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Income Taxes

12 Months Ended

Dec. 31, 2018

13. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into U.S. Law. In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act

, which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 31, 2018, the Company has completed its accounting for the tax effects related to the enactment of the Tax Act.

Deferred Tax Assets and Liabilities

The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. During the year ended December 31, 2017, the Company remeasured certain deferred tax assets and liabilities and recorded a $15.0 million provisional tax charge. During the year ended December 31, 2018, the Company reduced the initial provisional tax charge by recording a $4.9 million benefit related to accelerated tax deductions claimed on the 2017 U.S. Federal Income Tax Return.

One-Time

Transition Tax

The Tax Act required U.S. companies to pay a

one-time

transition tax on certain unremitted foreign earnings. During the year ended December 31, 2017, the Company recorded a $20.9 million provisional tax charge based on post-1986 earnings and profits of foreign subsidiaries that were previously deferred from U.S. income taxes. Upon further analysis, the Company reduced the initial provisional tax charge by recording a $8.1 million benefit during the year ended December 31, 2018.

Foreign Tax Credit Utilization

The Tax Act changed taxation of foreign earnings. Generally, the Company will no longer be subject to U.S. federal income taxes upon the receipt of dividends from foreign subsidiaries, nor will the Company be permitted to utilize foreign tax credits related to such dividends. As a result of the aforementioned, as well as the U.S. federal corporate income tax rate reduction, the acceleration of tax deductions, and the reduction in the

one-time

transition tax, the Company has more U.S. foreign tax credits than it anticipates being able to utilize prior to their expiration. Upon further analysis of certain aspects of the Tax Act and refinement of our calculations during the year ended December 31, 2018, the Company recorded an $15.5 million valuation allowance on this deferred tax asset.

Global Intangible

Low-Taxed

Income (GILTI)

The Tax Act subjects a U.S. shareholder to tax on global intangible

low-taxed

income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No 5,

Accounting for Global Intangible

Low-Taxed

Income,

states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred. For the year ended December 31, 2018, the Company has recorded $2.1 million of tax charge for the current impact of the GILTI provisions.

Indefinite Reinvestment

During the years ended December 31, 2017 and 2016, the Company considered all earnings in foreign subsidiaries to be indefinitely reinvested, and accordingly, recorded no deferred income taxes related to unremitted earnings. As of December 31, 2018, the Company considered only the earnings in its Indian subsidiaries to be indefinitely reinvested. The earnings of all other foreign subsidiaries are no longer considered indefinitely reinvested and the Company recorded a $1.1 million deferred tax charge associated with withholding and state taxes on the future repatriation of those earnings. The Company is also permanently reinvested for outside book/tax basis differences related to foreign subsidiaries.

For financial reporting purposes, income before income taxes includes the following components (in thousands):


	Years Ended December 31,
	2018		2017			2016
United States	$	16,312	$	(42,863	)	$	134,740
Foreign		75,487		86,435			50,841

Total	$	91,799	$	43,572		$	185,581

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


	Years Ended December 31,
	2018			2017			2016
Federal
Current	$	6,545		$	2,586		$	14,108
Deferred		(6,587	)		19,212			19,034

Total		(42	)		21,798			33,142
State
Current		4,441			(1,857	)		12,565
Deferred		(2,649	)		(1,324	)		(2,502	)

Total		1,792			(3,181	)		10,063
Foreign
Current		17,626			16,048			11,671
Deferred		3,502			3,772			1,170

Total		21,128			19,820			12,841

Total	$	22,878		$	38,437		$	56,046

Differences between the income tax expense computed at the statutory federal income tax rate and per the consolidated statements of operations are summarized as follows (in thousands):


	Years Ended December 31,
	2018			2017			2016
Tax expense at federal rate of 21% (35% pre-2018)	$	19,278		$	15,250		$	64,953
State income taxes, net of federal benefit		5,246			(2,238	)		7,060
Change in valuation allowance		12,657			(1,884	)		(8,524	)
Foreign tax rate differential		(4,796	)		(15,622	)		(11,830	)
Unrecognized tax benefit increase		1,262			3,007			1,045
Tax effect of foreign operations		8,546			5,532			5,988
Tax benefit of research & development		(2,557	)		(1,904	)		(1,088	)
Transition tax		(8,112	)		20,867			—
Revaluation of deferred tax balances		(4,937	)		14,953			—
Performance-based compensation		(4,541	)		2,081			—
Domestic production activities		—			(3,793	)		(700	)
Other		832			2,188			(858	)

Income tax provision	$	22,878		$	38,437		$	56,046

The countries having the greatest impact on the tax rate adjustment line shown in the above table as “Foreign tax rate differential” for the year ended December 31, 2018, are Ireland and Luxembourg. The countries having the greatest impact on the tax rate adjustment line shown in the above table as “Foreign tax rate differential” for the year ended December 31, 2017, are Ireland, Luxembourg, and the United Kingdom. The countries having the greatest impact on the tax rate adjustment line shown in the above table as “Foreign tax rate differential” for the year ended December 31, 2016, are Ireland, South Africa, and the United Kingdom.

The deferred tax assets and liabilities result from differences in the timing of the recognition of certain income and expense items for tax and financial accounting purposes. The sources of these differences at each balance sheet date are as follows (in thousands):


	December 31,
	2018			2017
Deferred income tax assets:
Net operating loss carryforwards	$	25,745		$	38,419
Tax credits		43,838			37,305
Compensation		15,934			18,124
Deferred revenue		27,587			22,248
Research and development expense deferral		12,631			—
Other		5,393			9,055

Gross deferred income tax assets		131,128			125,151
Less: valuation allowance		(20,415	)		(7,808	)

Net deferred income tax assets	$	110,713		$	117,343

Deferred income tax liabilities:
Depreciation and amortization	$	(60,872	)	$	(67,504	)
Deferred revenue		(54,508	)		—

Total deferred income tax liabilities		(115,380	)		(67,504	)

Net deferred income taxes	$	(4,667	)	$	49,839

Deferred income taxes / liabilities included in the balance sheet are:
Deferred income tax asset – noncurrent	$	27,048		$	66,749
Deferred income tax liability – noncurrent		(31,715	)		(16,910	)

Net deferred income taxes	$	(4,667	)	$	49,839

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income, carryback opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible differences, net of the valuation allowances recorded. During the year ended December 31, 2018, the Company increased its valuation allowance by $12.7 million which relates to an increase in valuation allowance on U.S. foreign tax credits offset by a reduction in valuation allowance on U.S. state net operating losses.

At December 31, 2018, the Company had domestic federal tax net operating losses (“NOLs”) of $72.4 million, which will begin to expire in 2019. The Company had deferred tax assets equal to $1.8 million related to domestic state tax NOLs which will begin to expire in 2019. The Company does not have any valuation allowance against the federal tax NOLs but has provided a $1.0 million valuation allowance against the deferred tax asset associated with the state NOLs. The Company had foreign tax NOLs of $32.5 million, of which $30.2 million may be utilized over an indefinite life, with the remainder expiring over the next 17 years. The Company has provided a $1.0 million valuation allowance against the deferred tax asset associated with the foreign NOLs.

The Company had U.S. foreign tax credit carryforwards at December 31, 2018, of $34.6 million, for which an $15.5 million valuation allowance has been provided. The U.S. foreign tax credits will begin to expire in 2022. The Company had foreign tax credit carryforwards in other foreign jurisdictions at December 31, 2018, of $1.5 million, of which $1.1 million may be utilized over an indefinite life, with the remainder expiring over the next seven years. The Company has provided a $1.1 million valuation allowance against the tax benefit associated with these foreign credits. The Company also has domestic federal and state general business credit carryforwards at December 31, 2018, of $12.5 million and $0.7 million, respectively, which will begin to expire in 2019 and 2022, respectively.

The unrecognized tax benefit at December 31, 2018 and 2017, was $28.4 million and $27.2 million, respectively, of which $22.6 million and $21.5 million, respectively, are included in other noncurrent liabilities in the consolidated balance sheets. Of the total unrecognized tax benefit amounts at December 31, 2018 and 2017, $27.5 million and $25.9 million, respectively, represent the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in the respective years.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 is as follows (in thousands):


	2018			2017			2016
Balance of unrecognized tax benefits at beginning of year	$	27,237		$	24,278		$	21,079
Increases for tax positions of prior years		315			2,478			58
Decreases for tax positions of prior years		(61	)		(114	)		(361	)
Increases for tax positions established for the current period		1,185			1,677			5,185
Decreases for settlements with taxing authorities		—			(154	)		(167	)
Reductions resulting from lapse of applicable statute of limitation		(115	)		(1,155	)		(1,310	)
Adjustment resulting from foreign currency translation		(155	)		227			(206	)

Balance of unrecognized tax benefits at end of year	$	28,406		$	27,237		$	24,278

The Company files income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions. The United States, Canada, India, Ireland, Luxembourg, South Africa, and United Kingdom are the main taxing jurisdictions in which the Company operates. The years open for audit vary depending on the tax jurisdiction. In the United States, the Company’s tax returns for years following 2014 are open for audit. In the foreign jurisdictions, the tax returns open for audit generally vary by jurisdiction between 2003 and 2017.

The Company’s Indian income tax returns covering fiscal years 2003, 2005, and 2010 through 2013 are under audit by the Indian tax authority. Other foreign subsidiaries could face challenges from various foreign tax authorities. It is not certain that the local authorities will accept the Company’s tax positions. The Company believes its tax positions comply with applicable tax law and intends to vigorously defend its positions. However, differing positions on certain issues could be upheld by tax authorities, which could adversely affect the Company’s financial condition and results of operations.

The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $3.9 million due to the settlement of various audits and the expiration of statutes of limitations. The Company accrues interest related to uncertain tax positions in interest expense or interest income and recognizes penalties related to uncertain tax positions in other income or other expense. As of December 31, 2018 and 2017, $1.2 million is accrued for the payment of interest and penalties related to income tax liabilities. The aggregate amount of interest and penalties expense (benefit) recorded in the statements of operations for the years ended December 31, 2018, 2017, and 2016, is $0.0 million, $(0.8) million, and $(0.2) million, respectively.