(10) Income Taxes

U.S. and international components of income before income taxes (in thousands) were comprised of the following for the periods indicated:

	Years Ended December 31,
	2017		2016		2015
U.S.	$	19,166	$	51,145	$	68,555
Foreign		53,441		61,901		69,309
Total	$	72,607	$	113,046	$	137,864

The provision for income taxes (in thousands) consisted of the following for the periods indicated:

	Years Ended December 31,
	2017			2016			2015
Current:
Federal	$	48,794		$	18,453		$	11,748
State		4,077			3,681			2,997
Foreign		4,074			4,941			7,565
	$	56,945		$	27,075		$	22,310

Deferred:
Federal	$	88		$	(4,742	)	$	9,215
State		(1,342	)		(890	)		693
Foreign		(727	)		695			(285	)
	$	(1,981	)	$	(4,937	)	$	9,623
Total provision	$	54,964		$	22,138		$	31,933

The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to the Company’s income before income taxes as follows for the periods indicated:

	Years Ended December 31,
	2017			2016			2015
Income tax expense at federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax effect		2.5	%		1.6	%		1.7	%
Foreign earnings taxed at different rates		(24.2	)%		(15.5	)%		(14.0	)%
Withholding tax		1.9	%		1.4	%		1.1	%
Foreign tax credit		(1.1	)%		(1.0	)%		(0.3	)%
Other international components		0.0	%		(0.1	)%		0.8	%
Change in valuation allowance		0.2	%		(0.8	)%		(0.1	)%
Deferred tax adjustments and rate changes		5.2	%		0.1	%		(0.1	)%
Deemed repatriation transition tax		55.5	%		0.0	%		0.0	%
Subpart F income		1.5	%		0.6	%		0.5	%
Research and development tax credit		(1.1	)%		(0.8	)%		(0.6	)%
Section 199 Deduction		(1.4	)%		(1.8	)%		(1.5	)%
Other permanent differences		1.7	%		0.9	%		0.7	%
Total		75.7	%		19.6	%		23.2	%

The Company’s U.S. and foreign effective tax rates for income before income taxes were as follows for the periods indicated:

	Years Ended December 31,
	2017			2016			2015
U.S.		269.3	%		32.3	%		36.0	%
Foreign		6.3	%		9.1	%		10.5	%
Combined		75.7	%		19.6	%		23.2	%

The change in the Company’s effective tax rate in 2017, as compared to the prior year, was primarily due to an estimated one-time tax provision of $44.0 million as a result of the Tax Act. This tax provision is comprised of a $40.3 million Transition Tax and a $3.7 million charge related to the re-measurement of net deferred tax assets arising from the new lower corporate tax rate effected by the Tax Act.

The Tax Act imposes a Transition Tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries of the Company. To determine the amount of the Transition Tax, the Company must determine, among other things, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company made a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $40.3 million, of which $36.8 million is recorded in “other long-term liabilities” in the Company’s Consolidated Balance Sheets. However, the Company continues to gather additional information to compute more precisely the post-1986 E&P and related non-U.S. income taxes paid.

The Tax Act also reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. Consequently, the Company has recorded a decrease related to its U.S. deferred tax assets and liabilities, with a corresponding net deferred income tax expense of $3.7 million for the year ended December 31, 2017 as a result of re-measuring net deferred tax assets at the new lower corporate tax rate of 21%.

Additionally, the Tax Act requires certain Global Intangible Low Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder. GAAP allows the Company to either: (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (ii) factor such amounts into its measurement of deferred taxes (the “deferred method”). The Company elected the period cost method. The GILTI tax rules will become effective for the 2018 tax year and therefore the Company has not made any adjustments related to the potential GILTI tax in its financial statements for the year ended December 31, 2017. The Company continues to evaluate the impact of the new GILTI tax rules and the application of ASC 740 on its financial statements.

Except as discussed below, the Company intends to indefinitely reinvest its undistributed earnings of all of its foreign subsidiaries. However, under the Tax Act, those undistributed earnings (as computed for U.S. federal income tax purposes, and with due regard to the discussion below regarding Subpart F deemed dividends) are subject to the Transition Tax, which was recorded at a provisional amount of $40.3 million during the year ended December 31, 2017.

In addition, U.S. federal tax laws require the Company to include in its U.S. taxable income certain investment income earned outside of the United States in excess of certain limits (“Subpart F deemed dividends”). Because Subpart F deemed dividends are already required to be recognized in the Company’s U.S. federal income tax return, the Company regularly repatriates Subpart F deemed dividends to the United States and no additional tax is incurred on the distribution. The Company repatriated Subpart F deemed dividends of $1.8 million and $1.9 million in 2017 and 2016, respectively, with no additional tax. The Company did not repatriate any Subpart F deemed dividends in 2015 because it did not report any Subpart F income on its 2014 U.S. tax return.

As of December 31, 2017 and 2016, the amount of cash and cash equivalents and short-term investments held by the Company’s U.S. entities was $293.8 million and $279.8 million, respectively, and by the Company’s non-U.S. entities was $381.4 million and $309.6 million, respectively. If the cash and cash equivalents and short-term investments held by the Company’s non-U.S. entities were to be actually repatriated to the United States, after taking into account the Transition Tax described above, the Company does not expect such repatriation to generate any additional U.S. federal taxable income to the Company.

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities (in thousands) were as follows for the periods indicated:

	December 31,
	2017			2016
Deferred tax assets, net:
Net operating loss carryforwards	$	761		$	214
Tax credits		1,520			1,372
Intangible assets		10			11
Deferred revenue adjustment		3,351			3,305
Accrued compensation		2,863			7,866
Share-based compensation expense		11,597			11,440
Deferred rent		0			1,281
Other		2,457			2,002
Deferred tax assets before valuation allowance		22,559			27,491
Valuation allowance		(1,015	)		(832	)
Deferred tax assets, net of valuation allowance		21,544			26,659

Deferred tax liabilities:
Prepaid expenses and other		684			1,098
Property and equipment		6,778			10,821
Capitalized software development costs		695			3,330
Total deferred tax liabilities		8,157			15,249
Total net deferred tax asset	$	13,387		$	11,410

Reported as:
Non-current deferred tax assets, net		13,391			11,704
Non-current deferred tax liabilities		(4	)		(294	)
Total net deferred tax asset	$	13,387		$	11,410

As of December 31, 2017 and 2016, the Company had income taxes payable of $0.4 million and $10.5 million, respectively, recorded in “accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets.

As of December 31, 2017, the Company had unrecognized tax benefits of $4.0 million, recorded in “Other long-term liabilities” in the Company’s Consolidated Balance Sheets. The change in unrecognized tax benefits (in thousands) is presented in the table below:

Unrecognized tax benefits at January 1, 2017	$	3,121
Increase related to positions taken in prior period		771
Increase related to positions taken in current period		294
Decrease related to expiration of statute of limitations		(741	)
Unrecognized tax benefits at December 31, 2017		3,445
Accrued interest		569
Unrecognized tax benefits recorded in other long-term liabilities at December 31, 2017	$	4,014

If recognized, $3.5 million of the gross unrecognized tax benefits would impact the Company’s effective tax rate. Over the next 12 months, the amount of the Company’s liability for unrecognized tax benefits shown above is not expected to change by a material amount. The Company recognizes estimated accrued interest related to unrecognized tax benefits in the provision for income tax accounts. During the years ended December 31, 2017, 2016, and 2015, the Company released or recognized an immaterial amount of accrued interest. The amount of accrued interest related to the above unrecognized tax benefits was approximately $0.6 million and $0.4 million as of December 31, 2017 and 2016, respectively.

The Company files tax returns in numerous foreign countries as well as the United States and its tax returns may be subject to audit by tax authorities in all countries in which it files. Each country has its own statute of limitations for making assessment of additional tax liabilities. In 2017, the Company settled the tax examination in Germany for tax years 2013, 2014, and 2015 without any material audit assessments. The Company’s U.S. tax returns for tax years from 2014 forward are subject to potential examination by the Internal Revenue Service.

The Company’s major foreign tax jurisdictions and the tax years that remain subject to potential examination are Germany for tax years 2016 forward, Poland and China for tax years 2013 forward, Spain for tax years 2014 forward, and the United Kingdom for tax years 2016 forward. To date there have been no material audit assessments related to audits in the United States or any of the applicable foreign jurisdictions.

The Company had no U.S. net operating loss (“NOL”) carryforwards as of December 31, 2017 and 2016. The Company had $2.5 million and $0.7 million of foreign NOL carryforwards as of December 31, 2017 and 2016, respectively.

The Company’s valuation allowances of $1.0 million and $0.8 million at December 31, 2017 and 2016, respectively, primarily relate to certain foreign tax credit carryforward tax assets. The Company assessed whether its valuation allowance analyses are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits) and concluded that they were not significantly affected by the Tax Act.

In determining the Company’s provision for or benefit from income taxes, net deferred tax assets, liabilities, and valuation allowances, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methods, and prudent and feasible tax planning strategies. As a multinational company, the Company is required to calculate and provide for estimated income tax liabilities for each of the tax jurisdictions in which it operates. This process involves estimating current tax obligations and exposures in each jurisdiction, as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, changes in tax laws, particularly changes related to the utilization of NOLs in various jurisdictions, and changes resulting from tax audits can all affect the overall effective income tax rate which, in turn, impacts the overall level of income tax expense or benefit and net income.

Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain. Therefore, actual results could differ materially from projections. The timing and manner in which the Company will use research and development tax credit carryforward tax assets, alternative minimum tax credit carryforward tax assets, and foreign tax credit carryforward tax assets in any year, or in total, may be limited by provisions of the Internal Revenue Code regarding changes in the Company’s ownership. Currently, the Company expects to use the tax assets, subject to Internal Revenue Code limitations, within the carryforward periods. Valuation allowances have been established where the Company has concluded that it is more likely than not that such deferred tax assets are not realizable. If the Company is unable to sustain profitability in future periods, it may be required to increase the valuation allowance against the deferred tax assets, which could result in a charge that would materially adversely affect net income in the period in which the charge is incurred.

Section 382 of the Internal Revenue Code provides an annual limitation on the amount of federal NOLs and tax credits that may be used in the event of an ownership change. The limitation is based on, among other things, the value of the company as of the change date multiplied by a U.S. federal long-term tax exempt interest rate. The Company does not currently expect the limitations under the Section 382 ownership change rules to impact the Company’s ability to use its NOL carryforwards or tax credits that existed as of the date of the ownership change.