Income Taxes

The TCJA was enacted into law on December 22, 2017 and impacted our effective tax rate for the year ended December 31, 2017 and 2018. The TCJA made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As of December 31, 2017, we recorded a provisional tax charge for the estimated impact of the TCJA of $84.3 million, of which $73.9 million was related to a provisional transition tax liability on the mandatory deemed repatriation of foreign earnings and $10.4 million was related to the remeasurement of certain deferred tax assets and liabilities. As of December 31, 2018, we have finalized our assessment of the impact of the TCJA on our 2017 financial statements and recorded additional charges of $3.0 million in 2018, all of which relate to the transition tax on the mandatory deemed repatriation of foreign earnings.

The TCJA also includes provisions for certain foreign-sourced earnings, referred to as Global Intangible Low-Taxed Income (“GILTI”), which impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. FASB guidance issued in January 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the “period cost method”), or (ii) account for GILTI in the measurement of deferred taxes (the “deferred method”). We have made the election to record GILTI tax using the period cost method.

Net income before provision for income taxes and equity in losses of investee consists of the following (in thousands):



	Year ended December 31,
	2018		2017		2016
Domestic	$	171,658	$	123,696	$	118,871
Foreign	294,993		241,103		123,695
Net income before provision for income taxes and equity in losses of investee	$	466,651	$	364,799	$	242,566

The provision for (benefit from) income taxes consists of the following (in thousands):



	Year Ended December 31,
	2018			2017		2016
Federal
Current	$	35,788		$	91,214	$	40,235
Deferred	(5,989		)	15,724		24,794
	29,799			106,938		65,029
State
Current	9,568			2,580		2,603
Deferred	(3,274		)	2,677		2,636
	6,294			5,257		5,239
Foreign
Current	22,753			15,285		8,964
Deferred	(1,123		)	2,682		(28,032		)
	21,630			17,967		(19,068		)
Provision for income taxes	$	57,723		$	130,162	$	51,200

The differences between income taxes using the federal statutory income tax rate of 21% for 2018 and 35% for 2017 and 2016 and our effective tax rate are as follows:



	Year Ended December 31,
	2018		2017		2016
U.S. federal statutory income tax rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.3		1.4		2.1
U.S. tax on foreign earnings	4.1		1.5		0.2
Impact of U.S. Tax Cuts and Jobs Act (“TCJA”)	2.1		23.1		—
Impact of differences in foreign tax rates	(6.7	)	(18.0	)	(6.3	)
Impact of expiration of statute of limitations	(6.2	)	—		—
Stock-based compensation	(3.4	)	(6.3	)	1.2
Other items not individually material	0.2		(1.0	)	1.8
Valuation allowance release for Israel	—		—		(12.9	)
	12.4	%	35.7	%	21.1	%

As of December 31, 2018, undistributed earnings of the Company's foreign subsidiaries totaled $533.5 million. As a result of the TCJA, during the year ended December 31, 2017, we provided for U.S. income taxes on undistributed foreign earnings through December 31, 2017, and we have reassessed our capital needs and investment strategy with regard to the indefinite reinvestment, determining that certain of those are no longer indefinitely reinvested. Of the total undistributed foreign earnings as of December 31, 2018, the amount that is not indefinitely reinvested is $239.2 million. The remaining amount of undistributed foreign earnings of approximately $294.3 million continues to be indefinitely reinvested in our international operations. Since U.S. income taxes have already been provided under the GILTI provisions of the TCJA, the additional tax impact of the distribution of such foreign earnings to the U.S. parent company would be limited to withholding taxes and is not significant.

On July 1, 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations, as well as realigned the ownership and use of intellectual property among our wholly-owned subsidiaries. We continue to anticipate that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in our foreign operations. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. federal statutory rate will have a beneficial impact on our worldwide effective tax rate over time. Although the license of intellectual property rights between consolidated entities did not result in any gain in the consolidated financial statements, we generated taxable income in certain jurisdictions in 2016 resulting in a tax expense of $34.3 million. Additionally, as a result of the restructuring in 2016, we reassessed the need for a valuation allowance against our deferred tax assets considering all available evidence. Given the earnings in 2016 and anticipated future earnings of our subsidiary in Israel, we concluded that we had sufficient positive evidence to release the valuation allowance against our Israel operating loss carryforwards of $31.4 million, which resulted in an income tax benefit in 2016 of the same amount.

In June 2017, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted an extension of certain income tax incentives for an additional twelve year period. Under these incentives, all of the income in Costa Rica is subject to a reduced tax rate. In order to receive the benefit of these incentives, we must hire a specified number of employees and maintain certain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse, and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2018, 2017 and 2016. As a result of these incentives, our income taxes were reduced by $2.4 million, $1.8 million and $19.1 million in the year ended December 31, 2018, 2017 and 2016, respectively, representing a benefit to diluted net income per share of $0.03, $0.02 and $0.23 in the year ended December 31, 2018, 2017 and 2016, respectively.

As of December 31, 2018 and 2017, the significant components of our deferred tax assets and liabilities are (in thousands):



	Year Ended December 31,
	2018			2017
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	25,410		$	24,971
Reserves and accruals	24,769			12,547
Stock-based compensation	8,571			10,074
Deferred revenue	14,285			10,811
Net translation losses	1,158			1,928
Credit carryforwards	115			792
	74,308			61,123
Deferred tax liabilities:
Depreciation and amortization	8,320			7,522
Prepaid expenses	902			751
Unremitted foreign earnings	612			3,305
	9,834			11,578
Net deferred tax assets before valuation allowance	64,474			49,545
Valuation allowance	(251		)	(278		)
Net deferred tax assets	$	64,223		$	49,267

The total valuation allowance as of December 31, 2018 was not material. During the year ended December 31, 2018, the valuation allowance decreased by a nominal amount which was mainly related to foreign currency translation adjustments.

As of December 31, 2018, we have fully utilized California net operating loss carryforwards. As of December 31, 2018, we have California research credit carryforwards of approximately $1.9 million which can be carried forward indefinitely. In addition, we have foreign net operating loss carryforwards of approximately $105.7 million, the majority of which can be carried forward indefinitely, and a minor portion of which, if not utilized, will expire beginning after 2023.

In the event of a change in ownership, as defined under federal and state tax laws, our tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the tax credit carryforwards before utilization.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2018, 2017 and 2016, are as follows (in thousands):



Unrecognized tax benefit as of December 31, 2015	$	39,413
Tax positions related to current year:
Additions for uncertain tax positions	6,971
Unrecognized tax benefit as of December 31, 2016	46,384
Tax positions related to current year:
Additions for uncertain tax positions	1,819
Tax positions related to prior year:
Additions for uncertain tax positions	1,809
Decreases for uncertain tax positions	(826		)
Settlements with tax authorities	(1,527		)
Reductions due to lapse of applicable statute of limitations	(3		)
Unrecognized tax benefit as of December 31, 2017	47,656
Tax positions related to current year:
Additions for uncertain tax positions	14,519
Tax positions related to prior year:
Additions for uncertain tax positions	80
Reductions due to lapse of applicable statute of limitations	(28,993		)
Unrecognized tax benefit as of December 31, 2018	$	33,262

As of December 31, 2018, $29.9 million of our unrecognized tax benefits would impact our effective tax rate if recognized.

We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and the Netherlands. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2015. We are currently under examination by the Internal Revenue Service for tax years 2015 and 2016. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2010.

We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. For the year ended December 31, 2018 and 2017, interest and penalties included in tax expense was a benefit of $1.5 million and an expense of $0.8 million, respectively. Our total interest and penalties accrued as of December 31, 2018 and 2017 was $0.9 million and $2.9 million, respectively. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although it is possible that our balance of gross unrecognized tax benefits could materially change in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.