Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income tax attributable to continuing operations during the three months ended March 31, 2020 and 2019 was an income tax benefit of $1.9 million and $16.4 million, respectively, representing effective tax rates of 475.0% and 1,025.0%, respectively.

The difference in income tax at the U.S. federal income tax rate of 21.0% and GCP’s overall income tax rate for the three months ended March 31, 2020 was primarily due to benefits recognized as a result of the Coronavirus Aid Relief and Economic Security ("CARES") Act. The CARES Act allows for accelerated interest and depreciation deductions which will cause GCP to incur tax net operating losses in 2019 and 2020. Under the CARES Act, these losses can be carried back to offset prior year taxable income that was taxed at the U.S. federal income tax rate of 35%. This resulted in an income tax benefit of $2.8 million, offset by increases in unrecognized tax benefits of $0.4 million and valuation allowance expense of $0.6 million.

The difference between the provision for income taxes at the U.S. federal income tax rate of 21.0% and GCP's overall income tax rate for the three months ended March 31, 2019 was primarily attributable to the finalization of the Transition Tax regulations issued in January 2019 resulting in a tax benefit from the release of an uncertain tax position in the amount of $20.2 million, partially offset by a tax expense of $3.6 million on changes to GCP's 2017 income tax liability and Transition Tax.

Tax Reform

As a result of the additional deductions and net operating loss carryback allowable to GCP under the CARES Act, GCP decreased its outstanding Transition Tax liability by $12.4 million, increased its income tax receivable by $1.2 million, and reduced its deferred tax assets by $10.8 million during the three months ended March 31, 2020. GCP had previously elected to pay the Transition Tax over the eight-year period as provided in the 2017 Tax Act. As of March 31, 2020, the unpaid balance of the Transition Tax obligation is $29.0 million, net of overpayments and foreign tax credits. After considering overpayments, the outstanding payable is due between April 2023 and April 2025.

During the year ended December 31, 2018, GCP recorded a $20.2 million liability for an unrecognized tax benefits related to certain capital gains recognized as a result of the application of the Transition Tax. As a result of clarifications contained in final regulations issued by the IRS in January 2019, GCP decreased its liability for unrecognized tax benefits by $20.2 million during the three months ended March 31, 2019. For additional information related to the 2017 Tax Act, please refer to Note 9, "Income Taxes," to the Company's Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K.

Repatriation

In general, it is GCP's practice and intention to permanently reinvest the earnings of its foreign subsidiaries and repatriate earnings only when the tax impact is efficient.

Valuation Allowance

        In evaluating GCP's ability to realize its deferred tax assets, GCP considers all reasonably available positive and negative evidence, including recent earnings experience, expectations of future taxable income and the tax character of that income, the period of time over which temporary differences become deductible and the carryforward and/or carryback periods available to GCP for tax reporting purposes in the related jurisdiction. In estimating future taxable income, GCP relies upon assumptions and estimates about future activities, including the amount of future federal, state and foreign pretax operating income that GCP will generate; the reversal of temporary differences; and the implementation of feasible and prudent tax planning strategies. GCP records a valuation allowance to reduce deferred tax assets to the amount that it believes is more likely than not to be realized.

During the three months ended March 31, 2020 and March 31, 2019, GCP incurred income tax expense for valuation allowances of $0.6 million and $0.4 million, respectively, recorded against deferred tax assets for prior net operating losses incurred primarily in Australia and India.

Tax Sharing Agreement

In connection with the Separation, GCP and Grace entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement, GCP and Grace will indemnify and hold each other harmless in accordance with the principles outlined therein. Please refer to Note 17, "Related Party Transactions and Transactions with Grace" for further information on the Tax Sharing Agreement.