NOTE 9 - Income Taxes

Income before income taxes includes the following:


(Dollars in thousands)	2016		2015(1)		2014(1)
United States	$	(1,886)	$	3,826	$	3,271
Foreign		14,324		23,149		12,067
Income before income taxes and equity earnings of unconsolidated joint ventures	$	12,438	$	26,975	$	15,338
Equity earnings of unconsolidated joint ventures:
United States		--		--		--
Foreign		999		1,204		1,015
Income before income taxes	$	13,437	$	28,179	$	16,353

(1) 2015 and 2014 balances included the restatement impact as a result of a change in accounting principle (see Note 2 – Summary of Significant Accounting Policies – Accounting Changes).

Significant components of the provision for income taxes are as follows:


(Dollars in thousands)	2016		2015(1)		2014(1)
Current income tax expense
Federal	$	2,982	$	481	$	827
State		675		516		511
Foreign		4,685		3,120		1,251
Total		8,342		4,117		2,589
Deferred income tax expense (benefit)
Federal		(4,197)		612		(13,611)
State		(422)		(940)		(1,104)
Foreign		297		1,359		3,201
Total		(4,322)		1,031		(11,514)
Total income tax expense (benefit)	$	4,020	$	5,148	$	(8,925)

(1) 2015 and 2014 balances included the restatement impact as a result of a change in accounting principle (see Note 2 – Summary of Significant Accounting Policies – Accounting Changes).

Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. The components of the deferred tax assets and liabilities are as follows:


(Dollars in thousands)	December 31, 2016		December 31, 2015(1)
Deferred Tax Assets:
Net operating loss carry-forwards	$	11,940	$	13,286
Alternative minimum tax credit carry-forwards		1,690		540
Compensation and employee benefits		6,221		5,531
Deferred revenue		5,486		6,592
Accrued expenses		7,134		7,971
Accrued taxes		3,381		3,285
Land and property		12,857		11,264
Other		995		1,058
Total Deferred Tax Assets		49,704		49,527
Deferred Tax Liabilities:
Intangibles		(1,482)		(2,321)
Cancellation of indebtedness		(1,559)		(2,396)
Notes receivable		(7,403)		(8,696)
Total Deferred Tax Liabilities		(10,444)		(13,413)
Net deferred tax assets before valuation allowance		39,260		36,114
Valuation allowance		(10,593)		(11,530)
Net deferred tax asset	$	28,667	$	24,584

(1) December 31, 2015 balances included the restatement impact as a result of a change in accounting principle (see Note 2 – Summary of Significant Accounting Policies – Accounting Changes)

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. US GAAP presumes that a valuation allowance is required when there is substantial negative evidence about the realization of deferred tax assets, such as a pattern of comprehensive losses in recent years, coupled with facts that suggest such losses may continue. Because such negative evidence is available for our Puerto Rico, New Zealand and US state operations as of December 31, 2016, we recorded a valuation allowance of $10.6 million.

As of December 31, 2016, we had the following carry-forwards:

approximately $2.0 million in U.S. alternative minimum tax credit carry-forwards with no expiration date;

approximately $12.0 million in available New Zealand loss carry-forwards with no expiration date;

approximately $45.0 million in New York state loss carryforwards expiring in 2034; and,

approximately $40.0 million in New York city loss carryforwards expiring in 2034.

We disposed of our Puerto Rico operations during 2005 and plan no further investment in Puerto Rico for the foreseeable future. We have approximately $14.1 million in Puerto Rico loss carry-forwards expiring no later than 2017. No material future tax benefits from Puerto Rico loss carry-forwards can be recognized by the Company unless it re-enters the Puerto Rico market for which the Company has no current plans.

We expect no other substantial limitations on the future use of U.S. or foreign loss carry-forwards except as described above.

The provision for income taxes is different from amounts computed by applying U.S. statutory rates to consolidated losses before taxes. The significant reason for these differences is as follows:


(Dollars in thousands)	2016		2015(1)		2014(1)
Expected tax provision	$	4,566	$	9,581	$	5,739
Increase (decrease) in tax expense resulting from:
Foreign tax rate differential		(648)		(654)		1,252
Change in valuation allowance		129		1,531		(16,580)
Indefinite reinvestment assertion		--		(3,089)		--
State and local tax provision		307		1,133		461
State rate and law change		--		(3,635)		--
Prior year adjustments		(954)		(514)		--
Unrecognized tax benefits		262		946		700
Other		358		(151)		(497)
Actual tax provision (benefit)	$	4,020	$	5,148	$	(8,925)

(1) 2015 and 2014 balances included the restatement impact as a result of a change in accounting principle (see Note 2 – Summary of Significant Accounting Policies – Accounting Changes)

The undistributed earnings of the Company's Australian subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with a hypothetical calculation.

As part of current taxes payable, we have accrued $2.6 million in connection with federal and state liabilities arising from the “Tax Audit/Litigation” matter which has now been settled (see Note 12 – Commitments and Contingencies).

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2016, 2015, and 2014:


(Dollars in thousands)	2016		2015		2014
Unrecognized tax benefits – gross beginning balance	$	11,022	$	3,760	$	2,160
Gross increases – prior period tax provisions		133		6,679		1,600
Gross increases – current period tax positions		325		583		--
Unrecognized tax benefits – gross ending balance	$	11,480	$	11,022	$	3,760

As of December 31, 2016 and 2015, if recognized, $10.0 million and $9.4 million respectively, of the unrecognized tax benefits would impact Reading International’s effective tax rate.

We record interest and penalties related to income tax matters as part of income tax expense. During the year ended December 31, 2015, we recorded an increase to tax interest of $0.5 million, resulting in a total $5.9 million in interest. During the year ended December 31, 2016, we recorded an increase to tax interest of $0.4 million, resulting in a total $6.3 million in interest.

It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, it is probable that within the next 12 months the reserve for uncertain tax positions will increase within a range of $500,000 to $1.5 million. The reasons for such change include but are not limited to tax positions expected to be taken during 2016, revaluation of current uncertain tax positions, and expiring statutes of limitations.

Generally, changes to our federal and most state income tax returns for the calendar year 2012 and earlier are barred by statutes of limitations. Certain U.S. subsidiaries filed federal and state tax returns for periods before these entities became consolidated with us. These subsidiaries were examined by IRS for the years 1996 to 1999 and significant tax deficiencies were assessed for those years. Those deficiencies have been settled, as discussed in “Tax Audit/Litigation,” Note 12 – Commitments and Contingencies. New Zealand tax returns for the Reading New Zealand tax consolidated group for 2009 and later are under examination as of December 31, 2015. The income tax returns filed in Australia and Puerto Rico for calendar year 2011 and afterward generally remain open for examination as of December 31, 2016.