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INCOME TAXES | 12 Months Ended
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Dec. 31, 2017
INCOME TAXES [ABSTRACT] |
INCOME TAXES | (10)INCOME TAXES The sources of pre-tax operating income are as follows (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Domestic |  | $ | 10,909 |  | $ | (6,216) |  | $ | 25,402 |
Foreign |  |  | 77,978 |  |  | 56,514 |  |  | 60,487 |
Total |  | $ | 88,887 |  | $ | 50,298 |  | $ | 85,889 |
The United States recently enacted comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the "2017 Tax Act") that, among other things, reduces the U.S. federal corporate income tax rate from 35% to 21% and implements a territorial tax system, but imposes an alternative “base erosion and anti-abuse tax” (“BEAT”), and an incremental tax on global intangible low taxed foreign income (“GILTI”) effective January 1, 2018. In addition, the law imposes a one-time mandatory repatriation tax on accumulated foreign earnings on domestic corporations effective for the 2017 tax year. In response, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has not completed its final analysis of the full impact of the 2017 Act on its tax provisions. However, the Company has recognized the provisional impacts related to the one-time transition tax and revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 31, 2017. The significant components of this expense include (i) the remeasurement of net deferred tax assets at the lower enacted U.S. federal corporate tax rate, which resulted in a net $1.1 million increase in income tax expense; and (ii) the deemed repatriation tax on unremitted non-U.S. earnings and profits that were previously tax deferred and other tax impacts of the 2017 Tax Act, which resulted in a $62.4 million increase in income tax expense, net of deductions and credits. No amount was booked related to withholding taxes on the changes in indefinite reinvestment assertion on the potential repatriation of foreign earnings as it is the Company’s determination that there would be no material additional amount of tax if the related foreign cash was repatriated to the United States. The Company has not completed its analysis in regard to the full tax impact related to a change in indefinite reinvestment reassertion as the computation is complex and impacted by the provisional calculations outlined above. No additional income taxes have been provided for any remaining outside basis difference inherent in our foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. Determination of any unrecognized deferred tax liability related to the outside basis difference in investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which we operate. The ultimate impact of the 2017 Tax Act may materially differ from the provisional amounts recorded, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. In addition, foreign and state governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect our financial position and results of operations. Our selection of an accounting policy with respect to the new GILTI rules will depend in part on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI, and if so, what the impact is expected to be. We have not yet computed a reasonable estimate of the effect of this provision, and therefore, we have not made a policy decision regarding whether to record deferred taxes related to GILTI nor have we made any adjustments related to GILTI tax in our year-end financial statements. We expect to complete our analysis of the impacts of the 2017 Tax Act within the measurement period in accordance with SAB 118. The components of the Company’s Provision for (benefit from) income taxes are as follows (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Current provision for (benefit from) |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 48,556 |  | $ | (373) |  | $ | 4,094 |
State |  |  | 99 |  |  | 372 |  |  | 1,829 |
Foreign |  |  | 12,643 |  |  | 14,447 |  |  | 4,764 |
Total current provision for (benefit from) |  |  | 61,298 |  |  | 14,446 |  |  | 10,687 |
Deferred provision for (benefit from) |  |  |  |  |  |  |  |  |  |
Federal |  |  | 14,441 |  |  | (2,390) |  |  | (1,895) |
State |  |  | 707 |  |  | 103 |  |  | 1,085 |
Foreign |  |  | 1,629 |  |  | 704 |  |  | 10,127 |
Total deferred provision for (benefit from) |  |  | 16,777 |  |  | (1,583) |  |  | 9,317 |
Total provision for (benefit from) income taxes |  | $ | 78,075 |  | $ | 12,863 |  | $ | 20,004 |
The following reconciles the Company’s effective tax rate to the federal statutory rate (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Income tax per U.S. federal statutory rate (35%) |  | $ | 31,110 |  | $ | 17,605 |  | $ | 30,062 |
State income taxes, net of federal deduction |  |  | 460 |  |  | (158) |  |  | 1,603 |
Change in valuation allowances |  |  | (924) |  |  | (129) |  |  | 3,923 |
Foreign income taxes at different rates than the U.S. |  |  | (14,417) |  |  | (10,206) |  |  | (14,490) |
Foreign withholding taxes |  |  | 323 |  |  | 590 |  |  | 958 |
Losses in international markets without tax benefits |  |  | 1,098 |  |  | 2,474 |  |  | 1,999 |
Nondeductible compensation under Section 162(m) |  |  | 647 |  |  | 104 |  |  | 512 |
Liabilities for uncertain tax positions |  |  | 1,607 |  |  | (133) |  |  | 1,756 |
Permanent difference related to foreign exchange gains |  |  | 142 |  |  | 388 |  |  | 162 |
(Income) losses of foreign branch operations |  |  | (824) |  |  | (635) |  |  | (517) |
Non-taxable earnings of noncontrolling interest |  |  | (1,030) |  |  | (1,128) |  |  | (1,349) |
Foreign dividend less foreign tax credits |  |  | (4,798) |  |  | (4,646) |  |  | (4,425) |
Increase in deferred tax liability - branch losses in UK |  |  | — |  |  | — |  |  | (2,530) |
Decrease (increase) to deferred tax asset - change in tax rate |  |  | 1,101 |  |  | 443 |  |  | (526) |
State income tax credits |  |  | 207 |  |  | 100 |  |  | (1,477) |
Foreign earnings taxed currently in U.S. |  |  | 3,143 |  |  | 3,673 |  |  | 2,839 |
Taxes related to prior year filings |  |  | (865) |  |  | 2,554 |  |  | 344 |
Taxes related to US tax reform |  |  | 61,569 |  |  | — |  |  | — |
Other |  |  | (474) |  |  | 1,967 |  |  | 1,160 |
Income tax per effective tax rate |  | $ | 78,075 |  | $ | 12,863 |  | $ | 20,004 |
The Company’s deferred income tax assets and liabilities are summarized as follows (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |
Deferred tax assets, gross |  |  |  |  |  |  |
Accrued workers compensation, deferred compensation and employee benefits |  | $ | 8,597 |  | $ | 11,212 |
Allowance for doubtful accounts, insurance and other accruals |  |  | 2,197 |  |  | 3,348 |
Amortization of deferred rent liabilities |  |  | 2,352 |  |  | 3,362 |
Net operating losses |  |  | 17,887 |  |  | 20,253 |
Equity compensation |  |  | 1,481 |  |  | 2,489 |
Customer acquisition and deferred revenue accruals |  |  | 7,026 |  |  | 11,739 |
Federal and state tax credits, net |  |  | 50 |  |  | 7,439 |
Depreciation and amortization |  |  | — |  |  | 4,671 |
Unrealized losses on derivatives |  |  | 3,137 |  |  | 13,815 |
Contract acquisition costs |  |  | — |  |  | 1,044 |
Other |  |  | 1,557 |  |  | 2,331 |
Total deferred tax assets, gross |  |  | 44,284 |  |  | 81,703 |
Valuation allowances |  |  | (9,526) |  |  | (9,949) |
Total deferred tax assets, net |  |  | 34,758 |  |  | 71,754 |
Deferred tax liabilities |  |  |  |  |  |  |
Depreciation and amortization |  |  | (12,850) |  |  | — |
Contract acquisition costs |  |  | (5,331) |  |  | — |
Intangible assets |  |  | (15,405) |  |  | (17,971) |
Other |  |  | (446) |  |  | (357) |
Total deferred tax liabilities |  |  | (34,032) |  |  | (18,328) |
Net deferred tax assets |  | $ | 726 |  | $ | 53,426 |
Quarterly, the Company assesses the likelihood by jurisdiction that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized. As of December 31, 2017 the Company had approximately $4.2 million of net deferred tax assets in the U.S. and $3.5 million of net deferred tax liabilities related to certain international locations whose recoverability is dependent upon their future profitability. As of December 31, 2017 the deferred tax valuation allowance was $9.5 million and related primarily to tax losses in foreign jurisdictions which do not meet the “more-likely-than-not” standard under current accounting guidance. When there is a change in judgment concerning the recovery of deferred tax assets in future periods, a valuation allowance is recorded into earnings during the quarter in which the change in judgment occurred. In 2017, the Company made adjustments to its deferred tax assets and corresponding valuation allowances. The net change to the valuation allowance consisted of the following: a $0.1 million increase in certain state credits and NOLs that are now expected to be utilized prior to expiration, a $2.1 million increase in valuation allowance in the United Kingdom, Ireland, Canada, Luxembourg and Australia for deferred tax assets that do not meet the “more-likely-than-not” standard, and a $2.5 million release of valuation allowance in Argentina, New Zealand, Belgium, Turkey, United States and various other jurisdictions related to the utilization or write-off of deferred tax assets. Activity in the Company’s valuation allowance accounts consists of the following (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Beginning balance |  | $ | 9,949 |  | $ | 10,139 |  | $ | 10,721 |
Additions of deferred income tax expense |  |  | 2,044 |  |  | 1,914 |  |  | 4,300 |
Reductions of deferred income tax expense |  |  | (2,467) |  |  | (2,104) |  |  | (4,882) |
Ending balance |  | $ | 9,526 |  | $ | 9,949 |  | $ | 10,139 |
As of December 31, 2017, after consideration of all tax loss and tax credit carry back opportunities, the Company had tax affected tax loss carry forwards worldwide expiring as follows (in thousands):
2018 |  | $ | 98
2019 |  |  | 205
2020 |  |  | 319
2021 |  |  | 160
After 2021 |  |  | 9,687
No expiration |  |  | 5,282
Total |  | $ | 15,751
The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the governments of the Philippines and Costa Rica. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted multiple agreements with an initial period of four years and additional periods for varying years, expiring at various times between 2017 and 2019. The aggregate benefit to income tax expense for the years ended December 31, 2017, 2016 and 2015 was approximately $11.9 million, $12.4 million and $12.2 million, respectively, which had a favorable impact on diluted net income per share of $0.26, $0.27 and $0.25, respectively. Accounting for Uncertainty in Income Taxes In accordance with ASC 740, the Company has recorded a reserve for uncertain tax positions. The total amount of interest and penalties recognized in the accompanying Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2017, 2016 and 2015 was approximately $1.8 million, $693 thousand and $709 thousand, respectively. The Company had a reserve for uncertain tax benefits, on a net basis, of $3.3 million and $3.5 million for the years ended December 31, 2017 and 2016, respectively. The liability for uncertain tax positions was increased by $0.9 million during 2016 for new uncertain tax positions. The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the three years ended December 31, 2017 is presented below (in thousands):
Balance as of December 31, 2014 |  | $ | 1,661
Additions for current year tax positions |  |  | 1,048
Reductions in prior year tax positions |  |  | —
Balance as of December 31, 2015 |  |  | 2,709
Additions for current year tax positions |  |  | 826
Reductions in prior year tax positions |  |  | (1,153)
Balance as of December 31, 2016 |  |  | 2,382
Additions for current year tax positions |  |  | 916
Reductions in prior year tax positions |  |  | —
Balance as of December 31, 2017 |  | $ | 3,298
At December 31, 2017, the amount of uncertain tax benefits that, if recognized, would reduce tax expense was $5.1 million. Within the next 12 months, it is expected that the amount of unrecognized tax benefits will be reduced by $3.9 million as a result of the expiration of various statutes of limitation or the confirmation of tax positions by tax authorities. In accordance with ASC 740, the Company recorded a liability of $0.9 million related to an uncertain tax position. The Company recorded a liability during the second quarter of 2015 of $1.75 million and during the first quarter of 2016 of $1.1 million, inclusive of penalties and interest, for an uncertain tax position. See Note 1 for further information on these items. During the second quarter of 2016, $0.3 million of liability was released due to the closing of a statute of limitations. During the third quarter of 2016, $0.8 million of liability was released due to the favorable outcome of communications with a revenue authority related to site compliance for locations with tax advantaged status. During the third quarter of 2016, $0.5 million of liability was released due to the closing of a statute of limitations. The Company and its domestic and foreign subsidiaries (including Percepta LLC and its domestic and foreign subsidiaries) file income tax returns as required in the U.S. federal jurisdiction and various state and foreign jurisdictions. The following table presents the major tax jurisdictions and tax years that are open as of December 31, 2017 and subject to examination by the respective tax authorities:
Tax Jurisdiction |  | Tax Year Ended
United States |  | 2014 to present
Australia |  | 2013 to present
Brazil |  | 2012 to present
Canada |  | 2009 to present
Mexico |  | 2012 to present
Philippines |  | 2015 to present
The Company’s U.S. income tax returns filed for the tax years ending December 31, 2014 to present, remain open tax years. The Company has been notified of the intent to audit, or is currently under audit of, income taxes for Canada for tax years 2009 and 2010, the Philippines for tax year 2015, Ireland for tax year 2016 and the state of Minnesota in the United States for tax years 2014 through 2016. Although the outcome of examinations by taxing authorities are always uncertain, it is the opinion of management that the resolution of these audits will not have a material effect on the Company’s Consolidated Financial Statements. The Company successfully closed their audit in the second quarter of 2017 in Hong Kong for the tax year 2014 with no material changes. The Company also recorded a benefit in the amount of $0.8 million in the financial statements during the fourth quarter related to the favorable resolution of tax audits.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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