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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes

9. Income Taxes

Income Tax Provision. The components of net income before income taxes are as follows (in thousands):

 

 

 

2022

 

 

2021

 

 

2020

 

Domestic

 

$

53,251

 

 

$

98,261

 

 

$

77,721

 

Australia

 

 

(5,851

)

 

 

(3,429

)

 

 

(2,085

)

India

 

 

9,517

 

 

 

5,873

 

 

 

6,245

 

Ireland

 

 

(3,391

)

 

 

1,627

 

 

 

874

 

United Kingdom

 

 

2,533

 

 

 

(5,734

)

 

 

(4,281

)

Foreign other

 

 

4,722

 

 

 

4,348

 

 

 

6,882

 

Total

 

$

60,781

 

 

$

100,946

 

 

$

85,356

 

The income tax provision consists of the following (in thousands):

 

 

 

2022

 

 

2021

 

 

2020

 

Current:

 

 

 

 

 

 

 

 

 

Federal

 

$

30,012

 

 

$

17,012

 

 

$

17,760

 

State

 

 

6,517

 

 

 

5,835

 

 

 

5,373

 

Australia

 

 

55

 

 

 

118

 

 

 

40

 

India

 

 

4,370

 

 

 

959

 

 

 

1,788

 

Ireland

 

 

273

 

 

 

561

 

 

 

567

 

United Kingdom

 

 

349

 

 

 

426

 

 

 

357

 

Foreign other

 

 

2,772

 

 

 

1,338

 

 

 

2,026

 

 

 

 

44,348

 

 

 

26,249

 

 

 

27,911

 

Deferred:

 

 

 

 

 

 

 

 

 

Federal

 

 

(21,962

)

 

 

2,294

 

 

 

(497

)

State

 

 

(3,073

)

 

 

344

 

 

 

(1,031

)

Australia

 

 

(890

)

 

 

(180

)

 

 

(424

)

India

 

 

(1,388

)

 

 

368

 

 

 

(387

)

Ireland

 

 

(341

)

 

 

(150

)

 

 

331

 

United Kingdom

 

 

469

 

 

 

(558

)

 

 

304

 

Foreign other

 

 

(442

)

 

 

248

 

 

 

438

 

 

 

 

(27,627

)

 

 

2,366

 

 

 

(1,266

)

Total income tax provision

 

$

16,721

 

 

$

28,615

 

 

$

26,645

 

 

The effective tax rate in India of 31.3%, 22.6% and 22.4% in 2022, 2021 and 2020 respectively, differs from the statutory rate of approximately 29% due primarily to certain operations occurring within a Special Economic Zone (“SEZ”). Under the terms of SEZ, CSG qualifies for a reduced income tax rate on operations within the SEZ for a period of up to 10 years, beginning in 2018. In 2022, the rate increased due to reduced operations within the SEZ. The effective tax rates in Australia, Ireland and the United Kingdom differ from the statutory rates of 30%, 12.5%, and 19% respectively, due to changes in valuation allowances on deferred tax assets, withholding taxes incurred, and the impact of foreign exchange recognition on certain intercompany loans.

The difference between our income tax provision computed at the statutory Federal income tax rate and our financial statement income tax is summarized as follows (in thousands):

 

 

 

2022

 

 

2021

 

 

2020

 

Provision at Federal rate of 21%

 

$

12,764

 

 

$

21,199

 

 

$

17,925

 

State income taxes, net of Federal impact

 

 

2,079

 

 

 

4,882

 

 

 

3,430

 

Research and experimentation credits

 

 

(1,560

)

 

 

(2,062

)

 

 

(2,705

)

Stock award vesting

 

 

(1,355

)

 

 

(538

)

 

 

(540

)

Tax uncertainties

 

 

(227

)

 

 

69

 

 

 

(403

)

Section 162(m) compensation limitation

 

 

2,326

 

 

 

1,610

 

 

 

4,494

 

Foreign rate differential

 

 

571

 

 

 

592

 

 

 

462

 

Valuation allowance for deferred tax assets

 

 

638

 

 

 

1,427

 

 

 

1,002

 

Withholding tax

 

 

1,948

 

 

 

2,305

 

 

 

2,572

 

Other impact of foreign operations

 

 

422

 

 

 

(468

)

 

 

621

 

Statutory rate change

 

 

303

 

 

 

(299

)

 

 

71

 

Convertible debt premium

 

 

(1,017

)

 

 

—

 

 

 

—

 

Other

 

 

(171

)

 

 

(102

)

 

 

(284

)

Total income tax provision

 

$

16,721

 

 

$

28,615

 

 

$

26,645

 

We have undistributed earnings of approximately $70 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings; therefore, a provision has not been made for foreign withholding taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexities of the hypothetical calculation.

Deferred Income Taxes. Net deferred income tax assets as of December 31, 2022 and 2021 are as follows (in thousands):

 

 

 

2022

 

 

2021

 

Deferred income tax assets

 

$

81,747

 

 

$

56,065

 

Deferred income tax liabilities

 

 

(27,733

)

 

 

(25,250

)

Valuation allowance

 

 

(27,925

)

 

 

(29,983

)

Net deferred income tax assets

 

$

26,089

 

 

$

832

 

 

The components of our net deferred income tax assets (liabilities) as of December 31, 2022 and 2021 are as follows (in thousands):

 

 

 

2022

 

 

2021

 

Net deferred income tax assets:

 

 

 

 

 

 

Accrued expenses and reserves

 

$

6,206

 

 

$

9,470

 

Stock-based compensation

 

 

5,321

 

 

 

3,807

 

Software

 

 

(855

)

 

 

(1,435

)

Client contracts and related intangibles

 

 

(9,577

)

 

 

(5,993

)

Goodwill

 

 

(13,424

)

 

 

(11,563

)

Net operating loss carryforwards

 

 

27,820

 

 

 

31,548

 

Property and equipment

 

 

(3,789

)

 

 

(4,311

)

Deferred revenue

 

 

4,882

 

 

 

3,578

 

State taxes

 

 

-

 

 

 

195

 

Contingent payments

 

 

(88

)

 

 

(123

)

Foreign exchange gain/loss

 

 

1,791

 

 

 

1,064

 

Operating lease right-of-use assets and lease liabilities

 

 

5,872

 

 

 

1,768

 

Unrecognized tax benefit

 

 

408

 

 

 

522

 

Credits and incentives

 

 

374

 

 

 

397

 

R&D

 

 

28,733

 

 

 

554

 

Other

 

 

340

 

 

 

1,337

 

Total net deferred income tax assets

 

 

54,014

 

 

 

30,815

 

Less: valuation allowance

 

 

(27,925

)

 

 

(29,983

)

Net deferred income tax assets

 

$

26,089

 

 

$

832

 

Beginning January 1, 2022, we are required to capitalize certain research and development expenditures in accordance with section 174 of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act of 2017, instead of previously being allowed to expense. Amortization of such capitalized expenditures are allowed over a 5-year period if incurred domestically or a 15-year period if incurred outside the United States. Of the total R&D related deferred income tax assets (net of applicable amortization) as of December 31, 2022, in the table above, Federal and state was $28.2 million with the remaining amount attributable to foreign R&D credits.

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2022, we believe we will generate sufficient taxable income in the future such that we will realize 100% of the benefit of our U.S. Federal deferred income tax assets, thus no valuation allowance has been established. As of December 31, 2022, we have state and foreign deferred income tax assets (net of federal benefit related to state and foreign income tax jurisdictions) of $3.2 million and $34.7 million, respectively, and have established valuation allowances against those state and foreign income tax deferred income tax assets of $2.0 million and $26.0 million, respectively.

As of December 31, 2022 and 2021, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $13 million and $18 million, respectively, which will begin to expire in 2029 and can be utilized through 2033. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired businesses. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2022 and 2021, we have: (i) state NOL carryforwards of approximately $42 million and $41 million, respectively, which will expire beginning in 2023 with a portion of the losses available over an indefinite period of time; and (ii) foreign subsidiary NOL carryforwards of approximately $104 million and $116 million, respectively, which will expire beginning in 2031, with a portion of the losses available over an indefinite period of time.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state, and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. There are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various foreign, federal, state, or local tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

A reconciliation of the beginning and ending balances of our liability for unrecognized tax benefits is as follows (in thousands):

 

 

 

2022

 

 

2021

 

 

2020

 

Balance, beginning of year

 

$

2,929

 

 

$

1,393

 

 

$

1,540

 

Additions related to prior acquisitions

 

 

2

 

 

 

1,508

 

 

 

160

 

Lapse of statute of limitations

 

 

5

 

 

 

(151

)

 

 

(313

)

Additions for tax positions of prior years

 

 

8

 

 

 

36

 

 

 

111

 

Reductions for tax positions of prior years

 

 

(382

)

 

 

(62

)

 

 

(105

)

Additions for tax positions of current year

 

 

—

 

 

 

205

 

 

 

—

 

Balance, end of year

 

$

2,562

 

 

$

2,929

 

 

$

1,393

 

We recognize interest and penalties associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements. In addition to the $2.6 million, $2.9 million, and $1.4 million of liability for unrecognized tax benefits as of December 31, 2022, 2021, and 2020, we had $0.6 million, $0.7 million, and $0.6 million, respectively of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $2.6 million of unrecognized tax benefits as of December 31, 2022, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., India, and Australia are the primary taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $0.6 million over the next twelve months due to completion of tax audits and the expiration of statute of limitations.