Income Taxes

(Loss) income before taxes and equity in earnings of affiliates were as follows:



	Years Ended
	December 31, 2019			December 29, 2018		December 30, 2017
Domestic	$	(809	)	$	59	$	69
Foreign	(220		)	84		70
Total (loss) income before taxes and equity in earnings of affiliates	$	(1,029	)	$	143	$	139

The provisions for income taxes were as follows:



	Years Ended
	December 31, 2019			December 29, 2018			December 30, 2017
Current income tax (benefit) expense:
U.S. federal	$	—		$	13		$	22
State and local	2			4			4
Foreign	16			25			16
Total current	18			42			42
Deferred income tax (benefit) expense:
U.S. federal	(10		)	—			7
State and local	(7		)	—			—
Foreign	(8		)	(5		)	(1		)
Total deferred	(25		)	(5		)	6
Total income tax (benefit) expense	$	(7	)	$	37		$	48

Significant components of our deferred tax assets and liabilities were as follows:



	Years Ended
	December 31, 2019			December 29, 2018
Deferred income tax assets:
Investment in partnerships	$	96		$	72
Net operating losses and other carryforwards	38			3
Inventory, premium coupon redemptions, and accounts receivable valuation allowances	—			1
Share-based compensation	7			—
Other assets	12			1
Total deferred income tax assets	153			77
Valuation allowance for deferred tax assets	(49		)	(1		)
Net deferred income tax assets	104			76
Deferred income tax liabilities:
Intangibles amortization	(125		)	(20		)
Other liabilities	(6		)	—
Total deferred income tax liabilities	(131		)	(20		)
Net deferred income tax (liabilities) assets	$	(27	)	$	56

The deferred income tax assets (liabilities) are classified in the consolidated and combined balance sheets as follows:



	December 31, 2019			December 29, 2018
Non-current deferred income tax assets, net ^(a)	$	20		$	72
Non-current deferred income tax liabilities, net	(47		)	(16		)
Non-current deferred income tax (liabilities) assets	$	(27	)	$	56
(a) Included in Investments and other

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The assessment of the amount of value assigned to the deferred tax assets under the applicable accounting rules is judgmental.

The valuation allowance was $49 million as of December 31, 2019 and $1 million as of December 29, 2018. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax assets will be realized. The ultimate realization of deferred taxes assets is dependent upon generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxable income in carryback years and tax-planning strategies when making this assessment. In evaluating whether it is more likely than not that our deferred tax assets would be recovered, we considered various potential sources of positive and negative evidence including historical cumulative income or loss, projections of future taxable income, available tax planning strategies which are prudent and feasible to implement, and future reversals of existing taxable temporary differences.

In the fourth quarter of 2019, we incurred additional losses which, for the first time, created a three-year cumulative loss in the U.S. We determined that the cumulative loss represented a significant piece of negative evidence which is difficult to overcome in determining whether a valuation allowance was required. The cumulative loss caused us to reassess the weight of other available evidence at September 30, 2019. That reassessment resulted in our conclusion that negative evidence at September 30, 2019 outweighed the positive which resulted in the need for a revision.

We revised our consolidated financial statements for our quarter ended September 30, 2019, see Note 1 - Business Overview and Significant Accounting Policies. We determined that these amounts are not material to our previously issued quarterly financial statements. The impact to our previously issued consolidated financial statements was as follows:



	As of September 30, 2019
Consolidated Balance Sheet:	Previously Reported			Revision			As Revised
Non-current deferred income tax assets, net^(a)	$	38		$	(19	)	$	19
Total assets	3,328			(19		)	3,309
Deferred income taxes	11			34			45
Total liabilities	1,989			34			2,023
Accumulated deficit	(939		)	(53		)	(992		)
Total shareholders’ equity	1,329			(53		)	1,276
Total liabilities, redeemable non-controlling interests, and shareholders’ equity	$	3,328		$	(19	)	$	3,309

(a) Included in Investments and other
	Quarter Ended September 30, 2019
Consolidated Statement of Operations:	Previously Reported			Revision			As Revised
Income tax benefit (expense)	$	60		$	(53	)	$	7
Net (loss) income	$	(909	)	$	(53	)	$	(962	)
Net (loss) income attributable to Covetrus	$	(906	)	$	(53	)	$	(959	)
(Loss) earnings per share attributable to Covetrus:
Basic	$	(8.09	)	$	(0.47	)	$	(8.56	)
Diluted	$	(8.09	)	$	(0.47	)	$	(8.56	)

The balance sheet contains assets and liabilities held for sale. The amounts of deferred tax assets and liabilities held for sale at December 31, 2019 were not material.

At December 31, 2019, we had the following tax loss and tax credit carryforwards available to offset taxable income in prior and future years:



	Amount		Expiration Period
U.S. federal tax loss carryforwards	$	21	2023 - unlimited
U.S. federal and state interest carryforwards	$	8	unlimited
U.S. state tax loss carryforwards	$	5	2020 - 2039
Non-U.S. tax loss carryforwards	$	4	2020 - unlimited
Total tax loss and tax credit carryforwards	$	38

The U.S. state tax loss carryforwards were incurred in various jurisdictions. The non-U.S. tax loss carryforwards were incurred in various jurisdictions, predominantly France, Germany, Poland, Sweden, and the U.K.

The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate due to the following:



	Years Ended
	December 31, 2019		December 29, 2018		December 30, 2017
Income tax provision at federal statutory rate	21.0	%	21.0	%	35.0	%
Transition tax on deemed repatriation of foreign earnings	—		2.8		9.4
Pass through non-controlling interest	—		(2.1	)	(7.9	)
State income tax provision, net of federal income tax effect	0.5		1.4		2.0
Foreign income tax provision (benefit)	0.3		1.4		(6.2	)
Tax on GILTI	(0.9	)	1.4		—
Excess tax benefits related to share-based compensation	—		(0.7	)	(2.9	)
Revaluation of deferred tax assets and liabilities	(0.9	)	—		5.3
Valuation allowance impacts	(3.9	)	—		—
Goodwill impairment	(14.4	)	—		—
Other	(1.0	)	0.7		(0.1	)
Total income tax provision	0.7	%	25.9	%	34.6	%

We file U.S. federal and various state and local income tax returns as well as income tax returns in 25 foreign jurisdictions. Tax returns are generally subject to examination for a period of three to five years after the filing of the respective return. The tax years subject to examination by major tax jurisdictions include the years 2016 and forward by the U.S. Internal Revenue Service, the years 2015 and forward for certain state and local jurisdictions, and the years 2011 and forward for certain foreign jurisdictions.

The Tax Act is comprehensive tax legislation that implemented complex changes to the U.S. tax code and also moved from a global tax regime to a modified territorial regime, which required U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S., provisions for GILTI, a beneficial tax rate on FDII, BEAT that imposes tax on certain foreign related-party payments, and interest limitation. We became subject to the GILTI, FDII, BEAT and interest limitation provisions effective January 1, 2018.

We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred and estimated the impact of each provision of the Tax Act on the effective tax and recorded tax expense for the GILTI provision of $10 million and an interest limitation of $7 million for the year ended December 31, 2019. We recorded a tax expense for the GILTI provision of $2 million for the year ended December 29, 2018. We have concluded that the BEAT and FDII provisions of the Tax Act will not apply to or will not have a material impact on our consolidated and combined financial statements, therefore, we have not recorded an estimate for these items in the effective tax rate for the years ended December 29, 2018 and December 31, 2019.

Due to the complexities of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allowed us to record a provisional amount for any income tax effects of the Tax Act in accordance with ASC 740, to the extent that a reasonable estimate could be made, in our 2017 combined financial statements. SAB 118 allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.

In the fourth quarter of 2017, we recorded provisional amounts related to the Tax Act for any items that could be reasonably estimated at the time. This included the one-time transition tax that we estimated to be $13 million and a net deferred tax expense of $7 million attributable to the revaluation of deferred tax assets and liabilities due to the lower-enacted federal income tax rate of 21%. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in a one-time tax expense of $20 million. Absent the effects of the transition, the revaluation of deferred tax assets and liabilities, and the adoption of ASU 2016-09, “Accounting for Stock Compensation,” our effective tax rate for the year ended December 30, 2017, would have been 22.8% as compared to our actual effective tax rate of 34.6%.

For the year ended December 29, 2018, we recorded $4 million additional expense for the one-time transition tax. The change was a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued. As of December 29, 2018, we completed our analysis of the impact of the Tax Act in accordance with SAB 118 and the amounts are final.

Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be subject to U.S. federal income tax, however, there could be U.S. state and/or foreign withholding taxes upon distribution of such unremitted earnings. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practicable.

ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within the guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain tax matters.

The following table provides a reconciliation of unrecognized tax benefits which are included in Other liabilities within the balance sheets:



	Years Ended
	December 31, 2019			December 29, 2018			December 30, 2017
Balance at beginning of period	$	6		$	8		$	8
Additions based on prior year tax positions	—			2			1
Reductions from lapse in statutes of limitations	(2		)	(4		)	(1		)
Balance at end of period	$	4		$	6		$	8

The amount of unrecognized tax benefits that would affect the effective tax rate if recognized during the year ended December 31, 2019 would be $4 million. We believe that it is reasonably possible that a decrease of up to $1 million in unrecognized tax benefits related to foreign tax exposures may be necessary in the coming year due to lapses of statute of limitations.

The balance sheet at December 31, 2019 contains unrecognized tax benefits of $1 million related to assets held for sale.

We recognize interest and penalties related to unrecognized tax benefits as components of Income tax (benefit) expense in the statements of operations and accrued $2 million in 2019 and $1 million in 2018.