Income Taxes

Consolidated income (loss) before taxes for domestic and foreign operations consisted of the following (in thousands):



	Years Ended December 31,
	2014		2013			2012
Domestic	$	122,974	$	(9,935	)	$	(87,122	)
Foreign	835,888		996,458			820,120
Total	$	958,862	$	986,523		$	732,998

The income tax (benefit) provision attributable to income before income taxes is as follows (in thousands):



	Years Ended December 31,
	2014			2013			2012
Current
Federal	$	2,260		$	135		$	5,912
Foreign	2,043			2,057			2,042
	$	4,303		$	2,192		$	7,954
Deferred
Federal	$	(13,286	)	$	(19,826	)	$	(3,655	)
State	4,094			—			—
Foreign	1,107			—			—
	(8,085		)	(19,826		)	(3,655		)
Total	$	(3,782	)	$	(17,634	)	$	4,299

The income tax (benefit) provision differs from that computed at the federal statutory corporate tax rate as follows:



	Years Ended December 31,
	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
Foreign tax rate differential	(19.1	)%	(23.1	)%	(25.6	)%
Non-taxable foreign income	(13.1	)%	(13.4	)%	(15.4	)%
Foreign tax credits, net of valuation allowance	(95.2	)%	(89.3	)%	1.7	%
Repatriation of foreign earnings	88.0	%	87.2	%	0.0	%
Other, net	2.9	%	1.9	%	3.6	%
Valuation allowance, other	1.1	%	(0.1	)%	1.3	%
Effective tax rate	(0.4	)%	(1.8	)%	0.6	%

On November 30, 2010, Wynn Macau SA received an exemption from Macau’s 12% Complementary Tax on casino gaming profits, thereby exempting the casino gaming profits of Wynn Macau SA through December 31, 2015. Accordingly for the years ended December 31, 2014, 2013, and 2012, the Company was exempted from the payment of $99.4 million, $107.3 million and $87.1 million in such taxes or $0.98, $1.06 and $0.84 per share, respectively. The Company’s non-gaming profits remain subject to the Macau Complementary Tax and its casino winnings remain subject to the Macau Special Gaming tax and other levies in accordance with its concession agreement.

In July of 2011, Wynn Macau SA received an extension of its agreement with the Macau Special Administrative Region that provides for an annual payment of MOP $15.5 million (approximately $1.9 million U.S. dollars) as complementary tax otherwise due by shareholders of Wynn Macau SA on dividend distributions through 2015. As a result of the shareholder dividend tax agreements, income tax expense includes $1.9 million for each of the years ended December 31, 2014, 2013 and 2012, respectively.

The Macau special gaming tax is 35% of gross gaming revenue. U.S. tax laws only allow a foreign tax credit up to 35% of “net” foreign source income. In February 2010, the Company and the IRS entered into a Pre-Filing Agreement (“PFA”) providing that the Macau Special Gaming Tax qualifies as a tax paid in lieu of an income tax and could be claimed as a U.S. foreign tax credit.

During 2014 and 2013, the Company recognized tax benefits of $895.0 million and $879.7 million, respectively (net of valuation allowance and uncertain tax positions), for foreign tax credits generated applicable to the earnings of Wynn Macau SA. During 2012, the Company did not repatriate any earnings of Wynn Macau SA and consequently did not generate foreign tax credits in that year.

Accounting standards require recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied. During 2014 and 2013, the aggregate valuation allowance for deferred tax assets increased by $709.8 million and $755.5 million, respectively. The 2014 and 2013 increases are primarily related to foreign tax credit carryforwards and other foreign deferred tax assets that are not considered more likely than not realizable.

The Company recorded tax benefits resulting from the exercise of nonqualified stock options and the value of vested restricted stock and accrued dividends of $9.4 million, $10.5 million and $5.5 million as of December 31, 2014, 2013 and 2012, respectively, in excess of the amounts reported for such items as compensation costs under accounting standards related to stock-based compensation. The Company uses a with-and-without approach to determine if the excess tax deductions associated with compensation costs have reduced income taxes payable.

The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following (in thousands):



	As of December 31,
	2014			2013
Deferred tax assets—U.S.:
Current:
Receivables, inventories, accrued liabilities and other	$	48,093		$	36,556
Less: valuation allowance	(45,992		)	(34,347		)
	2,101			2,209
Long-term:
Foreign tax credit carryforwards	3,283,669			2,614,665
Intangibles and related other	27,201			26,324
Stock based compensation	16,972			10,736
Pre-opening costs	10,876			12,884
Other	10,540			11,341
	3,349,258			2,675,950
Less: valuation allowance	(3,202,971		)	(2,514,258		)
	146,287			161,692
Deferred tax liabilities—U.S.:
Current:
Prepaid insurance, maintenance and taxes	(6,948		)	(6,243		)
Long-term:
Property and equipment	(170,405		)	(176,036		)
Deferred tax assets—Foreign:
Current:
Accrued liabilities	173			164
Less: valuation allowance	(173		)	(164		)
	—			—
Long-term:
Net operating loss carryforwards	16,797			13,701
Property and equipment	22,740			17,441
Pre-opening costs	7,396			3,040
Other	1,930			4,074
Less: valuation allowance	(47,653		)	(38,256		)
	1,210			—
Deferred tax liabilities—Foreign:
Long-term:
Property and equipment	(2,317		)	—
Net deferred tax liability	$	(30,072	)	$	(18,378	)

As of December 31, 2014, the Company had foreign tax credit carryforwards (net of uncertain tax positions) of $3,283.7 million. Of this amount, $619.6 million will expire in 2018, $110.9 million will expire in 2019, $530.4 million in 2020, $540.3 million in 2021, $757.0 million in 2023 and $725.5 million in 2024. The Company has no U.S. tax loss carryforwards. The Company incurred foreign tax losses of $59.6 million, $75.0 million and $79.1 million during the tax years ended December 31, 2014, 2013 and 2012, respectively. These foreign tax loss carryforwards expire in 2017, 2016 and 2015, respectively. The Company incurred a U.S. capital loss of $3.6 million during the year ended December 31, 2011. The U.S. capital loss carryforward will expire in 2016.

In assessing the need for a valuation allowance, the Company does not currently consider forecasted future operating results when scheduling the realization of deferred tax assets and the required valuation allowance but instead relies on the reversal of net taxable temporary differences. The valuation allowance for foreign tax credits was determined by scheduling the existing U.S. taxable temporary differences that are expected to reverse and result in “net” foreign source income during the 10-year foreign tax credit carryover period.

As of December 31, 2014 and 2013, the Company had valuation allowances of $3,242.1 million and $2,542.8 million, respectively, provided on foreign tax credits expected to expire unutilized and valuation allowances of $6.9 million and $5.8 million provided on other U.S. deferred tax assets. As of December 31, 2014 and 2013, the Company had a valuation allowance of $47.8 million and $38.4 million, respectively, provided on its foreign deferred tax assets.

Except for $198.6 million of accumulated earnings which the Company plans on repatriating, the Company has not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of $412.1 million and $388.1 million as of December 31, 2014 and 2013, respectively, which are indefinitely reinvested and will be used to fund future operations or expansion. The amount of the unrecognized deferred tax liability associated with these temporary differences is approximately $144.2 million and $135.8 million for the years ended December 31, 2014 and 2013. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings planned for repatriation. For the years ended December 31, 2014 and 2013, the Company repatriated $1,125.3 million and $840.9 million from Wynn Macau, Limited. The amounts repatriated were used to fund domestic operations, to provide additional U.S. liquidity, and to fund dividends to the Company’s shareholders.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	As of December 31,
	2014			2013			2012
Balance—beginning of year	$	89,544		$	84,289		$	85,498
Increases based on tax positions of the current year	3,297			8,360			8,140
Increases based on tax positions of prior years	322			—			—
Decreases for tax positions of prior years	(867		)	—			—
Settlements with taxing authorities	(997		)	—			—
Lapses in statutes of limitations	(2,415		)	(3,105		)	(9,349		)
Balance—end of year	$	88,884		$	89,544		$	84,289

As of December 31, 2014, 2013, and 2012, unrecognized tax benefits of $88.9 million, $60.3 million and $55.2 million, respectively, were recorded as reductions in deferred income taxes, net. As of December 31, 2013 and 2012, unrecognized tax benefits of $29.2 million and $29.1 million, respectively, were recorded in other long-term liabilities. The Company had no unrecognized tax benefits recorded in other long-term liabilities as of December 31, 2014. As a result of the adoption of accounting guidance in 2014, the Company reclassified unrecognized tax benefits in other long-term liabilities to deferred income taxes, net. See Note 2 "Summary of Significant Accounting Policies" for further discussion on adoption of accounting guidance.

As of December 31, 2014, 2013 and 2012, $20.7 million, $20.7 million and $18.8 million, respectively, of unrecognized tax benefits would, if recognized, impact the effective tax rate.

The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2014, 2013 and 2012, the Company recognized interest and penalties of $0.0 million, $0.0 million and $0.3 million, respectively.

The Company anticipates that the 2010 statute of limitations will expire in the next 12 months for certain foreign tax jurisdictions. Also, the Company’s unrecognized tax benefits include certain income tax accounting methods. These accounting methods govern the timing and deductibility of income tax deductions. As a result, the Company’s unrecognized tax benefits could decrease by a range of $0.0 million to $0.6 million over the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company’s income tax returns are subject to examination by the IRS and other tax authorities in the locations where it operates. The Company’s 2002 to 2010 domestic income tax returns remain subject to examination by the IRS to the extent of tax attributes carryforwards to future years. The Company’s 2011 to 2013 domestic income tax returns also remain subject to examination by the IRS. The Company’s 2010 to 2013 Macau income tax returns remain subject to examination by the Macau Financial Services Bureau.

In April 2012, the Company reached an agreement with the Appellate division of the IRS regarding issues raised during the examination of the 2006 through 2009 U.S. income tax returns. The settlement with the Appellate division did not impact the Company’s unrecognized tax benefits. The settlement of the 2006 through 2009 examination issues resulted in a cash tax payment of $1.3 million and the utilization of $3.1 million and $0.9 million in foreign tax credit and general business credit carryforwards, respectively.

During December 2012, the IRS completed an examination of the Company’s 2010 U.S. income tax return and had no changes. In May 2013, the Company received notification that the IRS completed its examination of the Company’s 2011 U.S. income tax return and had no changes.

For tax year 2012, the Company participated in the IRS Compliance Assurance Program (“CAP”) which accelerates IRS examination of key transactions with the goal of resolving any issues before the taxpayer files its return. In February 2014, the Company received notification that the IRS completed its examination of the Company's 2012 U.S. income tax return and had no changes.

In March 2013 and in December 2013, the Company received notification that it had been selected for the Compliance Maintenance phase of CAP for the 2013 and 2014 tax years, respectively. In the Compliance Maintenance phase, the IRS, at its discretion, may reduce the level of review of the taxpayer’s tax positions based on the complexity and number of issues, and the taxpayer’s history of compliance, cooperation and transparency in the CAP. The Company does not expect a change in its unrecognized tax benefits as a result of the completion of these examinations.

In December 2014, the Company received notification that it was accepted into the Compliance Maintenance phase of CAP for the 2015 tax year.

In July 2012, the Macau Financial Services Bureau commenced an examination of the 2008 Macau income tax return of Wynn Macau SA. In November 2012, the Company received the results of the examination. While no additional tax was due, adjustments were made to the Company’s foreign net operating loss carryforwards.

In January 2013, the Macau Financial Services Bureau examined the 2009 and 2010 Macau income tax returns of Palo, which is a co-holder of the land concession for Wynn Palace. The exam resulted in no change to the tax returns.

In March 2013, the Macau Financial Services Bureau commenced an examination of the 2009, 2010, and 2011 Macau income tax returns of Wynn Macau SA. In December 2014, Wynn Macau SA reached an agreement with the Macau Financial Services Bureau regarding issues raised during its examination. While no additional tax was due as a result of the examination, adjustments were made to the Company's foreign net operating loss carryforwards.

On December 31, 2014, the statute of limitations for the 2009 Macau Complementary tax return expired. As a result of the exam settlement and the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.4 million.