gross) originating from its acquisition of its Aeropost, Inc. subsidiary, as the Company expects that $11.1 million of this NOL will expire before being utilized. ﻿ The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, for PriceSmart, Inc., and March 2018 for Aeropost, Inc., there will be annual limitations in the amount of U.S. taxable income that may be offset by NOLs of approximately $6.0 million, through 2022. The Company expects substantially all recoverable NOLs will be recovered by 2023. ﻿ The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted to the U.S. because the Company considers these earnings to be permanently reinvested as management has no plans to repatriate undistributed earnings and profits of foreign affiliates. As of August 31, 2019 and 2018, the undistributed earnings of these foreign subsidiaries are approx imately $108.9 million and $45.2 million, respectively. Undistributed earnings were substantially reduced this year by action of the transition tax imposed upon the Company by the U.S. Tax Reform. ﻿ The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more-likely-than-not-standard for recognition of tax benefits. These positions are recorded as unrecognized tax benefits. ﻿ A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): ﻿ ﻿
﻿ |  |  |  |  |  |  |  |  |  |
﻿ |  | Years Ended August 31,
﻿ |  | 2019 |  | 2018 |  |  | 2017
﻿Balance at beginning of fiscal year |  | $ | 7,005 |  | $ | 7,694 |  |  | $ | 7,754
﻿Gross increase - tax positions in prior period |  |  | 530 |  |  | 1,600 | (1) |  |  | —
﻿Gross decrease - tax positions in prior period |  |  | — |  |  | (2,526) | (2) |  |  | —
﻿Additions based on tax positions related to the current year |  |  | 94 |  |  | 258 |  |  |  | 36
﻿Settlements |  |  | — |  |  | — |  |  |  | (65)
﻿Expiration of the statute of limitations for the assessment of taxes |  |  | (1,139) |  |  | (21) |  |  |  | (31)
﻿Balance at end of fiscal year |  | $ | 6,490 |  | $ | 7,005 |  |  | $ | 7,694
﻿
| (1) |  | Aeropost related unrecognized tax benefits, with corresponding increase to Goodwill, due to current year acquisition.
| (2) |  | Beneficial impact of US tax rate change, with corresponding detrimental rate change offset in deferred tax assets.
﻿ As of August 31, 2019, the liability for income taxes associated with unrecognized tax benefits was $6.5 million and can be reduced by $3.6 million of tax benefits recorded as deferred tax assets and liabilities. The total $6.5 million unrecognized tax benefit includes $400,000 of associated timing adjustments. The net amount of $6.1 million would, if recognized, favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate. ﻿ The Company recognizes interest and/or penalties related to unrecognized tax benefits in income tax expense. As of August 31, 2019 and 2018, the Company had accrued an additional $2.0 million and $2.1 m i llion, respectively, for the payment of interest and penalties related to the above mentioned unrecognized tax benefits. ﻿ The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the twelve-month period ending August 31, 2019 could result in a total income tax benefit amounting up to $3.1 million. ﻿ The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. ﻿ In one country in which the Company has warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court), effective for fiscal years 2015-2018, do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of August 31, 2019, the Company had deferred tax assets of approximately $2.6 million in this country. Also, the Company had an income tax receivable balance of $7.8 million as of August 31, 2019 related to excess payments from fiscal years 2015 and 2019. In fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies, on a go-forward basis, the reimbursement process for excess minimum tax paid beginning in fiscal year 2019, but does not address periods prior to fiscal year 2019. Nevertheless, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will succeed in its refund request, related appeals and/or court challenge on this matter. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below: ﻿ ﻿
﻿ |  |
﻿Tax Jurisdiction |  | Fiscal Years Subject to Audit
﻿U.S. federal |  | 2003 to 2005, 2007, 2011* to 2015*, 2016 to the present
﻿California (U.S.) (state return) |  | 2005 and 2015 to the present
﻿Florida(U.S.) (state return) |  | 2011 to 2015*, 2016 to the present
﻿Aruba |  | 2013 to the present
﻿Barbados |  | 2013 to the present
﻿Costa Rica |  | 2011 to 2012, 2014*, 2015 to the present
﻿Colombia |  | 2015 to the present
﻿Dominican Republic |  | 2011 to 2012 and 2016 to the present
﻿El Salvador |  | 2016 to the present
﻿Guatemala |  | 2009, 2012 to 2013, 2015 the present
﻿Honduras |  | 2014 to the present
﻿Jamaica |  | 2013 to the present
﻿Mexico |  | 2014 to the present
﻿Nicaragua |  | 2015 to the present
﻿Panama |  | 2015*, 2016 to the present
﻿Trinidad |  | 2013 to the present
﻿U.S. Virgin Islands |  | 2001 to the present
﻿Spain |  | 2016 to the present
﻿Chile |  | 2016* to the present
﻿*Aeropost only |  |
﻿ Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to audit.

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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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