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Income Taxes | 6 Months Ended
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Jun. 30, 2021
Income Tax Disclosure [Abstract] |
Income Taxes | 11. Income Taxes For the three months ended June 30, 2021, we recorded an income tax expense of $1.7 million on income before taxes of $50.3 million, for an effective rate of 3.4 percent. For the three months ended June 30, 2020, we recorded an income tax expense of $3.8 million on income before taxes of $9.2 million, for an effective rate of 41.3 percent. The decrease in the effective rate versus the three months ended June 30, 2020 was primarily driven by the revaluation of the deferred tax assets due to enacted statutory tax rate changes and the release of non-U.S. reserves for unrecognized tax benefits for which the time to assess has lapsed. For the six months ended June 30, 2021, we recorded an income tax benefit of $4.2 million on income before taxes of $24.0 million, for an effective rate of (17.5) percent. For the six months ended June 30, 2020, we recorded an income tax expense of $6.9 million on income before taxes of $20.3 million, for an effective rate of 34.0 percent. The decrease in the effective rate versus the six months ended June 30, 2020 was primarily driven by the revaluation of the deferred tax assets due to enacted statutory tax rate changes and the release of non-U.S. reserves for unrecognized tax benefits for which the time to assess has lapsed. The U.S. federal statute of limitations remains open for the years 2017 and forward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 2 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Australia (2016 forward), Brazil (2015 forward), Canada (2017 forward), Germany (2016 forward), Sweden (2016 forward) and the U.K. (2018 forward). We are currently under examination in certain foreign jurisdictions. Brazil Tax Assessments In connection with our May 1, 2012, acquisition of the Mead Consumer and Office Products business ("Mead C&OP"), we assumed all of the tax liabilities for the acquired foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment against Tilibra, challenging the tax deduction of goodwill from Tilibra's taxable income for the year 2007 (the "First Assessment"). A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013 (the "Second Assessment" and together with the First Assessment, the "Brazil Tax Assessments"). Tilibra is disputing both of the Brazil Tax Assessments. The final administrative appeal of the Second Assessment was decided against the Company in 2017. In 2018, we appealed this decision to the judicial level. In the event we do not prevail at the judicial level, we will be required to pay an additional penalty representing attorneys' costs and fees; accordingly, in the first quarter of 2019, the Company recorded an additional reserve in the amount of $5.6 million. In connection with the judicial challenge, we were required to provide security to guarantee payment of the Second Assessment should we not prevail. In the third quarter of 2020, the final administrative appeal of the First Assessment was decided against the Company. We decided to challenge the First Assessment at the judicial level. We recorded an additional expense in the third quarter of 2020 of $1.2 million representing additional attorneys' costs and fees, which we will be required to pay if we do not prevail at the judicial level. In connection with the judicial challenge, we were required to provide security to guarantee payment of the First Assessment should we not prevail. We believe we have meritorious defenses and intend to vigorously contest both of the Brazil Tax Assessments; however, there can be no assurances that we will ultimately prevail. The ultimate outcome will not be determined until the Brazilian judicial process is complete, which is expected to take a number of years. If the FRD's initial position is ultimately sustained, payment of the amount assessed would materially and adversely affect our cash flow in the year of settlement. Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, we consider the outcome of these disputes to be uncertain. Since it is not more likely than not that we will prevail, in 2012, we recorded a reserve in the amount of $44.5 million (at December 31, 2012 exchange rates) in consideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and which included the 2007-2012 tax years plus penalties and interest through December 2012. Included in this reserve is an assumption of penalties at 75 percent, which is the standard penalty. While there is a possibility that a penalty of 150 percent could be imposed in connection with the First Assessment, based on the facts in our case and existing precedent, we believe the likelihood of a 150 percent penalty is not more likely than not as of June 30, 2021. We will continue to actively monitor administrative and judicial court decisions and evaluate their impact, if any, on our legal assessment of the ultimate outcome of our disputes. In addition, we will continue to accrue interest related to this contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. The time limit for issuing an assessment for 2011 and 2012 expired in January 2018 and January 2019, respectively. Since we did not receive an assessment for either of these periods, we reversed the amounts previously accrued, including $5.6 million related to 2011, which was reversed in the first quarter of 2018. During the six months ended June 30, 2021 and 2020, we accrued additional interest as a charge to current income tax expense of $0.2 million and $0.2 million, respectively. At current exchange rates, our accrual through June 30, 2021, including tax, penalties and interest is $30.0 million (reported in "Other non-current liabilities").

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