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Note 9 - Income Taxes
 12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

9. Income Taxes:

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 21% for the years ended  December 31, 2020,  December 31, 2019 and  December 31, 2018, to income before provision for income taxes as a result of the following (Dollar amounts in thousands of U.S. dollars): 

 

  

Year ended December 31,

 
  

2020

  

2019

  

2018

 
             

Income for the year before provision for income taxes

 $10,760  $24,571  $26,155 

Computed federal tax expense

  2,259   5,160   5,492 
             

Increase (reduction) in income tax expense resulting from:

            

State income taxes

  303   526   846 

Change in Valuation allowance

  1,867   5,277   2,811 
Expired business tax credits  1,044   -   - 

Non-creditable Foreign Tax

  818   515   - 

Excess tax benefits on share-based compensation expense

  (407)  (634)  (697)

Permanent differences

  (161)  (103)  159 

Effect of deferred tax in foreign branch

  (774)  (840)  - 

Others

  36   (728)  409 

Provision for income taxes

 $4,985  $9,173  $9,020 

 

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21% ; (2) changing rules related to uses and limitations of net operating loss carry forwards created in tax years beginning after December 31, 2017; (3) bonus depreciation allows for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax; and (6) new tax rules related to foreign operations.

 

In Fiscal 2020, the Company did not utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. Despite this, due to the reduction in tax rate to 21%, it is unlikely we will ultimately be able to fully claim the Fiscal 2020 foreign taxes paid in future years as a foreign tax credit. As such, we have taken a valuation allowance on foreign tax credits not utilized for 2020 income tax purposes and net operating losses not expected to be utilized in the future, the net negative effect of which is a $2.9 million addition to income tax expense.

 

In Fiscal 2019, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to fully claim the Fiscal 2019 foreign taxes paid in future years. In addition, the Company generated net operating losses of $0.3 million which it does not expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign tax credits not utilized for 2019 income tax purposes and net operating losses not expected to be utilized in the future, the net negative effect of which is a $5.3 million addition to income tax expense.

 

In Fiscal 2018, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to fully claim the Fiscal 2018 foreign taxes paid in future years. In addition, the Company generated net operating losses of $0.2 million which it does not expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign tax credits not utilized for 2018 income tax purposes and net operating losses not expected to be utilized in the future, the net negative effect of which is a $2.8 million addition to income tax expense.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2020, and  December 31, 2019 are presented below (Dollar amounts in thousands of U.S. dollars):

 

  

December 31, 2020

  

December 31, 2019

 

Deferred tax assets (liabilities):

        

Deferred tax assets:

        

Deferred revenue

 $5,739  $6,301 

Foreign tax credits and general business credits

  11,203   9,004 

Net operating losses

  1,452   1,341 

Accruals, including foreign exchange and other

  792   1,490 

Sub-total Deferred tax assets

  19,186   18,136 

Valuation allowance

  (11,232)  (9,365)

Total deferred tax assets

 $7,954  $8,771 

Deferred tax liabilities:

        

Prepaid registry fees and expenses

 $(16,909) $(16,237)

Amortization

  (7,083)  (6,925)

Limited life intangible assets

  (4,327)  (5,958)

Indefinite life intangible assets

  (2,847)  (3,110)
Foreign branch deferred tax liability  (1,256)  (2,012)

Total deferred tax liability

 $(32,422) $(34,242)
         

Net deferred tax asset (liability)

 $(24,468) $(25,471)

 

In assessing the realizability of deferred tax assets, management 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 years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment.

 

We believe it is more likely than not that our remaining deferred tax assets, net of the valuation allowance, will be realized based on current income tax laws, including those modified by the Tax Act, and expectations of future taxable income stemming from forecasted profits from ongoing operations and from the reversal of existing deferred tax liabilities.

 

The Company had nil total gross unrecognized tax benefits as of both December 31, 2020 and December 31, 2019.

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. The Company did not have any interest and penalties accrued as of December 31, 2020 and December 31, 2019.

 

In connection with the eNom acquisition in 2017, we acquired deferred tax liabilities primarily composed of prepaid registry fees. As a result, we aligned our tax methodology pertaining to the deductibility of prepaid registry fees for our other subsidiaries. In the first quarter of 2019, we determined that we were in technical violation with respect to the administrative application of the accounting method change relating to the deductibility of prepaid registry fees for these additional subsidiaries. In February 2019, the Company filed an application for relief ("9100 Relief") to correct the issue. In November 2019, the Company was granted 9100 Relief and was given 30 days to file the appropriate forms based on prescribed instructions. The Company filed the forms in December, 2019 and now awaits the final IRS response and acceptance of the change in accounting method. Management is of the view that it is more likely than not that the IRS will accept the 9100 Relief and filing of the prescribed forms. As such, no additional tax uncertainties or related interest or penalties have been recorded as at December 31, 2020.