Income taxes

The Company is incorporated in Bermuda and migrated its tax residence to the United Kingdom on April 1, 2015. Belmond’s effective tax rate is significantly affected by its mix of income and loss in various jurisdictions as there is significant variation in the income tax rate imposed and also by the effect of losses in jurisdictions where the tax benefit is not recognized. In the year ended December 31, 2016, the additional tax attributable to taxation rates in excess of the territory where Belmond Ltd. is tax resident had the impact of increasing the provision for income taxes by $9,509,000 (2015: $12,948,000).

Accordingly, the income tax provision is attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax, and is impacted by the effect of valuation allowances and uncertain tax positions. The income tax provision is also affected by certain items that may occur in any given year, but are not consistent from year to year.

The provision for income taxes consists of the following:



			Provision for income taxes
Year ended December 31, 2016	Pre-tax (loss)/ income $’000		Current $’000		Deferred $’000		Total $’000

UK	(6,702	)	949		(444	)	505
Bermuda	160		—		—		—
United States	2,681		(1,510	)	(1,978	)	(3,488	)
Brazil	15,303		5,498		(121	)	5,377
Italy	19,971		4,468		1,998		6,466
Peru	13,965		4,261		1,625		5,886
Rest of the world	(4,622	)	3,007		(1,385	)	1,622

	40,756		16,673		(305	)	16,368



			Provision for income taxes
Year ended December 31, 2015	Pre-tax (loss)/ income $’000		Current $’000	Deferred $’000		Total $’000

UK	(18,965	)	1,585	(2,262	)	(677	)
Bermuda	(4,315	)	—	—		—
United States	1,439		1,310	1,698		3,008
Brazil	10,380		2,768	760		3,528
Italy	17,351		4,006	(824	)	3,182
Peru	12,078		3,154	(677	)	2,477
Rest of the world	7,386		4,341	1,182		5,523

	25,354		17,164	(123	)	17,041



			Provision for income taxes
Year ended December 31, 2014	Pre-tax (loss)/ income $’000		Current $’000	Deferred $’000		Total $’000

UK	(3,476	)	535	(1,279	)	(744	)
Bermuda	(25,702	)	—	—		—
United States	312		1,867	(193	)	1,674
Brazil	21,275		7,872	(447	)	7,425
Italy	9,572		6,752	(1,738	)	5,014
Peru	9,505		3,923	(1,652	)	2,271
Rest of the world	(3,381	)	5,540	(5,638	)	(98	)

	8,105		26,489	(10,947	)	15,542

The reconciliation of earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax at the statutory tax rate to the provision for income taxes is shown in the table below:



	2016		2015		2014
Year ended December 31,	$'000		$'000		$'000

Earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax	40,756		25,354		8,105

Tax charge at statutory tax rate of 20%,15% and Nil% ⁽¹⁾	8,151		3,803		—

Exchange rate movements on deferred tax	(1,785	)	(1,912	)	(3,680	)
Notional interest deductions	(1,812	)	(1,867	)	(1,622	)
Imputed cross border charges	995		716		—
Disallowable goodwill impairment charges	—		2,198		—
Other permanent disallowable expenditure/(income)	483		5,762		2,566
Unrecognized tax loss generated on disposal of Hotel Ritz by Belmond	—		(16,029	)	—
Change in valuation allowance	4,876		16,320		4,573
Difference in taxation rates	9,509		12,948		15,089
Change in provisions for uncertain tax positions	(3,350	)	279		545
Change in tax rates	(643	)	(5,121	)	(2,081	)
Other	(56	)	(56	)	152

Provision for income taxes	16,368		17,041		15,542

⁽¹⁾ The Company migrated its tax residence to the United Kingdom on April 1, 2015, which has a statutory tax rate of 20%. Prior to that date, the Company was tax resident in Bermuda, which does not impose an income tax. The statutory tax rate of 15% represents the average statutory tax rate for the 12 months ended December, 31 2015.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following summarizes Belmond’s net deferred tax assets and liabilities:



	2016		2015		2014
Year ended December 31,	$’000		$’000		$’000

Operating loss carry-forwards	82,292		89,513		111,779
Pensions	255		63		477
Share-based compensation	3,617		2,978		3,872
Other	8,283		8,952		11,559
Less: Valuation allowance	(70,241	)	(69,928	)	(91,462	)

Net deferred tax assets	24,206		31,578		36,225

Other	(5,032	)	(7,427	)	(6,138	)
Property, plant and equipment	(141,231	)	(147,265	)	(162,625	)

Deferred tax liabilities	(146,263	)	(154,692	)	(168,763	)

Net deferred tax liabilities	(122,057	)	(123,114	)	(132,538	)

The Company nets deferred tax assets and liabilities where permitted to do so on a jurisdictional basis.

Non-current deferred income tax liabilities are presented separately on the face of the consolidated balance sheets for all periods and non-current deferred tax assets are included within Other assets.

The gross amount of tax loss carry-forwards is $369,523,000 at December 31, 2016 (2015 - $354,717,000). Of this amount, $11,715,000 will expire in the five years ending December 31, 2021 and a further $78,755,000 will expire in the five years ending December 31, 2026. The remaining losses of $279,053,000 will expire after December 31, 2026 or have no expiry date. After weighing all positive and negative evidence, a valuation allowance has been provided against deferred tax assets where management believes it is more likely than not that the benefits associated with these assets will not be realized.

A deferred tax liability of $1,669,000 (2015 - $541,000) has been recognized in respect of income taxes and foreign withholding taxes on the excess of the amount for financial reporting purposes over the tax basis of the investments in foreign joint ventures. Except for earnings that are currently distributed, income taxes and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The cumulative amount of such unremitted earnings is approximately $1,355,000,000 at December 31, 2016 (2015 - $1,267,000,000). The determination of the additional deferred taxes that have not been provided is not practical.

Belmond’s 2016 tax provision of $16,368,000 (2015 - $17,041,000; 2014 - $15,542,000) included a benefit of $3,350,000 (2015 - charge of $279,000; 2014 - charge of $545,000) in respect of the provision for uncertain tax positions, of which a charge of $639,000 (2015 - charge of $247,000; 2014 - benefit of $426,000) related to the potential interest and penalty costs associated with the uncertain tax positions.

The 2016 provision for income taxes included a deferred tax provision of $4,876,000 in respect of valuation allowances due to a change in judgment concerning Belmond’s ability to realize loss carryforwards and other deferred tax assets in certain jurisdictions compared to a $16,320,000 provision in 2015.

At December 31, 2016, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2016	$’000		$’000		$’000		$’000

Balance, January 1, 2016	3,678		2,967		656		55
Additional uncertain tax provision identified during the year	78		61		4		13
Increase to uncertain tax provision on prior year positions	4		—		4		—
Uncertain tax provisions settled during the year	(3,308	)	(2,668	)	(640	)	—
Decreases as a result of expiration of the statute of limitations	(124	)	(104	)	(2	)	(18	)
Foreign exchange	(10	)	(7	)	(1	)	(2	)

Balance at December 31, 2016	318		249		21		48

At December 31, 2016, Belmond recognized a $318,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2016, if recognized, would affect the effective tax rate.

At December 31, 2015, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2015	$’000		$’000		$’000		$’000

Balance at January 1, 2015	3,437		2,966		416		55
Additional uncertain tax provision identified during the year	78		62		7		9
Increase to uncertain tax provision on prior year positions	236		—		236		—
Decreases as a result of expiration of the statute of limitations	(35	)	(30	)	(2	)	(3	)
Foreign exchange	(38	)	(31	)	(1	)	(6	)

Balance at December 31, 2015	3,678		2,967		656		55

At December 31, 2015, Belmond recognized a $3,678,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2015, if recognized, would affect the effective tax rate.

At December 31, 2014, the total amounts of unrecognized tax benefits included the following:



	Total		Principal		Interest		Penalties
Year ended December 31, 2014	$’000		$’000		$’000		$’000

Balance, January 1, 2014	2,988		2,935		7		46
Additional uncertain tax provision identified during the year	523		90		413		20
Increase to uncertain tax provision on prior year positions	49		49		—		—
Uncertain tax provisions settled during the year	(49	)	(49	)	—		—
Decreases as a result of expiration of the statute of limitations	(27	)	(20	)	(3	)	(4	)
Foreign exchange	(47	)	(39	)	(1	)	(7	)

Balance, December 31, 2014	3,437		2,966		416		55

At December 31, 2014, Belmond recognized a $3,437,000 liability in respect of its uncertain tax positions. The entire balance of unrecognized tax benefit at December 31, 2014, if recognized, would affect the effective tax rate.

Certain subsidiaries of the Company are subject to taxation in the United States and various states and other non-U.S. jurisdictions. As of December 31, 2016, the earliest year in any jurisdiction which is open to examination by the tax authorities is 2002.

Belmond believes that it is reasonably possible that within the next 12 months the uncertain tax provision will decrease by approximately $80,000 as a result of expiration of uncertain tax positions in certain jurisdictions in which Belmond operates. These amounts relate primarily to transfer pricing inquiries with the tax authorities.