INCOME TAXES

Loss from operations before income taxes consists of the following (in thousands):



	Year ended December 31,
	2017			2016			2015
United States	$	(50,041	)	$	(53,833	)	$	(16,826	)
International	(34,666		)	(26,597		)	758
Loss before income taxes	$	(84,707	)	$	(80,430	)	$	(16,068	)

The components of the benefit from income taxes consist of the following (in thousands):



	Year ended December 31,
	2017			2016			2015
Current:
Federal	$	(4,530	)	$	(950	)	$	(1,981	)
State	129			181			120
International	273			2,738			1,966
Deferred:
Federal	—			(713		)	—
State	—			—			—
International	2,376			(9,372		)	(512		)
Total benefit from income taxes	$	(1,752	)	$	(8,116	)	$	(407	)

The differences between the benefit from income taxes computed at the U.S. federal statutory rate at 35% and the Company’s actual benefit from income taxes are as follows (in thousands):



	Year ended December 31,
	2017			2016			2015
Benefit from for income taxes at U.S. Federal statutory rate	$	(29,648	)	$	(28,150	)	$	(5,624	)
Differential in rates on foreign earnings	15,920			11,741			1,584
Non-deductible amortization expense	—			617			947
Tax Reform Tax rate reduction	14,527			—			—
Change in valuation allowance	(2,834		)	4,465			2,230
Change in liabilities for uncertain tax positions	(2,009		)	(960		)	(1,083		)
Non-deductible stock-based compensation	1,934			1,480			1,398
Non-deductible meals and entertainment	380			441			395
Non-deductible acquisition cost	—			—			457
Adjustments related to tax positions taken during prior years	(473		)	(163		)	(781		)
Adjustments made under intercompany transactions	—			1,779			—
Tax Refund	(834		)	—			—
Other	1,285			634			70
Total benefit from income taxes	$	(1,752	)	$	(8,116	)	$	(407	)

The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by changes in or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.

In 2017, the Company had a worldwide consolidated loss before tax of $84.7 million and tax benefit of $1.8 million, with an effective income tax rate of 2%. The Company’s 2017 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to the Company’s geographical income mix, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate change in foreign jurisdictions, tax benefits associated with the release of tax reserves for uncertain tax positions resulting from the expiration of the statutes of limitations, a one-time benefit of $2.6 million from the reduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, and the net of various other discrete tax adjustments.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the TCJA; however, the effects on existing deferred tax balances has been determined and recorded. The impact of remeasuring deferred tax assets at the lower tax rate is a $14.5 million reduction of the value of net deferred tax assets (which represent future tax benefits), which is offset by a corresponding reduction in the related valuation allowance. As a result, there is net zero impact to the Company’s tax expense for 2017. Under the TCJA, the corporate AMT was repealed. Therefore, corporations which have been unable to utilize AMT credit carryforwards now have the opportunity to realize them through cash refunds. The Company has an AMT credit carryforward of $2.6 million that previously was not considered realizable and as such had a valuation allowance recorded. As a result of the TCJA, the valuation allowance was released and is reflected as a benefit in the Company's 2017 income tax provision. The Company has reclassified the $2.6 million credit carryforward to other receivables in the consolidated balance sheet to reflect the expected cash refund.

The TCJA also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. Although the Company currently does not expect to be impacted by the mandatory deemed repatriation provision of the TCJA., because the Company believes our cumulative unremitted earnings and profits are negative, due to the complexity of our international tax and legal entity structure, the Company will continue to analyze the earnings and profits and tax pools of our foreign subsidiaries to reasonably estimate the effects of the mandatory deemed repatriation provision of the TCJA over the one-year measurement period.

In 2016, the Company had a worldwide consolidated loss before tax of $80.4 million and tax benefit of $8.1 million, with an annual effective tax rate of 10%. The Company’s 2016 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to geographical income mix and its tax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorable resolutions of uncertain tax positions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.

In 2015, the Company had a worldwide consolidated loss before tax of $16.1 million and tax benefit of $0.4 million, with an effective income tax rate of 3%. The Company’s 2015 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates and the Company’s U.S. losses generated for the year received no tax benefit as a result of a full valuation allowance against all of its U.S. deferred tax assets, as well as adjustments relating to its 2014 U.S. federal tax return filed in September 2015 and the reversal of uncertain tax positions resulting from the expiration of the statutes of limitations. In addition, the impairment of the VJU investment (see Note 3, “Investments in Other Equity Securities”) received no tax benefit.

The components of net deferred tax assets included in the Consolidated Balance Sheets are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Reserves and accruals	$	17,247		$	25,527
Net operating loss carryforwards	34,915			33,321
Research and development credit carryforwards	34,419			28,759
Deferred stock-based compensation	2,677			4,292
Depreciation and amortization	—			554
Intangibles	2,062			—
Other tax credits	—			2,738
Other	1,441			—
Gross deferred tax assets	92,761			95,191
Valuation allowance	(77,756		)	(74,480		)
Gross deferred tax assets after valuation allowance	15,005			20,711
Deferred tax liabilities:
Depreciation and amortization	(259		)	—
Intangibles	—			(1,417		)
Convertible notes	(4,284		)	(8,603		)
Other	—			(510		)
Gross deferred tax liabilities	(4,543		)	(10,530		)
Net deferred tax assets	$	10,462		$	10,181

The following table summarizes the activities related to the Company’s valuation allowance (in thousands):



	Year ended December 31,
	2017			2016			2015
Balance at beginning of period	$	74,480		$	64,545		$	75,199
Additions	9,028			18,291			3,068
Deductions	(5,752		)	(8,356		)	(13,722		)
Balance at end of period	$	77,756		$	74,480		$	64,545

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction by jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

In 2017, the Company continued to record a valuation allowance against all of its United States deferred tax assets as well as its net operating losses generated in 2017 due to significant cumulative losses in the United States, resulting in a net increase in valuation allowance of $9.0 million. This increase in valuation allowance is offset partially by the release of $3.2 million of valuation allowance associated with the Company’s foreign subsidiaries and $2.6 million associated with the AMT refund related to the TCJA. As of December 31, 2017, the Company had a valuation allowance of $77.8 million against all of its U.S. federal, California and other state net deferred tax assets, including net operating loss carryforwards and R&D tax credit carryforwards, and against the majority of its foreign deferred tax assets.

The Company adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, using a modified-retrospective transition method, in the first quarter of fiscal 2017. As a result, the Company recorded a cumulative effect of $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuation allowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings or effective tax rate for 2017.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this ASU during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4 million to the retained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and write off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. The Company concluded that no adjustment to the consolidated financial statements as of December 31, 2016 and 2017 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.

As of December 31, 2017, the Company had $111.4 million, $49.1 million, $25.4 million and $53.2 million of foreign, U.S. federal, U.S. California state, and U.S. other states net operating loss carryforwards (“NOL”), respectively. There is no expiration to the utilization of the foreign NOL, while the U.S. federal and California NOL will begin to expire at various dates beginning in 2018 through 2037, if not utilized.

As of December 31, 2017, the Company had U.S. federal and California state tax credit carryforwards of approximately $11.3 million and $33.9 million, respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit forward will not expire.

The Company has not provided U.S. federal and California state income taxes, as well as foreign withholding taxes, on approximately $10.5 million of cumulative undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investment in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2017, the Company had $18.8 million that would favorably impact the effective tax rate in future periods if recognized. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions):



	Year ended December 31,
	2017			2016			2015
Balance at beginning of period	$	19.2		$	15.6		$	15.7
Increase in balance related to tax positions taken during current year	1.4			4.6			0.7
Decrease in balance as a result of a lapse of the applicable statues of limitations	(2.2		)	(1.0		)	(0.9		)
Increase in balance related to tax positions taken during prior years	1.8			—			0.3
Decrease in balance related to tax positions taken during prior years	(1.4		)	—			(0.2		)
Balance at end of period	$	18.8		$	19.2		$	15.6

The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements of Operations. The net interest and penalties charges recorded for the years ended December 31, 2015 through 2017, were not material. The Company had approximately $0.5 million of accrued interest and penalties related to uncertain tax positions as of December 31, 2017 and December 31, 2016.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. In 2016, the U.S. Internal Revenue Service concluded its audit for the Company’s 2012 tax year. As a result, the Company released $1.1 million of related tax reserves, including accrued interests and penalties in 2016.

The 2014 through 2016 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2015 tax years generally remain subject to examination by their respective tax authorities. In addition, a subsidiary of the Company is under audit for the 2013 and 2016 tax years, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018. The income tax benefits attributable to the Switzerland holiday were estimated to be approximately $0.6 million for fiscal year 2017 and approximately $0.7 million for each of the fiscal years 2016 and 2015, increasing diluted earnings per share by approximately $0.007, $0.008 and $0.008 for each of the fiscal years 2017, 2016 and 2015, respectively.