Income Taxes

12 Months Ended

Mar. 31, 2020

Income Taxes

The components of pretax income (loss), net of intercompany eliminations, are as follows:



	Year Ended March 31,
	2020			2019			2018
	(Amounts in millions)
United States	$	(453.3	)	$	(505.7	)	$	(824.1	)
International	250.2			197.6			972.8
	$	(203.1	)	$	(308.1	)	$	148.7

The Company's U.S. pre-tax losses and international pre-tax income are primarily driven by non-operating, intercompany items resulting from the Company's internal capital structure. The Company's capital structure generally provides foreign affiliate dividends to its Canadian parent company (i.e., Lionsgate) and interest-related tax deductions to its U.S. companies. The Company's international pre-tax income may be significantly impacted by these foreign affiliate dividends related to its internal capital structure.

On December 22, 2017, the Tax Act was signed into law, making significant changes to the taxation of U.S. business entities. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, imposed a one-time transition tax in connection with the move from a worldwide tax system to a territorial tax system, provided for accelerated deductions for certain U.S. film production costs, imposed limitations on certain tax deductions such as executive compensation in future periods, and included numerous other provisions. As the Company has a March 31 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 31.5% for the fiscal year ended March 31, 2018, and 21% for subsequent fiscal years.

Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, provided a measurement period of one year from the date of enactment for which provisional amounts could be recorded. During the quarter ended December 31, 2018, the Company completed its analysis and its accounting for the Tax Act, and there were no material adjustments to its provisional estimates.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, and has resulted in significant changes to the U.S. federal corporate tax law. Additionally, several state jurisdictions have enacted legislations to comply with federal changes and some foreign jurisdictions have enacted similar tax incentive legislations. As the enactment dates of these laws are before the end of the reporting period, the Company has considered the applicable tax law changes to its current and deferred income tax expense as of March 31, 2020 and concluded that the impact was immaterial. The Company is continuing to analyze the impact of these tax law changes to future periods.

The Company’s current and deferred income tax provision (benefits) are as follows:



	Year Ended March 31,
	2020			2019			2018
Current provision (benefit):	(Amounts in millions)
Federal	$	(0.6	)	$	9.1		$	(17.6	)
States	3.0			(0.7		)	(4.3		)
International	1.8			6.7			2.0
Total current provision (benefit)	$	4.2		$	15.1		$	(19.9	)
Deferred provision (benefit):
Federal	$	(18.5	)	$	(48.2	)	$	(269.0	)
States	(1.8		)	5.8			(18.5		)
International	19.4			18.8			(12.0		)
Total deferred benefit	(0.9		)	(23.6		)	(299.5		)
Total provision (benefit) for income taxes	$	3.3		$	(8.5	)	$	(319.4	)

The Company's income tax provision (benefit) differs from the federal statutory rate multiplied by pre-tax income (loss) due to the mix of the Company's pre-tax income (loss) generated across the various jurisdictions in which the Company operates and the tax deductions generated by the Company's capital structure. The Company's income tax provision for the fiscal year ended March 31, 2020 was impacted by changes in the valuation allowances against certain U.S. and foreign deferred tax assets, certain minimum taxes and foreign withholding taxes. The Company's income tax provision for fiscal 2020 was also impacted by the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations. The Company's income tax benefit for the fiscal year ended March 31, 2019 was offset by valuation allowances against certain U.S. and foreign deferred tax assets, certain minimum taxes imposed by the Tax Act, and the nondeductible portion of shareholder litigation settlements. The Company's income tax benefit for the fiscal year ended March 31, 2018 included a benefit from the impact of the change in U.S. federal tax rates imposed by the Tax Act on the Company's beginning net deferred tax liability balances, and a benefit from foreign affiliate dividends resulting from an internal capital restructuring in connection with our third party debt refinancing, which were offset by charges from increases in our valuation allowance associated with certain U.S. and foreign deferred tax assets.

The Company's income tax provision (benefit) can be affected by many factors, including the overall level of pre-tax income, the mix of pre-tax income generated across the various jurisdictions in which the Company operates, changes in tax laws and regulations in those jurisdictions, changes in uncertain tax positions, further interpretation and legislative guidance regarding the new CARES Act, changes in valuation allowances on its deferred tax assets, tax planning strategies available to the Company, and other discrete items.

The differences between income taxes expected at U.S. statutory income tax rates and the income tax provision are as set forth below:



	Year Ended March 31,
	2020			2019			2018
	(Amounts in millions)
Income taxes computed at Federal statutory rate	$	(42.6	)	$	(64.7	)	$	46.8
Foreign affiliate dividends	(35.2		)	(37.5		)	(329.1		)
Foreign operations subject to different income tax rates	51.4			(235.7		)	7.1
State income tax	1.2			(8.5		)	(21.2		)
Remeasurement of opening U.S. deferred tax liabilities due to the Tax Act	—			—			(165.0		)
Additional remeasurements of originating deferred tax assets and liabilities	—			—			75.6
Permanent differences	8.0			6.8			3.5
Nondeductible settlement costs	—			16.9			—
Other	2.5			0.3			(5.3		)
Increase in valuation allowance	18.0			313.9			68.2
Total provision (benefit) for income taxes	$	3.3		$	(8.5	)	$	(319.4	)

For the years ended March 31, 2020, 2019 and 2018, our total provision (benefit) for income taxes includes certain foreign affiliate dividends that can be received in our Canadian jurisdiction without being subject to tax under local tax law. As a result of an internal capital restructuring during the year ended March 31, 2019, the Company generated a net operating loss carryforward under local law in another foreign jurisdiction which was offset by a valuation allowance based on the Company’s assessment. During the fiscal year ended March 31, 2020, the Company utilized a portion of the net operating loss carryforward to offset certain interest expenses disallowed under local tax law. The Company’s utilization of net operating losses in the local foreign jurisdiction was fully offset by a change in the valuation allowance.

Although the Company is incorporated under Canadian law, the majority of its global operations are currently subject to tax in the U.S. As a result, the Company believes it is more appropriate to use the U.S. Federal statutory rate in its reconciliation of the statutory rate to its reported income tax rate.

The income tax effects of temporary differences between the book value and tax basis of assets and liabilities are as follows:



	March 31, 2020			March 31, 2019
	(Amounts in millions)
Deferred tax assets:
Net operating losses	$	608.6		$	609.5
Foreign tax credits	76.2			74.2
Investment in film and television obligations	35.1			79.0
Accounts payable	72.1			78.9
Operating leases - liabilities	30.0			—
Other assets	86.9			71.7
Reserves	14.6			13.9
Total deferred tax assets	923.5			927.2
Valuation allowance	(435.8		)	(401.1		)
Deferred tax assets, net of valuation allowance	487.7			526.1
Deferred tax liabilities:
Intangible assets	(413.3		)	(438.4		)
Fixed assets	(4.4		)	(8.6		)
Accounts receivable	(79.9		)	(110.6		)
Operating leases - assets	(24.8		)	—
Other	(1.9		)	(5.2		)
Total deferred tax liabilities	$	(524.3	)	$	(562.8	)

Net deferred tax liabilities	$	(36.6	)	$	(36.7	)

The Company has recorded valuation allowances for certain deferred tax assets, which are primarily related to U.S. and foreign net operating loss carryforwards and U.S. foreign tax credit carryforwards as sufficient uncertainty exists regarding the future realization of these assets.

At March 31, 2020, the Company had U.S. net operating loss carryforwards ("NOLs") of approximately $1,660.6 million available to reduce future federal income taxes which expire beginning in 2029 through 2039. At March 31, 2020, the Company had state NOLs of approximately $881.2 million available to reduce future state income taxes which expire in varying amounts beginning 2021. At March 31, 2020, the Company had Canadian loss carryforwards of $57.2 million which will expire beginning in 2034. At March 31, 2020, the Company had Luxembourg loss carryforwards of $768.8 million which will expire beginning in 2036. In addition, at March 31, 2020, the Company had U.S. credit carryforwards related to foreign taxes paid of approximately $76.2 million to offset future federal income taxes that will expire beginning in 2021.

The following table summarizes the changes to the gross unrecognized tax benefits for the years ended March 31, 2020, 2019, and 2018:



	Amounts in millions
Gross unrecognized tax benefits at March 31, 2017	$	14.2
Increases related to current year tax position	0.1
Increases related to prior year tax positions	11.5
Decreases related to prior year tax positions	(8.2		)
Settlements	—
Lapse in statute of limitations	—
Gross unrecognized tax benefits at March 31, 2018	17.6
Increases related to current year tax position	0.3
Increases related to prior year tax positions	2.5
Decreases related to prior year tax positions	(1.0		)
Settlements	(1.8		)
Lapse in statute of limitations	(0.8		)
Gross unrecognized tax benefits at March 31, 2019	16.8
Increases related to current year tax position	—
Increases related to prior year tax positions	—
Decreases related to prior year tax positions	(4.0		)
Settlements	(0.5		)
Lapse in statute of limitations	(0.8		)
Gross unrecognized tax benefits at March 31, 2020	$	11.5

For the years ended March 31, 2020, 2019, and 2018, interest and penalties were not significant. The Company records interest and penalties on unrecognized tax benefits as part of its income tax provision. The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. With a few exceptions, the Company is and can be subject to income tax examination by U.S. and state tax authorities. Currently, the Company is subject to an income tax examination by a certain state for the fiscal years ended March 31, 2008 and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs were generated and carried forward, and make adjustments up to the amount of the NOLs. Currently, audits are occurring in various state and local tax jurisdictions. In addition, the Company's Canadian tax returns are under examination for the years ended March 31, 2014 through March 31, 2017.

The total amount of unrecognized tax benefits as of March 31, 2020 that, if realized, would affect the Company's tax benefit (provision) are $12.8 million.

The Company estimates that approximately $4.9 million in unrecognized tax benefits may be realized in the next 12 months.