Qurate Retail, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income taxes

Income Taxes

Income tax expense (benefit) consisted of the following:



	Years ended December 31,
(in millions)	2016			2015		2014
Current:
U.S. federal	$	326		384		396
State and local	29			20		28
Foreign jurisdictions	73			75		132
Total	428			479		556
Deferred:
U.S. federal	(31		)	(86	)	(182	)
State and local	(8		)	3		(15	)
Foreign jurisdictions	(4		)	(7	)	(5	)
Total	(43		)	(90	)	(202	)
Total income tax expense	$	385		389		354

Pre-tax income was as follows:



	Years ended December 31,
(in millions)	2016		2015	2014
QVC-U.S.	$	859	909	827
QVC-International	168		142	160
Consolidated QVC	$	1,027	1,051	987

Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:



	Years ended December 31,
	2016		2015		2014
Provision at statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.3	%	1.4	%	0.9	%
Foreign taxes	(0.3	)%	0.2	%	0.6	%
Foreign earnings repatriation	0.2	%	0.2	%	(0.3	)%
Valuation allowance	1.0	%	0.9	%	0.2	%
Permanent differences	(0.6	)%	(0.2	)%	(0.5	)%
Change in tax law	1.0	%	—	%	—	%
Other, net	(0.1	)%	(0.5	)%	—	%
Total income tax expense	37.5	%	37.0	%	35.9	%

The tax effects of temporary differences that gave rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:



	December 31,
(in millions)	2016			2015
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for the uncollectible accounts	$	38		33
Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986	36			42
Allowance for sales returns	36			37
Deferred compensation	30			26
Unrecognized federal and state tax benefits	23			60
Accrued liabilities	79			96
Other	24			21
Subtotal	266			315
Valuation allowance	(22		)	(12	)
Total deferred tax assets	244			303
Deferred tax liabilities:
Depreciation and amortization	(1,009		)	(1,127	)
Cumulative translation of foreign currencies	(13		)	(3	)
Total deferred tax liabilities	(1,022		)	(1,130	)
Net deferred tax liability	$	(778	)	(827	)

In the above table, valuation allowances exist due, in part, to the uncertainty of whether or not the benefit of certain foreign tax credits and benefits will ultimately be utilized for income tax purposes.

The Company adopted ASU No. 2016-09 in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. Pursuant to the adoption of ASU No. 2016-09, the Company recognized a tax benefit of $7 million for 2016 reflected in income tax expense. The amounts of the tax benefits for 2015 and 2014 reflected in additional paid-in capital are reported in the consolidated statements of equity.

The Company is party to a Tax Liability Allocation and Indemnification Agreement (the "Tax Agreement") with Liberty. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Liberty for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Liberty an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Liberty, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution. These differences are related primarily to foreign tax credits recognized by QVC that are creditable under the Tax Agreement when and if utilized in Liberty’s consolidated tax return. The difference recorded during the year ended December 31, 2016 was a $64 million dividend and related primarily to foreign tax credits recognized by QVC and not utilized in Liberty’s tax return during the tax year. The differences recorded during the years ended December 31, 2015 and 2014, were $18 million and $29 million, respectively, in capital contributions and related primarily to foreign tax credit carryovers being utilized in Liberty’s consolidated tax return in excess of those recognized by QVC during the respective tax years. The amounts of the tax-related balance due to Liberty at December 31, 2016 and 2015 were $75 million and $71 million, respectively, and are included in accrued liabilities in the consolidated balance sheets.

The Company has provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries. The Company does not expect that any incremental US taxes related to repatriation of earnings of foreign subsidiaries will be material. The amount of the U.S. income tax expense (benefit) recorded in the years ended December 31, 2016, 2015 and 2014 on those undistributed earnings was $2 million, $2 million and ($3 million), respectively.

A reconciliation of the 2016 beginning and ending amount of the liability for unrecognized tax benefits is as follows:



(in millions)
Balance at January 1, 2016	$	91
Increases related to prior year tax positions	14
Decreases related to prior year tax positions	(7		)
Decreases related to settlements with taxing authorities	(49		)
Increases related to current year tax positions	6
Balance at December 31, 2016	$	55

Included in the balance of unrecognized tax benefits at December 31, 2016 are potential benefits of $33 million (net of a $18 million federal tax effect) that, if recognized, would affect the effective rate on income from continuing operations.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other(expense) income in the consolidated statements of operations. The Company did not have a material amount of interest accrued related to unrecognized tax benefits or tax penalties.

The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2017. These include nonfederal and other tax issues. The amount of unrecognized tax benefits related to these issues could have a net decrease of $6 million in 2017 as a result of potential settlements, lapsing of statute of limitations and revisions of settlement estimates.

The Company participates in a consolidated federal return filing with Liberty. As of December 31, 2016, the Company's tax years through 2012 are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2013 and 2014 tax years. The Company's 2015 and 2016 tax years are being examined currently as part of the Liberty consolidated return under the IRS's Compliance Assurance Process program. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of December 31, 2016, certain of the Company’s subsidiaries were under examination in Germany for 2012 through 2014 and the U.K. for 2015. The Company settled an audit of its German subsidiaries for the years 2009 through 2011, resulting in no change in consolidated tax expense. As of December 31, 2016, the Company, or one of its subsidiaries was under examination in the states/cities of California, New York, New York City and Pennsylvania. No material assessments have resulted from these audits as of that date.