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Income Tax | 12 Months Ended
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Dec. 31, 2015
Income Tax Disclosure [Abstract] |
Income Tax | Note 18—Income Tax On April 17, 2012, EVERTEC Group and Holdings were converted from a Puerto Rico corporation into Puerto Rico limited liability companies to benefit from changes to the Puerto Rico Income Tax Code allowing limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. As a result of these conversions and subsequent elections to be treated as partnerships, EVERTEC Group’s and Holding’s taxable income flows through to EVERTEC, Inc. EVERTEC Group, Holdings and EVERTEC, Inc. entered into a Tax Payment Agreement pursuant to which EVERTEC Group is obligated to make certain payments to Holdings or EVERTEC, Inc. for taxable periods or portions thereof occurring on or after April 17, 2012 (the “Effective Date”). Under the Tax Payment Agreement, EVERTEC Group will make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on EVERTEC Group if EVERTEC Group had been a corporation for tax purposes of that jurisdiction, together with all interest and penalties with respect thereto (“Taxes”), reduced by taking into account any applicable net operating losses or other tax attributes of Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period required to be made by EVERTEC Group to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the amount of the payment EVERTEC Group already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings or EVERTEC, Inc. shall promptly make a payment to EVERTEC Group in the amount of such difference. The components of income tax (benefit) expense consisted of the following:
|  | Years ended December 31, |
(Dollar amounts in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
|  |  |  |  | (As restated) |
Current tax (benefit) provision |  | $ | (245 | ) |  | $ | 12,602 |  |  | $ | 4,854 |
Deferred tax benefit |  |  | (3,090 | ) |  |  | (3,701 | ) |  |  | (3,419 | )
Income tax (benefit) expense |  | $ | (3,335 | ) |  | $ | 8,901 |  |  | $ | 1,435 |
The Company conducts operations in Puerto Rico and certain countries throughout the Caribbean and Latin America. As a result, the income tax expense (benefit) includes the effect of taxes paid to the Puerto Rico government as well as foreign jurisdictions. The following table presents the segregation of income tax expense (benefit) based on location of operations:
|  | Years ended December 31, |
(Dollar amounts in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
|  |  |  |  | (As restated) |
Income (loss) before income tax provision (benefit) |  |  |  |  |  |  |  |  |  |  |  |
Puerto Rico |  | $ | 73,327 |  |  | $ | 61,759 |  |  | $ | (34,565 | )
United States |  |  | 1,879 |  |  |  | 2,131 |  |  |  | 2,031 |
Foreign countries |  |  | 6,836 |  |  |  | 11,168 |  |  |  | 6,852 |
Total income (loss) before income tax provision (benefit) |  | $ | 82,042 |  |  | $ | 75,058 |  |  | $ | (25,682 | )
Current tax (benefit) provision |  |  |  |  |  |  |  |  |  |  |  |
Puerto Rico |  | $ | (3,500 | ) |  | $ | 8,090 |  |  | $ | 2,057 |
United States |  |  | 413 |  |  |  | (517 | ) |  |  | 753 |
Foreign countries |  |  | 2,842 |  |  |  | 5,029 |  |  |  | 2,044 |
Total currrent tax (benefit) provision |  | $ | (245 | ) |  | $ | 12,602 |  |  | $ | 4,854 |
Deferred tax benefit |  |  |  |  |  |  |  |  |  |  |  |
Puerto Rico |  | $ | (2,169 | ) |  | $ | (1,933 | ) |  | $ | (2,812 | )
United States |  |  | (114 | ) |  |  | (124 | ) |  |  | (4 | )
Foreign countries |  |  | (807 | ) |  |  | (1,644 | ) |  |  | (603 | )
Total deferred tax benefit |  | $ | (3,090 | ) |  | $ | (3,701 | ) |  | $ | (3,419 | )
Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements. On June 30, 2013, the Governor of Puerto Rico signed into law Act 40, effective as of January 1, 2013, which increased the maximum corporate income tax rate from 30% to 39%. This rate increase is only applicable to the fully taxable operations of EVERTEC in Puerto Rico. As a result of this tax rate increase, the deferred taxes were revalued resulting in the Company recognizing additional non-cash income tax expense of $1.4 million for the first half of 2013. In addition, Act 40 established a national gross receipts tax based on gross revenues that is included as part of the alternative minimum tax (“AMT”) calculation. On July 1, 2014, the Governor enacted Act 77 introducing a number of substantial amendments, including a deduction for the national gross receipts tax instead of including it as part of the computation of the AMT as previously required by Act 40 . On December 22, 2014 the Governor enacted law Act 239 providing a number of technical amendments to Act 77 including the elimination the national gross receipts tax for years 2015 and forward. As of December 31, 2015, the Company has $27.0 million of unremitted earnings from foreign subsidiaries. The Company has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries, because these earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions, therefore, EVERTEC believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to the Company’s undistributed earnings. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance. On October 19, 2012, EVERTEC Group was granted an additional tax exemption under the Tax Incentive Act No. 73 of 2008. Under this grant, EVERTEC Group will benefit from a preferential income tax rate on industrial development income, as well as from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to income tax obligations and January 1, 2013 with respect to municipal and property tax obligations. The grant establishes a base taxable income amount with respect to EVERTEC Group’s industrial development income, which amount will continue to be subject to the ordinary income tax rate under existing law. Applicable taxable income in excess of the established base taxable income amount will be subject to a preferential rate of 4%. The base taxable income amount will be ratably reduced to zero by the fourth taxable year at which point all of EVERTEC Group’s applicable industrial development income will be taxed at the preferential rate of 4% for the remaining period of the grant. The grant contains customary commitments, conditions and representations that EVERTEC Group will be required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 750 employees in EVERTEC Group’s Puerto Rico data processing operations during 2012 and at least 700 employees for the remaining years of the grant, (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made over four year capital investment cycles in $50.0 million increments); and (iii) 80% of EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result, among other things, in reductions in the benefits of the grant or revocation of the grant in its entirety, which could result in EVERTEC, Inc. paying additional taxes or other payments relative to what such parties would be required to pay if the full benefits of the grant are available. On October 11, 2011, the Puerto Rico Government approved a grant under Tax Incentive Law No. 73 of 2008, retroactively to December 1, 2009. Under this grant, activities derived from consulting and data processing services provided outside Puerto Rico are subject to a preferred rate that declines gradually from 7% to 4% by December 1, 2013. After this date, the rate remains at 4% until its expiration in November 1, 2024. In addition, EVERTEC Group has a base tax rate of 7% on income derived from certain development and installation service in excess of a determined income for a 10-year period from January 1, 2008. The following table presents the components of the Company’s deferred tax assets and liabilities:
|  | December 31, |
(Dollar amounts in thousands) |  | 2015 |  |  | 2014 |
|  |  |  |  | (As Restated) |
Deferred tax assets (“DTA”) |  |  |  |  |  |  |  |
Allowance for doubtful accounts |  | $ | 420 |  |  | $ | 245 |
Unearned income |  |  | 1,315 |  |  |  | 1,149 |
Investment in equity subsidiary |  |  | 292 |  |  |  | 304 |
Alternative minimum tax |  |  | 400 |  |  |  | 495 |
Share-based compensation |  |  | 379 |  |  |  | 89 |
Other temporary assets |  |  | 679 |  |  |  | 687 |
Total gross deferred tax assets |  |  | 3,485 |  |  |  | 2,969 |
Deferred tax liabilities (“DTL”) |  |  |  |  |  |  |  |
Deferred compensation |  | $ | 1,270 |  |  | $ | 1,144 |
Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase |  |  | 21,144 |  |  |  | 23,844 |
Total gross deferred tax liabilities |  |  | 22,414 |  |  |  | 24,988 |
Deferred tax liability, net |  | $ | (18,929 | ) |  | $ | (22,019 | )
Pursuant to the provision of the PR Code, net operating losses (“NOL”) can be carried forward for a period of seven, ten or twelve taxable years, depending on the taxable year generated. Act 72 of May 29, 2015, limited the amount of NOLs deduction to 80% for regular tax and 70% for AMT for the taxable year ended December 31, 2015. At December 31, 2015, the Company has $10.9 million NOL carryforwards for tax purposes available to offset future taxable income. As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain windfall tax benefit as of December 31, 2015, and December 31, 2014, that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $4.2 million if and when such windfall tax benefit is ultimately realized. We use tax law ordering when determining when windfall tax benefits have been realized. The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The following is a tabular reconciliation of the total amounts of UTBs:
|  | Years ended December 31, |
(Dollar amounts in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
|  |  |  |  | (As Restated) |
Balance, beginning of year |  | $ | 19,859 |  |  | $ | 20,616 |  |  | $ | 20,112 |
Gross increases—tax positions in prior period |  |  | 53 |  |  |  | — |  |  |  | 2,323 |
Gross decreases—tax positions in prior period |  |  | — |  |  |  | (757 | ) |  |  | (1,889 | )
Gross increases—tax positions in current period |  |  | — |  |  |  | — |  |  |  | 916 |
Lapse of statute of limitations |  |  | (7,065 | ) |  |  | — |  |  |  | (846 | )
Balance, end of year |  | $ | 12,847 |  |  | $ | 19,859 |  |  | $ | 20,616 |
As of December 31, 2015, 2014 and 2013, approximately $12.4 million for all years would affect the Company’s effective income tax rate, if recognized. The Company recognizes interest and penalties related to UTB as part of income tax expense. During the years ended December 31, 2015, 2014 and 2013, the Company recognized an income tax benefit of $2.0 million, an income tax expense of $1.2 million and an income tax expense of $0.9 million, respectively, related to interest and penalties. The amount accrued for interest and penalties at December 31, 2015 and 2014 was $1.3 million, and $3.3 million, respectively. The Company anticipates changes to the UTBs within the next 12 months to be primarily related to interest. The Company believes it has sufficient accruals for contingent tax liabilities. In connection with tax return examinations, contingencies can arise that generally result from different interpretations of tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the Company’s Puerto Rico and foreign tax examinations or the expiration of the statute of limitations for specific jurisdictions, that the liability for UTBs may increase or decrease within the next twelve months, the Company does not expect any such change would have a material effect on our financial condition, results of operations or cash flow. The Company and its subsidiaries are subject to Puerto Rico income tax as well as income tax of multiple foreign jurisdictions. A significant majority of the income tax is from Puerto Rico with a statute of limitations of four years after filing the income tax returns; therefore, the income tax returns for 2011, 2012, 2013, and 2014 are currently open for examination. The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income (loss) before income taxes as a result of the following:
|  | Years ended December 31, |
(Dollar amounts in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
|  |  |  |  | (As restated) |
Computed income tax at statutory rates |  | $ | 31,996 |  |  | $ | 29,435 |  |  | $ | (10,109 | )
Benefit of net tax-exempt interest income |  |  | (284 | ) |  |  | — |  |  |  | (180 | )
Differences in tax rates due to multiple jurisdictions |  |  | 37 |  |  |  | (942 | ) |  |  | 577 |
Tax (benefit) expense due to a change in estimate |  |  | (201 | ) |  |  | (916 | ) |  |  | 83 |
Adjustment to deferred taxes due to changes in enacted tax rate and tax grant |  |  | — |  |  |  | (731 | ) |  |  | 3,568 |
Effect of net disallowed operating losses in foreign entities |  |  | 103 |  |  |  | 83 |  |  |  | 93 |
Effect of income subject to tax-exemption grant |  |  | (23,375 | ) |  |  | (19,858 | ) |  |  | 6,242 |
Unrecognized tax benefit |  |  | (11,626 | ) |  |  | 1,830 |  |  |  | 1,168 |
Other |  |  | 15 |  |  |  | — |  |  |  | (7 | )
Income tax (benefit) expense |  | $ | (3,335 | ) |  | $ | 8,901 |  |  | $ | 1,435 |

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