Taxes

Domestic income from continuing operations before taxes was $30,080,000 in 2017, $23,939,000 in 2016, and $11,637,000 in 2015. Foreign income from continuing operations before taxes was $236,842,000 in 2017, $144,856,000 in 2016, and $115,325,000 in 2015.

Income tax expense on continuing operations consisted of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	78,054		$	14,459		$	16,430
State	2,687			(617		)	378
Foreign	7,714			8,149			4,946
	88,455			21,991			21,754
Deferred:
Federal	1,569			(3,031		)	(2,541		)
State	(639		)	1,066			(165		)
Foreign	359			(1,058		)	250
	1,289			(3,023		)	(2,456		)
	$	89,744		$	18,968		$	19,298

A reconciliation of the U.S. federal statutory corporate tax rate to the Company’s income tax expense on continuing operations, or effective tax rate, was as follows:



	Year Ended December 31,
	2017		2016		2015
Income tax provision at federal statutory corporate tax rate	35	%	35	%	35	%
State income taxes, net of federal benefit	—		1		—
Foreign tax rate differential	(27	)	(17	)	(19	)
Tax credit	(1	)	(1	)	—
Discrete tax benefit related to employee stock option exercises	(14	)	(7	)	—
Discrete tax expense related to 2017 Tax Act	36		—		—
Discrete tax expense related to write-down of deferred tax assets	5		—		—
Other discrete tax events	(1	)	—		(2	)
Other	1		—		1
Income tax provision on continuing operations	34	%	11	%	15	%

On December 22, 2017, the United States Congress passed and the President signed into law the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act includes a number of changes that impact the Company's deferred tax positions, with the primary impact resulting from a decrease in the U.S. federal statutory corporate tax rate from 35% to 21%. The Company has remeasured its deferred tax positions as of December 31, 2017 at the new enacted tax rate, and accordingly, has recognized tax expense of $12,523,000 from the write-down of deferred tax assets in 2017.

In addition, the Tax Act subjects unrepatriated foreign earnings to a one-time transition tax, regardless of the Company's financial statement assertion related to indefinite reinvestment or whether the Company ultimately repatriates any of the foreign earnings, for which the Company has recorded estimated tax expense of $101,379,000 in 2017.

Furthermore, the Tax Act replaces the current system of taxing U.S. corporations on repatriated foreign earnings with a partial territorial system that provides a 100% dividends-received deduction to domestic corporations for foreign-source dividends received from 10% or more owned foreign corporations. The Company has recorded a decrease in tax expense of $3,843,000 in 2017 from the reversal of the tax effect of a 2016 dividend paid in 2017 from a wholly-owned foreign subsidiary to its domestic entity.

The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 118 to provide guidance to companies on how to implement the accounting and disclosure changes as a result of the Tax Act. The SEC staff guidance has recognized that, due to the complexity and timing of the release of the Tax Act, the accounting for this change in the law may be incomplete upon issuance of a company's financial statements for the reporting period in which the Tax Act was enacted. SAB No. 118 states that if a company can determine a reasonable estimate for the effects of the Tax Act then this estimate can be included in the financial statements. The Company has made what it considers to be a reasonable estimate of the impact of the new taxes relating to foreign earnings and the write-down of its deferred tax assets in its financial statements. This significant estimate is highly judgmental and changes to this estimate could result in material charges or credits in future reporting periods. U.S. Treasury regulations and administrative guidance have not been finalized as of the date of these financial statements. The issuance of final regulations may require the Company to revise its estimates of earnings and profits as well as certain deferred taxes as required.

The Company will continue to gather and analyze information on historical unrepatriated foreign earnings and to monitor state laws relating to this income to finalize both the federal and state tax impact. The Tax Act limits certain deductions and these limitations may impact the value of existing deferred tax assets. The Company will continue to review the impact of these limitations as regulatory guidance is issued.

The majority of income earned outside of the United States is indefinitely reinvested to provide funds for international expansion. The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United States, Ireland, and China. The statutory tax rate is 12.5% in Ireland and 25% in China. International rights to certain of the Company’s intellectual property are held by a subsidiary whose legal jurisdiction does not tax this income, resulting in a foreign effective tax rate lower than the above mentioned statutory rates. However, this income has been included in the provisional estimate of the one-time transitional tax on unrepatriated foreign earnings under the Tax Act. The Company has not yet determined how the Tax Act will impact its financial statement assertion related to indefinite reinvestment in future years.

As of December 31, 2017 and December 31, 2016, respectively, $498,653,000 and $437,691,000, of the Company’s cash, cash equivalents, and investments were held by foreign subsidiaries and are generally denominated in U.S. Dollars.

In 2016, the Company adopted Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting." This Update required excess tax benefits arising from the difference between the deduction for tax purposes and the compensation expense for financial reporting purposes from stock option exercises to be recognized as an income tax benefit in the income statement. Previous guidance required excess tax benefits to be recognized as additional paid-in-capital in shareholders' equity on the balance sheet. This provision is required to be applied prospectively and therefore, 2015 was not restated. As a result of this change, income tax expense was reduced by $38,569,000 in 2017 and $11,889,000 in 2016.

Interest and penalties included in income tax expense was $71,000, $92,000, and $34,000 in 2017, 2016, and 2015, respectively.

The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands):



Balance of reserve for income taxes as of December 31, 2015	$	5,296
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods	11
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	1,235
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities	—
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(823		)
Balance of reserve for income taxes as of December 31, 2016	5,719
Gross amounts of decreases in unrecognized tax benefits as a result of tax positions taken in prior periods	(56		)
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	1,993
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities	(116		)
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(791		)
Balance of reserve for income taxes as of December 31, 2017	$	6,749

The Company’s reserve for income taxes, including gross interest and penalties, was $7,516,000 as of December 31, 2017, which included $6,488,000 classified as a non-current liability and $1,028,000 recorded as a reduction to non-current deferred tax assets. The Company's reserve for income taxes, including gross interest and penalties, was $6,389,000 as of December 31, 2016, which included $5,361,000 classified as a non-current liability and $1,028,000 recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was $767,000 and $670,000 as of December 31, 2017 and December 31, 2016, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $1,000,000 to $1,200,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts. Within the United States, the tax years 2014 through 2017 remain open to examination by the Internal Revenue Service and various state taxing authorities. The tax years 2012 through 2017 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.

In 2011, the Company finalized an Advanced Pricing Agreement (APA) with Japan that will cover tax years 2006 through 2011, with a requested extension to 2012. The Company has concluded negotiations for an APA between Japan and Ireland that will cover tax years 2014 through 2018 with retroactive application to 2013. The Company believes it is adequately reserved for these open years.

Deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2017			2016
Non-current deferred tax assets:
Stock-based compensation expense	$	11,664		$	15,365
Federal and state tax credit carryforwards	6,707			5,154
Bonuses, commissions, and other compensation	5,704			2,483
Inventory and revenue related	3,415			2,919
Depreciation	2,279			2,882
Other	3,012			3,714
Gross non-current deferred tax assets	32,781			32,517
Non-current deferred tax liabilities:
Nondeductible intangible assets	(87		)	(379		)
Gross non-current deferred tax liabilities	(87		)	(379		)
Valuation allowance	(5,309		)	(4,116		)
Net non-current deferred tax assets	$	27,385		$	28,022

Non-current deferred tax liabilities:
Other	$	(312	)	$	—
Net non-current deferred tax liabilities	$	(312	)	$	—

In 2017, the Company recorded a valuation allowance of $1,193,000 for state research and development tax credits that were not considered to be realizable. Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future state income tax liabilities. In addition, the Company had $7,735,000 of state research and development tax credit carryforwards, net of federal tax, as of December 31, 2017, which will begin to expire in 2019.

While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to current operations in the period of determination.

On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD). A pre-tax gain of $125,357,000 and associated income tax expense of $47,175,000 was recorded in 2015.

Cash paid for income taxes totaled $11,802,000 in 2017, $20,748,000 in 2016, and $58,280,000 in 2015. The 2015 income tax payments included remittances related to the sale of SISD.