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Income Taxes
 3 Months Ended
Mar. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes

11. Income Taxes

 

For the three months ended March 31, 2022, we recorded income tax expense of $1.7 million on a loss before taxes of $1.0 million. For the three months ended March 31, 2021, we recorded an income tax benefit of $5.9 million on a loss before taxes of $26.3 million. The decrease of the tax benefit of $7.6 million compared to the three months ended March 31, 2021 was primarily due to the decrease in our pre-tax book loss of $25.3 million during the first quarter of 2022 compared to the first quarter of 2021. We also recorded an additional $0.9 million of discrete income tax expense during the first quarter of 2022 compared to the first quarter of 2021.

 

The U.S. federal statute of limitations remains open for the years 2018 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 (2017 forward), Brazil (2015 forward), Canada (2017 forward), Germany (2016 forward), Sweden (2016 forward) and the U.K. (2019 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").

 

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 this adverse decision in the tax authority's lawsuit at the judicial level seeking to collect the tax when the collection action is filed. 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 anticipation of 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. Because the Brazilian courts have determined that we will have to pay the standard penalty of 75 percent if we do not prevail on our challenges of the Brazil Tax Assessments instead of the 150 percent that could be imposed, we have included an assumption of penalties at 75 percent in this reserve. 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 and we have reversed the amounts previously accrued for them. During the three months ended March 31, 2022 and 2021, we accrued additional interest as a charge to current income tax expense of $0.3 million and $0.3 million, respectively. At current exchange rates, our accrual through March 31, 2022, including tax, penalties and interest is $32.1 million (reported in "Other non-current liabilities").