XML 22 R10.htm IDEA: XBRL DOCUMENT v3.10.0.1
Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
In determining the quarterly provisions for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on our expected annual income and statutory tax rates in the U.S., Canada, Japan, Hong Kong, and the U.K. For the three months ended September 30, 2018 and 2017, the Company's effective tax rate was 81% and 654%, respectively. For the nine months ended September 30, 2018 and 2017, the Company's effective tax rate was 44% and 74%, respectively. The Company's effective tax rate decreased for the three months ended September 30, 2018 from the corresponding three months ended September 30, 2017, due primarily to the geographic mix of income from continuing operations and a reduction in the U.S. statutory tax rate offset by an increase in foreign losses not benefited for the three months ended September 30, 2018. The Company's effective tax rate decreased for the nine months ended September 30, 2018 from the corresponding nine months ended September 30, 2017, due primarily to the geographic mix of income from continuing operations and a reduction in the U.S. statutory tax rate offset by an increase in foreign losses not benefited for the nine months ended September 30, 2018.
On December 22, 2017, the U.S. government enacted Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax, a deduction for foreign-derived intangible income (“FDII”) and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are effective January 1, 2018.
In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, a company should record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
After the passage of the U.S. government enacted Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017, all undistributed foreign earnings before the passage became subject to U.S. federal tax at reduced rates; however, as of December 31, 2017, the Company's provisional estimate is that there will be no net expense for the Transition Tax related to these undistributed earnings. The Company has not made any additional measurement-period adjustments related to these items during the three and nine months ended September 30, 2018. This is a provisional estimate pending further legislative action from the states regarding conformity with the Tax Act. The Company continues to gather additional information to complete the accounting for these items and will complete our accounting within the prescribed measurement period.
In addition, the Tax Act creates a new requirement that certain income such as Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the CFC U.S. shareholder. During the three and nine months ended September 30, 2018, the Company's estimate is that there is no significant impact of the GILTI provisions. However, due to the complexity of the new GILTI, the Company is continuing to evaluate these provisions of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI should be recorded as a current-period expense when incurred, or factored into a company’s measurement of its deferred taxes. The Company will continue to refine the calculations as additional analysis is completed. The Company's provisional estimates may be affected as the Company gains a more thorough understanding of the Tax Act and any such changes to those estimates could be material to income tax expense.
At September 30, 2018, the estimated amount of the unrecognized deferred tax liability attributed to future withholding taxes on dividend distributions of undistributed earnings for certain non-U.S. subsidiaries, which the Company intends to reinvest the related earnings indefinitely in its operations outside the U.S., is approximately $489,000.
The Company maintains liabilities for uncertain tax positions. The Company's unrecognized tax benefits decreased $390,000 for the nine months ended September 30, 2018 primarily due to the payments of settlements with tax authorities. At September 30, 2018, the Company had approximately $198,000 in total unrecognized tax benefits, which if recognized, would favorably affect the Company’s effective income tax rate.
The Company’s policy is to include interest and penalties related to unrecognized tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. At September 30, 2018 and December 31, 2017, the Company had approximately $516,000 and $651,000 and in accrued interest, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for certain years after 2010 and is subject to California tax examinations for years after 2005. The material foreign jurisdictions where the Company is subject to potential examinations by tax authorities are the France, Germany, Spain and United Kingdom for tax years after 2009.