XML 30 R20.htm IDEA: XBRL DOCUMENT v3.23.3
Income Taxes
 9 Months Ended
Sep. 30, 2023
Income Tax Disclosure [Abstract]  
Income Taxes

10. Income Taxes

 

For the three months ended September 30, 2023, we recorded income tax expense of $6.7 million on income before tax of $21.6 million. For the three months ended September 30, 2022, we recorded income tax expense of $4.1 million on loss before tax of $64.6 million. The $2.6 million increase in tax expense compared to the three months ended September 30, 2022 was primarily driven by an increase in tax expense for discrete tax items that include uncertain tax positions of $1.8 million, a change in valuation allowances of $0.7 million and a $4.0 million benefit due to the merger of our Brazilian entities that occurred in the three months ended September 30, 2022. This was partly offset by a tax benefit of $3.7 million due to a reduction in income before tax in the current quarter when excluding the non-cash goodwill impairment charge of $98.7 million from the prior year.

 

For the nine months ended September 30, 2023, we recorded income tax expense of $22.7 million on income before tax of $60.3 million. For the nine months ended September 30, 2022, we recorded income tax expense of $18.2 million on loss before tax of $13.8 million. The $4.5 million increase in tax expense compared to the nine months ended September 30, 2022 was primarily driven by an increase in tax expense for discrete tax items that include uncertain tax positions of $4.6 million, a change in valuation allowance of $0.7 million, withholding taxes of $1.4 million, a $4.0 million benefit due to the merger of our Brazilian entities in the prior year and a decrease in tax expense for discrete tax items that include changes to deferred taxes of $0.8 million that occurred in the nine months ended September 30, 2022. This was partly offset by a tax benefit of $5.4 million due to a reduction in income before tax in the current year when excluding the non-cash goodwill impairment charge of $98.7 million, from the prior year.

 

The U.S. federal statute of limitations remains open for the years 2019 and forward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 2 to 6 years. Years still open to examination by foreign tax authorities in major jurisdictions include Australia (2018 forward), Brazil (2018 forward), Canada (2018 forward), Germany (2020 forward), Sweden (2021 forward) and the U.K. (2021 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 its operating entity in Brazil ("ACCO Brazil"). In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment against ACCO Brazil, challenging the tax deduction of goodwill from ACCO Brazil's taxable income for the year 2007 (the "First Assessment"). A second assessment challenging the deduction of goodwill from ACCO Brazil'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 challenged this decision to the first judicial level. In the fourth quarter of 2022, this case was decided against the Company by the first level judicial court. We have appealed this decision to the second 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, and we determined that we would challenge this decision. In 2022, we challenged this adverse decision in the tax authority's lawsuit at the judicial level seeking to collect the tax. 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. It is possible we could have a final decision regarding the Second Assessment at any time in the next three 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, we have used this assumption in the reserve calculation. 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. During the nine months ended September 30, 2023 and 2022, we accrued additional interest as a charge to current income tax expense of $1.3 million and $1.4 million, respectively. At current exchange rates, our accrual through September 30, 2023, including tax, penalties and interest is $33.4 million (reported in "Other non-current liabilities").

 

During the third quarter of 2023, there was a change in Brazilian law which will allow the Company to seek cancellation of the 75 percent penalty that would be payable in the event we do not prevail in our actions challenging the Brazil Tax Assessments. The Company intends to initiate the administrative procedure to request the cancellation of the penalties as soon as possible.