Income taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

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%.

During the first quarter of 2019, we implemented a new transfer pricing policy, where the intercompany pricing mechanics between our entities are based on a return on operating assets per applicable guidelines defined by the Organization for Economic Cooperation and Development. As a result, certain of our resort entities that were previously in loss positions were expected to be profitable, which resulted in the release of their valuation allowances.

The adverse economic effects of the COVID-19 pandemic (see Note 1) have caused us to reassess our tax positions. Due to the current environment, including the temporary suspension of operations at our resorts, we concluded that our resort will be in loss positions for the year ended December 31, 2020 and adjusted our transfer pricing analysis accordingly. Additionally, we are closely monitoring the adverse effects of the COVID-19 pandemic on the realizability of our deferred tax assets. As a result, during the nine months ended September 30, 2020, we recognized an additional $20.2 million valuation allowance against the deferred tax assets of our Mexico, Jamaica and U.S. entities.

On March 27, 2020, the United States House of Representatives passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief Bill, and the President of the United States signed the legislation into law. We analyzed The CARES Act and do not expect the provisions of the legislation to have a significant impact on our effective tax rate or our income tax payable and deferred income tax positions as of September 30, 2020.

For the three months ended September 30, 2020, our income tax provision was $5.3 million, compared to a $1.5 million income tax provision for the three months ended September 30, 2019. The increase in our income tax provision of $3.8 million was driven primarily by additional tax expense of $20.2 million related to valuation allowances recognized for our Jamaica, Mexico and U.S. entities during the three months ended September 30, 2020, and a $1.4 million increase in tax expense associated with foreign exchange rate fluctuations. The increase in our income tax provision was offset by a $12.5 million increased tax benefit due to lower pre-tax book income from our tax paying entities, a $4.0 million increase in the discrete tax benefit due to lower future tax liabilities of certain Dominican Republic entities, and a $1.7 million tax benefit associated with an immaterial adjustment related to the sale of the Jewel Dunn’s River Beach Resort & Spa and Jewel Runaway Bay Beach Resort & Waterpark.

For the nine months ended September 30, 2020, our income tax benefit was $8.2 million, compared to a $10.0 million income tax benefit for the nine months ended September 30, 2019. The decrease in our income tax benefit of $1.8 million was driven primarily by a $3.2 million increase in income tax expense from a correction of an immaterial prior year error, a decreased tax benefit from the $14.3 million valuation allowance release during the nine months ended September 30, 2019 that did not occur during the nine months ended September 30, 2020, a $20.2 million tax provision related to valuation allowances recognized for our Jamaica, Mexico and U.S. entities, and a $2.3 million increase in tax expense associated with foreign exchange rate fluctuations. The decrease in the income tax benefit was offset by a $22.6 million increased tax benefit due to lower pre-tax book income from our tax paying entities, an $8.5 million increase in the discrete tax benefit due to lower future tax liabilities of certain Dominican Republic entities, and a $7.5 million discrete tax benefit associated with the sale of the Jewel Dunn’s River Beach Resort & Spa and Jewel Runaway Bay Beach Resort & Waterpark.

Two of our Dominican Republic entities, Playa Romana Mar B.V. and Playa Dominican Resorts B.V., which hold our Hilton La Romana All-Inclusive Resort and Hyatt Ziva and Hyatt Zilara Cap Cana resorts, respectively, were granted 15-year tax exemptions by the Ministry of Finance of the Dominican Republic beginning in 2019. The tax exemption status of Inversiones Vilazul, S.A.S., which holds our Dreams Punta Cana resort, expired on December 31, 2019.