Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

The Company evaluates its deferred tax assets each period to determine if a valuation allowance is required based on whether it is “more likely than not” that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods on a federal, state and foreign jurisdiction basis. The Company conducts its evaluation by considering all available positive and negative evidence, including historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. motion picture and broader economy, among others. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021 for each taxing jurisdiction. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections of future taxable income. For the year ended December 31, 2021, the Company remained in a cumulative loss over the past three-year period for the U.S. and international jurisdictions, with the exception of Norway and Finland.

The Company maintains a valuation allowance against U.S. deferred tax assets as well as international jurisdictions in which it operates, with the exception of Finland and Norway. During the first quarter of 2020, the severe impact of COVID-19 on operations in Germany and Spain caused the Company to conclude the realizability of deferred tax assets held in those jurisdictions does not meet the more likely than not standard. As such, a charge of $33.1 million and $40.1 million was recorded for Germany and Spain, respectively.

Cancellation of Debt Income. On July 31, 2020, the Company consummated previously announced private offers to exchange its Existing Subordinated Notes for newly issued Second Lien Notes due 2026. See Note 8—Corporate Borrowings and Finance Lease Obligations for further information. For US tax purposes the Company was required to recognize CODI on the difference between the face value of debt exchanged and the fair market value of the new debt issued. The Company recognized $1.2 billion of CODI for tax purposes for the year ended December 31, 2020.

IRS §108 provides relief from recognizing CODI as current taxable income to the extent that the tax paying legal entity is insolvent as defined by the US Tax Code. The Company determined that the level of its insolvency at July 31, 2020 exceeded the indicated amount of CODI resulting from the debt exchange. To the extent that an entity is insolvent, rather than recognize current taxable income, the entity may reduce its tax attributes including net operating losses, capital losses, tax credits, depreciable assets, investment in subsidiaries and other investments in the amount of the excluded CODI. The Company determined that $1.2 billion of its federal net operating losses would be eliminated as a result of the tax attribute reduction.

The actual effective rate for the year ended December 31, 2021 was 0.8%. The Company’s consolidated tax rate for the year ended December 31, 2021 differs from the U.S. statutory tax rate primarily due to the valuation allowances in U.S. and foreign jurisdictions, foreign tax rate differences, and federal and state tax credits, partially offset by state income taxes and permanent differences related to interest, compensation, and other discrete items. No tax impact was recorded on the $2,306.4 million goodwill impairment charge incurred during the year ended December 31, 2020, as the portion impaired was permanently non-deductible. At December 31, 2021 and December 31, 2020, the Company has recorded net deferred tax liabilities of $30.7 million and of $40.2 million, respectively.

Cares Act. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property, as well as loans to certain qualifying businesses. As of the date of this filing, the Company has not participated in CARES Act loans.

The income tax provision (benefit) reflected in the consolidated statements of operations consists of the following components:

The difference between the effective tax rate on net loss from continuing operations before income taxes and the U.S. federal income tax statutory rate is as follows:

The significant components of deferred income tax assets and liabilities as of December 31, 2021 and December 31, 2020 are as follows:

A rollforward of the Company’s valuation allowance for deferred tax assets is as follows:

(1)

The 2021 valuation allowance primarily relates to the Company’s increase in the current year’s federal, state and international net operating losses, for which no benefit has been recognized.

(2)

Primarily relates to amounts resulting from the Company’s changes in deferred tax assets and associated valuation allowance that are not related to income statement activity as well as amounts charged to other comprehensive income. In 2019, this includes $(28.6) million of valuation allowance associated with the sale of the Austria theatres.

The Company has federal income tax net operating loss carryforwards of $1,185.5 million. Approximately $320.6 million will begin to expire in 2022, and will completely expire in 2036, and will be limited annually due to certain change in ownership provisions of the Internal Revenue Code. Approximately $864.9 million can be used indefinitely. The Company’s foreign net operating losses of $898.4 million can be used indefinitely except for approximately $10.8 million, which will expire in various amounts between years 2022 and 2033. The Company also has state income tax loss carryforwards of $1,678.6 million. Approximately $1,192.4 million may be used over various periods ranging from 1 to 20 years. Approximately $486.2 million can be used indefinitely.

A reconciliation of the change in the amount of unrecognized tax benefits was as follows:


	Year Ended
(In millions)	December 31, 2021		December 31, 2020		December 31, 2019
Balance at beginning of period	$	33.5	$	31.0	$	22.0
Gross increases—current period tax positions		—		4.8		10.5
Gross decreases—prior period tax positions		(22.5)		(1.3)		(1.5)
Gross decreases—settlements with authorities		(2.2)		—		—
Gross decreases—expiration of statute of limitations		(0.5)		(1.0)		—
Balance at end of period	$	8.3	$	33.5	$	31.0

The Company recognizes income tax-related interest expense and penalties as income tax expense and general and administrative expense, respectively. No interest expense or penalties related to federal uncertain tax positions have been recognized for the years ended December 31, 2021, December 31, 2020, and December 31, 2019.

The Company analyzed and reviewed state uncertain tax positions to determine the necessity of accruing interest and penalties. For the year ended December 31, 2021, the Company recognized $0.6 million of interest expense and $0.4 million of penalties. For the year ended December 31, 2020, the Company recognized $1.1 million of interest expense and $0.5 million of penalties. The total amount of accrued interest and penalties for state uncertain tax positions at December 31, 2021 and December 31, 2020 was $0 and $1.6 million, respectively.

The total amount of net unrecognized tax benefits at December 31, 2021 and December 31, 2020 that would impact the effective tax rate, if recognized, would be $0.3 million and $6.9 million, respectively. The Company believes that it is reasonably possible that approximately $0.2 million of its unrecognized tax positions related to state taxes may be recognized by the end of 2022 as a result of settlements or the expiration of statute of limitations.

The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination of the tax year March 29, 2012 was settled in 2021 resulting in additional federal and state net operating losses (“NOLs”). Generally, tax years beginning after December 31, 2001 are still open to examination by various taxing authorities. Additionally, as discussed above, the Company has NOL

carryforwards for tax years ended December 31, 2002 through December 31, 2021, in the U.S. and various state jurisdictions which have carryforwards of varying lengths of time. These NOLs are subject to adjustment based on the statute of limitations applicable to the return in which they are utilized, not the year in which they are generated. Various state, local and foreign income tax returns are also under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements.

Utilization of the Company’s net operating loss carryforwards, disallowed business interest carryforward and other tax attributes became subject to the Section 382 ownership change limitation due to changes in our stock ownership on January 29, 2021. Management believes the Company’s ability to utilize these tax attributes has not been significantly limited by this event.