| Income taxes | Income taxes Net income before tax is summarized below ($ in thousands) : Year Ended December 31, 2018 2017 2016 Domestic $ (5,168 ) $ (6,066 ) $ (4,759 ) Foreign 36,344 14,876 29,207 Total net income before tax $ 31,176 $ 8,810 $ 24,448 The components of our income tax provision for the years ended December 31, 2018 , 2017 and 2016 are as follows ($ in thousands) : Year Ended December 31, 2018 2017 2016 Current: Domestic $ (1 ) $ (67 ) $ (3 ) Foreign (9,183 ) (7,967 ) (17,500 ) Total current income tax provision (9,184 ) (8,034 ) (17,503 ) Deferred: Domestic — — — Foreign (3,015 ) (1,017 ) 13,271 Total deferred income tax (provision) benefit (3,015 ) (1,017 ) 13,271 Total income tax provision for the period $ (12,199 ) $ (9,051 ) $ (4,232 ) Reconciliation of Netherlands statutory income tax rate to actual income tax rate A reconciliation of the Netherlands statutory income tax rate to our effective income tax rate from continuing operations is as follows ($ in thousands) : Year Ended December 31, 2018 2017 2016 Income tax provision at statutory rate $ (7,794 ) 25.0 % $ (2,203 ) 25.0 % $ (6,112 ) 25.0 % Differences between statutory rate and foreign rate 21,629 (69.4 )% 16,277 (184.8 )% 11,732 (48.0 )% Inflation adjustments 4,848 (15.6 )% 5,009 (56.9 )% 1,939 (7.9 )% Nondeductible interest and expenses (7,963 ) 25.5 % (6,975 ) 79.2 % (3,912 ) 16.0 % Debt extinguishment and other — — % 536 (6.1 )% (5 ) — % Business interruption proceeds — — % (164 ) 1.9 % 41 (0.2 )% Other (193 ) 0.7 % 229 (2.6 )% (1,218 ) 5.0 % Foreign exchange rate differences (3,561 ) 11.4 % (3,183 ) 36.1 % 7,212 (29.5 )% Dominican Republic tax classification (5,145 ) 16.5 % 3,994 (45.3 )% (3,470 ) 14.2 % Dutch and U.S. rate change (13,721 ) 44.0 % (2,590 ) 29.4 % — — % Change in valuation allowance (299 ) 1.0 % (19,981 ) 226.8 % (10,949 ) 44.8 % Accrual for uncertain tax positions — — % — — % 510 (2.1 )% Income tax provision $ (12,199 ) 39.1 % $ (9,051 ) 102.7 % $ (4,232 ) 17.3 % We are domiciled in The Netherlands and are taxed in The Netherlands with our other Dutch subsidiaries. Dutch companies are subject to Dutch corporate income tax at a general tax rate of 25% . For the year ended December 31, 2018 , we recognized an income tax provision of $12.2 million , resulting in an effective tax rate for the year of 39.1% . The 2018 income tax provision was driven primarily by $13.7 million tax expense on measurement of the Dutch deferred tax assets and liabilities pursuant to the Dutch tax rate change, an $8.0 million tax expense on non-deductible interest and other expenses, a $5.1 million expense associated with our Dominican Republic tax paying entities and a $3.6 million tax expense associated with foreign exchange rate fluctuations. The net income tax expense was partially offset by the tax benefit of $21.6 million from the rate-favorable jurisdictions and a $4.8 million tax benefit associated with inflation adjustments. For the year ended December 31, 2017 , we recognized an income tax provision of $9.1 million , resulting in an effective tax rate for the year of 102.7% . The 2017 income tax provision was driven primarily by $20.0 million tax expense due to additional valuation allowance established on our deferred tax assets, a $3.2 million tax expense associated with foreign exchange rate fluctuations and a $7.0 million tax expense on non-deductible interest and other expenses. The net income tax expense was partially offset by the tax benefit of $16.3 million from the rate-favorable jurisdictions, a $5.0 million tax benefit associated with inflation adjustments and a $4.0 million tax benefit on the reversal of the 2016 tax expense for one of our Dominican Republic entities pursuant to the Advanced Pricing Agreement (“APA”) signed with Dominican Republic tax authorities in December 2017 . This agreement is retroactive to 2016 . For the year ended December 31, 2016 , we recognized an income tax expense of $4.2 million , resulting in an effective tax rate for the year of 17.3% . The 2016 income tax expense was driven primarily by $3.5 million of deferred income tax expense in the Dominican Republic, $3.9 million tax expense on non-deductible expenses, as well as $10.9 million tax expense due to additional valuation allowance established on our deferred tax assets. The net income tax expense was partially offset by the tax benefit of $11.7 million from the rate-favorable jurisdictions, a $1.9 million tax benefit associated with inflation adjustments and a $7.2 million tax benefit associated with foreign exchange rate fluctuation. We have a taxable presence in a variety of jurisdictions worldwide, most significantly in Mexico, the Netherlands, the Dominican Republic and Jamaica. We have been granted certain “tax holidays,” providing us with temporary income tax exemptions. Specifically, two of our entities in the Dominican Republic are under a tax holiday. Inversiones Vilazul, S.A.S, has a tax exemption through December 31, 2019 and Playa Dominican Resorts B.V. is tax exempt for 15 years following the completion of the Hyatt Zilara Cap Cana and Hyatt Ziva Cap Cana. Effect of the Tax Cuts and Jobs Act On December 22, 2017 the U.S. government enacted comprehensive tax legislation, commonly referred to as U.S. Tax Reform. The Company recognized the income tax effects of tax reform in its financial statements for the year ended December 31, 2017, in accordance with Staff Accounting Bulletin (SAB) No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes. As noted in our Annual Report on Form 10-K for the year ended December 31, 2017, the Company completed its deferred tax accounting related to the reduction to the U.S. corporate income tax rate from 35% to 21%. The Company finalized its accounting for tax reform, pursuant to SAB 118 and did not make any significant measurement period adjustments for the year ended December 31, 2018. Since we are a Dutch owned Company and do not have any controlled foreign corporations under U.S. tax law, we concluded that the new legislation related to global intangible low-taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) do not have a material impact to our financial statement and therefore no policy decision is required. Effects of the Dutch Tax Rate Change On December 18, 2018 , the Dutch Senate approved the 2019 tax package. Effective January 1, 2019 , the corporate tax rate reduced from 25% to 22.55% for 2020, and 20.5% for 2021 and forward for amounts in excess of EUR200,000. These adjusted rates impact the carrying value of the Company’s deferred tax assets that are offset by a full valuation allowance. Additionally, our Netherlands entities have deferred tax liabilities on fixed assets without a valuation allowance. Our Netherlands deferred tax assets decreased $14.4 million and valuation allowance decreased $14.4 million without resulting in financial impact. Our Netherlands deferred tax liabilities on fixed assets decreased by $0.7 million , which has a deferred tax benefit of $0.7 million impact to the financial statement at the year ended December 31, 2018 . Dominican Republic Taxes in the Dominican Republic are determined based upon APAs approved by the Ministry of Finance of the Dominican Republic. As the associated APAs had not been finalized as of December 31, 2016, our 2016 income tax provision contemplated the existing Dominican statutory law, without consideration of an associated APA, and we recorded $0.6 million current tax expense and $3.4 million deferred tax expense for one of our Dominican Republic entities, Playa Cana B.V., as of December 31, 2016 . APAs were signed in December 2017 and remain in effect until 2019 . Pursuant to the signed APAs, our Dominican Republic entities are subject to the greater of an income tax, asset tax or gross receipts tax. In 2017, our tax paying Dominican Republic entities were not income tax payers and we project the same trend for the foreseeable future; therefore, our Dominican Republic entities are not subject to income tax accounting under U.S. GAAP. As such, the income tax expense recorded at December 31, 2016 was reversed at December 31, 2017 . During 2018 , Dominican Republic tax paying entities were subject to income tax. We projected that they will be subject to income taxes in some of the foreseeable years. We infer from ASC 740-10-55-144 that under these circumstances, a hybrid tax rate is applicable to compute deferred tax expenses. As such, for the year ended December 31, 2018 , the Company has recorded a current income tax expense of $0.3 million and a deferred tax expense of $4.8 million . The Company will closely monitor the operation in our Dominican Republic entities and update the computation as necessary on a quarterly basis. Deferred income taxes Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as net operating losses and tax credit carry-forwards. We measure those balances using the enacted tax rates we expect will be in effect when we pay or recover taxes. Deferred income tax assets represent amounts available to reduce income taxes we will pay on taxable income in future years. We evaluate our ability to realize these future tax deductions and credits by assessing whether we expect to have sufficient future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies to utilize these future deductions and credits. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized. The tax effect of each type of temporary difference and carry-forward that gives rise to a significant portion of our deferred tax assets and liabilities as of December 31, 2018 and 2017 were as follows ($ in thousands) : As of December 31, 2018 2017 Deferred tax assets: Advance customer deposits $ 6,098 $ 6,010 Trade payables and other accruals 5,210 5,072 Labor liability accrual 757 688 Property and equipment 766 45 Net operating losses 98,874 101,003 Total deferred tax asset 111,705 112,818 Valuation allowance (94,575 ) (98,755 ) Net deferred tax asset 17,130 14,063 Deferred tax liabilities: Accounts receivable and prepayments to vendors 1,113 928 Property and equipment 119,800 89,080 Other liabilities 823 73 Total deferred tax liability 121,736 90,081 Net deferred tax liability $ (104,606 ) $ (76,018 ) As of December 31, 2018 and 2017 , we had $18.9 million and $17.4 million , respectively, of net operating loss carryforwards in our Mexican subsidiaries. The carryforwards expire between 2019 to 2028. As of December 31, 2018 and 2017 , Playa had $349.5 million and $318.1 million , respectively, of net operating loss carryforwards in our Dutch subsidiaries that expire in varying amounts from 2019 to 2027. As of December 31, 2018 and 2017 , Playa had $61.0 million and $49.4 million , respectively, of net operating loss carryforwards in our Jamaica subsidiary. Jamaican NOL's do not expire, however, the utilization is limited to 50% of taxable income before the net operating loss deduction annually for our legacy Jamaican entity. This 50% cap does not apply to our newely formed Jamaican entities because of the exception that it does not apply during the five years of assessment following the first year of operation of a new trade, profession, or business. As of December 31, 2018 and 2017 , Playa had $20.5 million and $15.2 million , respectively, of net operating loss carryforwards in our U.S. subsidiary. These carryforwards generated pre-2018 expire in various amounts from 2034 to 2037, while net operating losses generated in 2018 and forward do not expire. As of December 31, 2018 and 2017 , Playa had no net operating loss carryforwards in our Dominican Republic subsidiary. The carryforwards expired in 2017. The ability to utilize the tax net operating losses in any single year ultimately depends upon our ability to generate sufficient taxable income. We have made no provision for foreign or domestic income taxes on the cumulative unremitted earnings of our subsidiaries. We believe that the earnings of our foreign subsidiaries can be repatriated without incurring additional income taxes, as a result of the applicable local statutory tax laws. The change in the valuation allowance established against our deferred tax assets for the years ended December 31, 2018 , 2017 and 2016 is summarized in the following table ($ in thousands) : Balance at January 1 Additions Deductions Balance at December 31 Deferred tax asset valuation allowance for the year ended December 31, 2018 $ (98,755 ) $ (23,789 ) $ 27,969 $ (94,575 ) December 31, 2017 $ (81,738 ) $ (19,469 ) $ 2,452 $ (98,755 ) December 31, 2016 $ (71,847 ) $ (19,333 ) $ 9,442 $ (81,738 ) The valuation allowance for each period is used to reduce the deferred tax asset to a more likely than not realizable value. As of December 31, 2018 , our valuation allowance relates primarily to net operating loss carryforwards, which we do not expect to utilize, most notably in Netherlands, Jamaica, the United States and certain legal entities in Mexico. We are subject to income taxes in a variety of jurisdictions worldwide. For our significant jurisdictions, the earliest years that remain subject to examination are 2008 for Mexico, 2016 for Netherlands and 2014 for the Dominican Republic, Jamaica and the United States. We consider the potential outcome of current and future examinations in our assessment of our reserve for uncertain tax positions. The following table reconciles our uncertain tax positions, as of December 31, 2018 , 2017 and 2016 : ($ in thousands) : As of December 31, 2018 2017 2016 Uncertain tax positions at January 1 $ — $ — $ 510 Additions for prior year tax positions — — — Settlements with Taxing Authorities — — — Expiration of statue limitation — — (510 ) Uncertain tax positions at December 31 $ — $ — $ — The reserve of $0.5 million for the uncertain tax position was for the withholding taxes related to intercompany charges at December 31, 2015, which was removed due to the expiration of the statute limitation at December 31, 2016. There were no uncertain tax positions recognized during 2018. |
