Income Taxes

We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results, and transfer pricing and tax regulations in the related jurisdictions.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Among other changes, the Tax Act lowered the U.S. statutory corporate income tax rate from 35% to 21% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of certain foreign subsidiaries.

Under accounting standards for income taxes, the impact of new tax legislation must be taken into account in the period in which it is enacted. Subsequent to the Tax Act, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) allowing companies to use provisional estimates to record the effects of the Tax Act. SAB 118 also provides a measurement period (not to exceed one year from the date of enactment) to complete the accounting for the impacts of the Tax Act.

As a result of the enactment, we recorded a provisional tax charge of $17.9 million in fiscal 2018 related to the one-time remeasurement of our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, the one-time repatriation tax applied to our undistributed foreign earnings and the impact of executive compensation that is no longer deductible under the Tax Act. In accordance with SAB 118, we completed the accounting for the tax effects of the Tax Act and recorded immaterial adjustments to the provisional tax charge during the fourth quarter of fiscal 2019.

The Tax Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company elected to account for the tax on GILTI as a period cost and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries.

In connection with the enactment of the Tax Act, we repatriated $40 million of cash held in our U.S. owned foreign subsidiaries without such funds being subject to further U.S. federal income tax. As of February 28, 2019, we had approximately $28.1 million of undistributed earnings. We intend to continue to reinvest these earnings outside the United States for the foreseeable future. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. It is not practicable for us to determine the amount of deferred income taxes associated with these undistributed earnings.

Our components of income before income tax expense are as follows:



	Fiscal Years Ended February 28,
(in thousands)	2019		2018		2017
U.S.	$	32,135	$	23,824	$	20,878
Non-U.S.	155,865		131,614		134,839
Total	$	188,000	$	155,438	$	155,717

Our components of income tax expense (benefit) are as follows:



	Fiscal Years Ended February 28,
(in thousands)	2019			2018		2017
U.S.
Current	$	2,460		$	3,380	$	19,195
Deferred	10,480			19,578		(10,475		)
	12,940			22,958		8,720

Non-U.S.
Current	2,102			1,912		(290		)
Deferred	(1,266		)	1,686		2,977
	836			3,598		2,687
Total	$	13,776		$	26,556	$	11,407

Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. A income tax rate reconciliation of these differences are as follows:



	Fiscal Years Ended February 28,
	2019		2018		2017
Effective income tax rate at the U.S. statutory rate	21.0	%	32.7	%	35.0	%
Impact of U.S. state income taxes	1.2	%	0.5	%	0.5	%
Effect of statutory tax rate in Macau	(10.3	)%	(19.5	)%	(20.1	)%
Effect of statutory tax rate in Barbados	(5.9	)%	(5.2	)%	(7.3	)%
Effect of statutory tax rate in Europe	(1.9	)%	(5.3	)%	(3.6	)%
Effect of income from other non-U.S. operations subject to varying rates	1.8	%	2.1	%	2.1	%
Effect of foreign exchange fluctuations	0.2	%	0.3	%	0.4	%
Effect of asset impairment charges	—	%	2.2	%	0.4	%
Effect of U.S. tax reform	(0.1	)%	11.5	%	—	%
Effect of uncertain tax positions	(0.6	)%	(1.3	)%	(1.1	)%
Effect of nondeductible executive compensation	0.9	%	0.6	%	—	%
Effect of base erosion and anti-abuse tax	1.0	%	—	%	—	%
Other items	—	%	(1.5	)%	1.0	%
Effective income tax rate	7.3	%	17.1	%	7.3	%

Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We currently have an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain employment and investment thresholds. The Macau Offshore Law and its supplementary regulations that grant tax incentives to approved offshore institutions will be abolished on January 1, 2021. Existing approved offshore institutions such as ours can continue to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, we believe our Macau subsidiary will become subject to a statutory corporate income tax of approximately 12%. The ultimate impact of this change, if any, on our overall effective tax rate will depend on a variety of factors including our mix of income by jurisdiction, transfer pricing considerations and the specific tax regulations applicable to us when we are no longer under the Macau Offshore regime. It is not practicable for us to determine the potential impact on our financial statements until the tax changes in Macau are fully established and our transfer pricing analysis is complete. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.

Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of the last day of February 2019 and 2018 are as follows:



	February 28,
(in thousands)	2019			2018
Deferred tax assets, gross:
Operating loss carryforwards	$	18,300		$	32,829
Accounts receivable	4,680			4,767
Inventories	7,806			7,183
Accrued expenses and other	8,293			7,385
Total gross deferred tax assets	39,079			52,164
Valuation allowance	(17,086		)	(17,747		)
Deferred tax liabilities:
Depreciation and amortization	(19,750		)	(24,859		)
Total deferred tax liabilities, net	$	2,243		$	9,558

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not be recoverable. In fiscal 2019, the $0.7 million net decrease in our valuation allowance was principally due to changes in estimates regarding the value of operating loss carryforwards to be used in the future.

The composition of our operating loss carryforwards at the end of fiscal 2019 is as follows:



	February 28, 2019
(in thousands)	Tax Year Expiration Date Range	Deferred Tax Assets			Operating Loss Carryforward
U.S. federal operating loss carryforward	Indefinite	$	1,051		$	5,005
U.S. state operating loss carryforward	2021 - 2037	138			3,704
Non-U.S. operating loss carryforwards with definite carryover periods	2020 - 2036	4,716			17,599
Non-U.S. operating loss carryforwards with indefinite carryover periods	Indefinite	12,395			44,396
Subtotals		18,300			$	70,704
Less portion of valuation allowance established for operating loss carryforwards		(17,086		)
Total		$	1,214

Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced.

During fiscal 2019 and 2018, changes in the total amount of unrecognized tax benefits were as follows:



	Fiscal Years Ended February 28,
(in thousands)	2019			2018
Total unrecognized tax benefits, beginning balance	$	4,428		$	6,611
Resolution of tax dispute	—			(1,486		)
Changes in tax positions taken during a prior period	15			88
Lapse in statute of limitations	(1,057		)	(890		)
Impact of foreign currency re-measurement	(161		)	218
Settlements	(20		)	(113		)
Total unrecognized tax benefits, ending balance	3,205			4,428
Less current unrecognized tax benefits	(316		)	(1,079		)
Noncurrent unrecognized tax benefits	$	2,889		$	3,349

Included in the balance of unrecognized tax benefits at the end of fiscal 2019 were $3.2 million (includes interest) of tax benefits, which, if recognized, would affect our effective tax rate. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.

We classify interest and penalties on uncertain tax positions as income tax expense. At the end of February 2019 and 2018, the liability for tax-related interest and penalties included in unrecognized tax benefits was $0.6 million and $1.1 million, respectively. Additionally, during fiscal 2019, 2018 and 2017 we recognized tax benefits from tax-related interest and penalties of $0.5, $0.5 and $0.6 million, respectively, in the consolidated statements of income.

We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. We do not expect that any proposed adjustments from these tax jurisdictions will have a material impact on our consolidated financial statements.

As of February 28, 2019, tax years under examination or still subject to examination by material tax jurisdictions are as follows:



Jurisdiction	Tax Years Under Examination	Open Tax Years
United Kingdom	- None -	2018	—	2019
United States	2016 - 2018	2016	—	2019
Switzerland	- None -	2015	—	2019
Hong Kong	- None -	2013	—	2019

During fiscal 2017 we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. We believe we have accurately reported our taxable income and are vigorously protesting the assessment through administrative processes with the state. We believe it is unlikely that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.