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Taxes | 12 Months Ended
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Dec. 31, 2019
Taxes |
Taxes | 3. Taxes In December 2017, the President signed the U.S. Tax Cuts and Jobs Act (2017 Tax Act), which includes a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law. Changes in tax law are accounted for in the period of enactment. As such, the 2017 consolidated financial statements reflect the immediate tax effect of the 2017 Tax Act, which was enacted on December 22, 2017 (Enactment Date). The 2017 Tax Act contains several key provisions including, among other things:
| · |  | A one-time tax on the mandatory deemed repatriation of post‑1986 untaxed foreign earnings and profits (E&P), referred to as the toll charge;
| · |  | A reduction in the maximum corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017;
| · |  | The introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (GILTI) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by applicable foreign tax credits; and
| · |  | The introduction of a quasi-territorial tax system for tax years beginning after December 31, 2017 by providing a dividend received deduction under the participation exemption system.
Pursuant to the 2017 Tax Act, we recorded the following adjustments to income tax expense during the fourth quarter of 2017:
| · |  | A one-time deemed repatriation of E&P on the Company’s post‑1986 untaxed foreign E&P amounting to $25.8 million. No toll tax charge was recorded due to the available net operating loss carryforwards; and
| · |  | A reduction of deferred tax assets and a corresponding reduction of the valuation allowance of $2.3 million, primarily for the remeasurement of our deferred tax assets at the enacted tax rate of 21%.
Beginning January 1, 2018, the Company performed a calculation of the GILTI provisions and concluded that it has no impact on account of the net losses of the Company’s foreign subsidiaries. The significant components of the provision for income taxes for the years ended December 31, 2019 and 2018 were as follows (in thousands):
|  | 2019 |  | 2018
Current income tax expense: |  |  |  |  |  |
Foreign |  | $ | 1,333 |  | $ | 1,467
Federal |  |  | 71 |  |  | 121
State and local |  |  | — |  |  | 45
|  |  | 1,404 |  |  | 1,633
Deferred income tax expense (benefit): |  |  |  |  |  |
Foreign |  |  | (323) |  |  | 312
Federal |  |  | 10 |  |  | (139)
State and local |  |  | — |  |  | 2
|  |  | (313) |  |  | 175
Provision for income taxes |  | $ | 1,091 |  | $ | 1,808
The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the years ended December 31, 2019 and 2018 is summarized as follows (in thousands, except percentage information):
|  |  |  | 2018 |
|  | 2019 |  | Restated |
Federal income tax expense at statutory rate |  | (21.0) | % | 21.0 | %
Effect of: |  |  |  |  |
Foreign operations permanent difference - foreign exchange gains and losses |  | (24.8) |  | 27.8 |
Return to provision true-up |  | (5.2) |  | — |
2017 Tax Act |  | — |  | (112.6) |
Tax effects of foreign operations |  | 120.8 |  | 58.8 |
Increase in unrecognized tax benefits (ASC 740) |  | 109.7 |  | 22.2 |
Change in valuation allowance |  | 23.9 |  | 68.3 |
Withholding tax |  | 12.2 |  | 7.8 |
State income tax net of federal benefit |  | 2.6 |  | 2.4 |
Foreign tax rate differential |  | 1.6 |  | 25.6 |
Others |  | (13.2) |  | (5.5) |
|  | 206.6 | % | 115.8 | %
Deferred tax assets and liabilities are classified as non-current. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 were as follows (in thousands):
|  | December 31,
|  | 2019 |  | 2018
Deferred income tax assets: |  |  |  |  |  |
Allowances not currently deductible |  | $ | 223 |  | $ | 232
Depreciation and amortization |  |  | 297 |  |  | 338
Equity compensation not currently deductible |  |  | 966 |  |  | 775
Net operating loss carryforwards |  |  | 5,317 |  |  | 5,089
Expenses not deductible until paid |  |  | 1,245 |  |  | 769
Other |  |  | 379 |  |  | 99
Total gross deferred income tax assets before valuation allowance |  |  | 8,427 |  |  | 7,302
Valuation allowance |  |  | (6,521) |  |  | (6,098)
Deferred income tax assets, net |  | $ | 1,906 |  | $ | 1,204
Deferred income tax liabilities: |  |  |  |  |  |
Intangibles from acquisition of MediaMiser |  |  | (316) |  |  | (356)
Other |  |  | (47) |  |  | (215)
Total deferred income tax liabilities |  |  | (363) |  |  | (571)
Net deferred income tax assets |  | $ | 1,543 |  | $ | 633
Net deferred income tax asset |  | $ | 1,906 |  | $ | 1,204
Net deferred income tax liability |  |  | (363) |  |  | (571)
Net deferred income tax assets |  | $ | 1,543 |  | $ | 633
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are available. As of December 31, 2019, the Company continues to maintain a valuation allowance on all U.S. and Canadian deferred tax assets. The Company maintained a valuation allowance of approximately $6.5 million and $6.1 million as of December 31, 2019 and 2018, respectively. The valuation allowance relates to U.S. and the Company’s Canadian subsidiaries deferred tax assets. The net change in the total valuation allowance was an increase of $0.4 million for the year ended December 31, 2019 compared to an increase of $0.7 million for the year ended December 31, 2018. Despite the access to the overseas earnings and the resulting toll charge, we intend to indefinitely reinvest the foreign earnings in our foreign subsidiaries on account of the foreign jurisdiction withholding tax that the Company has to incur on the actual remittances. Unremitted earnings of foreign subsidiaries amounted to approximately $25.7 million at December 31, 2019. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would have to accrue the applicable amount of foreign jurisdiction withholding taxes associated with such remittances. The 2017 Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distribution. Due to the one-time transition tax on the deemed repatriation of post‑1986 undistributed foreign subsidiary earnings and profits, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subjected to U.S. federal income tax. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes. To the extent the Company repatriates these earnings to the United States, it estimates that it will not incur significant additional taxes related to such amounts, however, the estimates are provisional and subject to further analysis. United States and foreign components of income (loss) before provision for income taxes for each of the two years ended December 31, were as follows (in thousands):
|  |  |  |  | 2018
|  | 2019 |  | (Restated)
United States |  | $ | (161) |  | $ | 3,107
Foreign |  |  | (367) |  |  | (1,545)
Totals |  | $ | (528) |  | $ | 1,562
At December 31, 2019, the Company had available U.S. federal net operating loss carryforwards of approximately $15.3 million. These net operating loss carryforwards expire at various times through the year 2035. At December 31, 2019, the Company’s Canadian subsidiaries had available net operating loss carryforwards of approximately $13.4 million in Canada which begin to expire in 2028. In addition, these subsidiaries also have research and development credits of approximately $1.5 million available to reduce taxable income in future years, which may be carried forward indefinitely. The potential benefits from these balances have not been recognized for financial statement purposes. The Company had unrecognized tax benefits of $3.0 million and $2.4 million as of December 31, 2019 and 2018, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.2 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively. The unrecognized tax benefits as of December 31, 2019 and 2018, if recognized, would have an impact on the Company’s effective tax rate. The Company is subject to Federal income tax, as well as income tax in various states and foreign jurisdictions. The Company has open tax years for U.S. Federal and State taxes from 2015 through 2019. Various foreign subsidiaries have open tax years from 2003 through 2019, some of which are under audit by local tax authorities. The Company believes that its ASC 740 accruals as of December 31, 2019 are adequate to cover the Company’s income tax exposures. The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest for the years ended (amounts in thousands):
|  | December 31,
|  | 2019 |  | 2018
Balance at January 1 |  | $ | 2,424 |  | $ | 2,177
Increase for tax position |  |  | 355 |  |  | 285
Interest accrual |  |  | 234 |  |  | 63
Foreign currency revaluation |  |  | (56) |  |  | (101)
Balance at December 31 |  | $ | 2,957 |  | $ | 2,424
Tax assessments In September 2015, the Company’s Indian subsidiary was subject to an inquiry by the Service Tax Department in India regarding the classification of services provided by this subsidiary, asserting that the services provided by this subsidiary fall under the category of online information and database access or retrieval services (OID Services), and not under the category of business support services (BS Services) that are exempt from service tax as historically indicated in the subsidiary’s service tax filings. The Company disagrees with the Service Tax Department’s position. In November 2019, the Commissioner of Central Tax, GST & Central Excise issued an order confirming the Service Tax Department’s position. The Company is contesting this order in an appeal to the Customs, Excise and Service Tax Appellate Tribunal. In the event the Service Tax Department is ultimately successful in proving that the services fall under the category of OID Services, the revenues earned by the Company’s Indian subsidiary for the period July 2012 through November 2016 would be subject to a service tax of between 12.36% and 15%, and this subsidiary may also be liable for interest and penalties. The revenue of our Indian subsidiary during this period was approximately $66.0 million. In accordance with new rules promulgated by the Service Tax Department, as of December 1, 2016 service tax is no longer applicable to OID or BS Services. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case. In a separate action relating to service tax refunds, in October 2016, the Company’s Indian subsidiary received notices from the Indian Service Tax Department in India seeking to reverse service tax refunds of approximately $160,000 previously granted to our Indian subsidiary for three quarters in 2014, asserting that the services provided by this subsidiary fall under the category of OID Services and not BS Services. The appeal was determined in favor of the Service Tax Department. The Company disagrees with the basis of this decision and is contesting it. The Company expects delays in its Indian subsidiary receiving further service tax refunds until this matter is adjudicated with finality, and currently has service tax credits of approximately $1.0 million recorded as a receivable. Based on the assessment of the Company’s counsel, the Company has not recorded any tax liability for this case. Substantial recovery against the Company in the above referenced 2015 Service Tax Department case could have a material adverse impact on the Company, and unfavorable rulings or recoveries in other tax proceedings could have a material adverse impact on the consolidated operating results of the period in which the rulings or recovery occurs.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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