INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

During the three months ended December 31, 2021, we completed an intra-entity transfer of certain intellectual property rights primarily to align with current and future international operations. This transaction was executed using transfer pricing guidelines issued by the relevant taxing authorities. Significant estimates and assumptions were required to compute the valuation of this transaction. These estimates and assumptions include, but are not limited to, estimated future revenue growth and discount rates, which by their nature are inherently uncertain, and, therefore, may ultimately differ materially from our actual results.

We have recorded certain tax reserves to address potential differences involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. While our tax position is not uncertain, because of the significant estimates used in the value of certain intellectual property rights, our tax reserves contain assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be materially more or less than the amount that we estimated.

In order to support and sustain the amortizable tax basis (and associated deferred tax asset, net of uncertain tax position), we must demonstrate economic ownership, including the appropriate authority and expertise to manage the intellectual property owned and serviced in the Netherlands. The determination of economic substance is a judgment that has to be evaluated by management on a continual basis requiring understanding and expertise of local laws of each associated tax jurisdiction. The Netherlands subsidiary serves as the principal Crocs corporate headquarters outside of the U.S. and already performs significant functions in support of the economic ownership of the intellectual property in the Netherlands. In 2021, we undertook many additional activities to align business operations that support the economic substance of the intellectual property in the Netherlands.

The transfer resulted in a step-up in tax basis of intellectual property rights and a correlated increase in foreign deferred tax assets based on the fair value of the transferred intellectual property rights. We recorded a deferred tax asset of $40.3 million, net of a reserve for uncertain tax positions of $16.1 million. As such, a net deferred tax asset of $24.2 million was recognized along with a corresponding foreign deferred income tax benefit.

The following table sets forth income before taxes and the expense for income taxes:

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Income before taxes:
U.S.	$	510,706	$	133,574	$	58,822
Foreign	153,143		73,405		60,500
Total income before taxes	$	663,849	$	206,979	$	119,322
Income tax expense (benefit):
Current income taxes:
U.S. federal	$	94,548	$	698	$	1,284
U.S. state	28,460		6,577		1,427
Foreign	56,430		211,904		13,373
Total current income taxes	179,438		219,179		16,084
Deferred income taxes:
U.S. federal	791		529		(10,249)
U.S. state	32		(2,381)		(3,579)
Foreign	(242,106)		(323,209)		(2,431)
Total deferred income taxes	(241,283)		(325,061)		(16,259)
Total income tax benefit	$	(61,845)	$	(105,882)	$	(175)

The following table sets forth income reconciliations of the statutory federal income tax rate to actual rates based on income or loss before income taxes:

	Year Ended December 31,
	2021				2020				2019
	(in thousands)
Income tax expense and rate attributable to:
Federal income tax rate	$	139,408	21.0	%	$	43,466	21.0	%	$	25,058	21.0	%
State income tax rate, net of federal benefit	22,952		3.5	%	7,231		3.5	%	5,983		5.0	%
Foreign income tax rate differential	18,890		2.8	%	(6,060)		(2.9)	%	1,994		1.7	%
GILTI, net	14,157		2.1	%	7,515		3.6	%	7,585		6.4	%
Non-deductible / non-taxable items	9,637		1.5	%	6,871		3.3	%	6,727		5.7	%
Change in valuation allowance	(192,337)		(29.0)	%	143,012		69.0	%	(33,691)		(28.2)	%
Foreign tax credits	(19,925)		(3.0)	%	(15,904)		(7.7)	%	(12,541)		(10.4)	%
Research and development credits	(13,104)		(2.0)	%	(148)		(0.1)	%	(189)		(0.2)	%
Uncertain tax positions	21,341		3.2	%	200,571		96.9	%	278		0.2	%
Share-based compensation	(11,930)		(1.8)	%	(1,303)		(0.6)	%	(2,715)		(2.3)	%
Intra-Entity IP Transfer	(41,858)		(6.3)	%	(492,470)		(237.9)	%	—		—	%
Enacted changes in tax law	(9,554)		(1.4)	%	—		—	%	634		0.5	%
Other	478		0.1	%	1,337		0.7	%	702		0.5	%
Effective income tax expense and rate	$	(61,845)	(9.3)	%	$	(105,882)	(51.2)	%	$	(175)	(0.1)	%

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table sets forth deferred income tax assets and liabilities as of the date shown:

	December 31,
	2021		2020
	(in thousands)
Non-current deferred tax assets:
Share-based compensation expense	$	2,706	$	1,934
Accruals, reserves, and other expenses	24,346		16,905
Net operating loss	24,573		26,842
Intangible assets	502,100		493,701
Foreign tax credit	39,442		38,948
Operating lease liabilities	35,755		41,391
Other	5,811		5,601
Valuation allowance	(26,467)		(226,655)
Total non-current deferred tax assets	$	608,266	$	398,667
Non-current deferred tax liabilities:
Unrealized gain on foreign currency	$	—	$	(506)
Property and equipment	(12,189)		(13,583)
Right-of-use assets	(28,598)		(33,769)
Other	(278)		(25)
Total non-current deferred tax liabilities	$	(41,065)	$	(47,883)

During 2021, valuation allowances recorded against deferred tax assets decreased by $200.2 million. The change in the valuation allowance includes $192.3 million related to income tax benefit and $7.9 million that does not impact the tax provision because this amount reflects the cumulative impact of unrecorded tax attributes related to changes in cumulative translation adjustments. During 2020, valuation allowances increased by $147.6 million. The change in the valuation allowance

includes $143.0 million related to income tax expense and $4.6 million that does not impact the tax provision because this amount reflects the impact of unrecorded tax attributes related to changes in cumulative translation adjustments. 

Our valuation allowances are primarily the result of uncertainties regarding the future realization of tax attributes recorded in various jurisdictions. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not the deferred tax assets will not be realized. We have evaluated the realizability of our deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results and the availability of prudent and feasible tax planning strategies. In assessing our valuation allowance we considered all available evidence, including the magnitude of recent and current operating results, the duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these jurisdictions, and our assessment regarding the sustainability of their profitability. The weight we give to any particular item is, in part, dependent upon the degree to which it can be objectively verified. During the three months ended June 30, 2021, a jurisdiction for which we have historically recorded significant valuation allowances enacted a favorable change in the tax law related to net operating loss carryforwards. The change in tax law impacted the assessment of valuation allowances in the jurisdiction as the reversal of existing deferred tax assets would generate indefinite carryforward net operating losses instead of losses with a limited carryforward period. During 2021, valuation allowances recorded against deferred tax assets decreased by $200.2 million.

In certain other jurisdictions, we recorded additional attributes, primarily driven by operational losses recognized based on local tax accounting requirements. These carryforwards were generated in jurisdictions where results indicate it is not more likely than not the deferred tax assets would be realized. We maintain a valuation allowance against the majority of these balances.

During 2021, all U.S. federal tax credits were utilized. We have included in the table above the prior year deferred tax assets related to U.S. federal tax carryforwards, including foreign tax credits and other tax credits, of $5.8 million as of December 31, 2020. We have included in the table above deferred tax assets related to U.S. state tax net operating loss carryforwards, some of which expire at various dates beginning in 2031 and some of which do not expire, of $2.4 million and $3.6 million at December 31, 2021 and 2020, respectively. We have recorded deferred tax assets related to foreign tax carryforwards, including foreign tax credits and net operating losses, which expire starting in 2022 and those which do not expire of $61.5 million and $58.4 million as of December 31, 2021 and 2020, respectively. We maintain a valuation allowance against a portion of the foreign carryforwards and other attributes.

The transition tax in the Tax Act imposed a tax on undistributed and previously untaxed foreign earnings at various tax rates. This tax largely eliminated the differences between the financial reporting and income tax basis of foreign undistributed earnings. Furthermore, as of December 31, 2021, foreign withholding taxes have not been provided on unremitted earnings of subsidiaries operating outside of the U.S. as these amounts are considered to be indefinitely reinvested.

The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Unrecognized tax benefit as of January 1	$	206,209	$	4,613	$	4,511
Additions in tax positions taken in prior period	6,169		519		631
Reductions in tax positions taken in prior period	(963)		(340)		(1,532)
Additions in tax positions taken in current period	23,061		200,947		1,786
Settlements	(763)		(294)		(391)
Lapse of statute of limitations	(342)		(258)		(368)
Cumulative foreign currency translation adjustment	(14,972)		1,022		(24)
Unrecognized tax benefit as of December 31	$	218,399	$	206,209	$	4,613

We recorded a net expense of $21.3 million related to increases in 2021 unrecognized tax benefits combined with amounts effectively settled under audit. Unrecognized tax benefits as of December 31, 2021 relate to tax years that are currently open under the statute of limitation. The primary impact of uncertain tax benefits on the rate reconciliation includes audit settlements, net increases in position changes, and accrued interest expense.

Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Our assessments are based on estimates and assumptions using the best available information to management. However, our

estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.

Interest and penalties related to income tax liabilities are included in ‘Income tax benefit’ in the consolidated statements of operations. For the years ended December 31, 2021, 2020, and 2019, we recorded approximately $1.0 million, $0.6 million, and $0.4 million, respectively, of penalties and interest. During the year ended December 31, 2021, we released $0.1 million of interest from settlements, lapse of statutes, and change in certainty. The cumulative accrued balance of penalties and interest was $2.0 million, $1.2 million, and $0.7 million, as of December 31, 2021, 2020, and 2019, respectively.

Unrecognized tax benefits of $218.7 million, $205.6 million, and $4.0 million as of December 31, 2021, 2020, and 2019, respectively, if recognized, would reduce the annual effective tax rate offset by deferred tax assets recorded for uncertain tax positions.

The following table sets forth the tax years subject to examination for the major jurisdictions where we conduct business as of December 31, 2021:

The Netherlands	2009 to 2021
Canada	2014 to 2021
Japan	2014 to 2021
China	2011 to 2021
Singapore	2017 to 2021
United States	2007 to 2021

We are currently under audit in China. U.S. state tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various state jurisdictions for a period up to two years after formal notification to the states. As such, U.S. state income tax returns for us are generally subject to examination for the years 2016 to 2021. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, we do not anticipate a significant change in the total amount of unrecognized tax benefits within the next twelve months.