Note 19 Income Taxes



The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.



Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $37,889 tax expense that was offset by an adjustment to the Company’s valuation allowance of a provisional $37,889 tax benefit.



The Tax Act also provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). The Company recognized a provisional $9,474 of income tax expense related to the transition tax, which was offset by its current year net operating loss. As such, the Company does not expect any cash tax payment to be made in connection with the transition tax.



While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions will result in an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the Company is required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into the measurement of the Company’s deferred taxes (the “deferred method”). The Company is continuing to evaluate the GILTI tax rules and have not yet adopted a policy to account for the related impacts.



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 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 recognized a net tax expense of $47,362 for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances which was offset by $47,362 of provisional tax benefit associated to the change in the valuation allowance and included these estimates in the consolidated financial statements for the year ended December 31, 2017. The Company is in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company expects to complete the analysis within the measurement period in accordance with SAB 118.



The components of the Company’s income before income taxes are as follows:







The components of income tax provision for the years ended December 31, 2017,  2016 and 2015 are as follows:







The overall effective tax rate differs from the statutory federal tax rate for the years ended December 31, 2017,  2016 and 2015 as follows:





The difference between the Company’s effective tax rate for 2017 and the federal statutory rate was 48.6 percentage points. The difference in the effective rate is due primarily to the impact of the Tax Act, change in valuation allowances that were recorded during the year, as well as the Company’s foreign income inclusions and employee share-based payments that were previously recognized through other comprehensive income.



The difference between the Company’s effective tax rate for 2016 and the federal statutory rate was 33.6 percentage points. The Company recorded nondeductible expenses, including non-deductible goodwill impairment charges and a valuation allowance in the U.S. and certain foreign jurisdictions, which contributed to a difference in the effective tax rate.



The difference between the Company’s effective tax rate for 2015 and the federal statutory rate was 36.4 percentage points. The Company incurred nondeductible expenses and recognized income for tax purposes, net of tax credits, not included in financial statement income, increasing the effective tax rate. The Company is benefiting from the U.S. domestic production activities deduction and from research credits, reducing the effective tax rate.



During the third quarter of 2017, the Company determined that it is more likely than not that the deferred tax assets related to Phenix Systems would not be realized based on the Company’s review of results from operations and other evidence.  During the fourth quarter, it was determined that it was more likely than not that Layerwise, located in Belgium, would realize benefits based on results from operations and utilization of existing net operating losses. There were no other changes to the Company’s valuation allowance assertions.



In 2016, there were no changes to the Company’s valuation allowance assertions. During the fourth quarter of 2015, based upon the Company’s review of results of operations and forecast estimates in connection with the assessment of deferred tax benefits, the Company determined that it is more likely than not that the deferred tax assets in the US and certain foreign jurisdictions will not be realized.  



The components of the Company’s net deferred income tax assets and net deferred income tax liabilities at December 31, 2017 and 2016 are as follows:







At December 31, 2017, $35,004 of the Company’s deferred income tax assets was attributable to $237,186 of gross net operating loss carryforwards, which consisted of $115,846 loss carryforwards for U.S. federal income tax purposes, $101,563 of loss carryforwards for U.S. state income tax purposes and $19,777 of loss carryforwards for foreign income tax purposes.



At December 31, 2016, $29,398 of the Company’s deferred income tax assets was attributable to $148,199 of gross operating loss carryforwards, which consisted of $50,587 loss carryforwards for U.S. federal income tax purposes, $78,274 of loss carryforwards for U.S. state income tax purposes and $19,338 of loss carryforwards for foreign income tax purposes.



The net operating loss carryforwards for U.S. federal income tax purposes begin to expire in 2022. The net operating loss carryforwards for U.S. state income tax purposes begin to expire in 2018. In addition, certain loss carryforwards for foreign income tax purposes begin to expire in 2018 and certain other loss carryforwards for foreign purposes do not expire.



At December 31, 2017, tax credit carryforwards included in the Company’s deferred income tax assets consisted of $2,845 of research and experimentation credit carryforwards for U.S. federal income tax purposes, $3,745 of research and experimentation tax credit carryforwards for U.S. state income tax purposes, $3,549 of foreign tax credits for U.S. federal income tax purposes, $474 of other U.S. federal tax credits, $170 of research and experimentation tax credit carryforwards for foreign income tax purposes and $600 of other state tax credits. Certain state research and experimentation and other state credits begin to expire in 2024. The Company has recorded a valuation allowance related to the U.S. federal and state tax credits.



At December 31, 2016, tax credit carryforwards included in the Company’s deferred income tax assets consisted of $2,544 of research and experimentation credit carryforwards for U.S. federal income tax purposes, $2,649 of research and experimentation tax credit carryforwards for U.S. state income tax purposes, $7,155 of foreign tax credits for U.S. federal income tax purposes, $474 of other U.S. federal tax credits, $149 of research and experimentation tax credit carryforwards for foreign income tax purposes and $600 of other state tax credits. Certain state research and experimentation credits begin to expire in 2017; other state credits begin to expire in 2024. The Company has recorded a valuation allowance related to the U.S. federal and state tax credits.



The Company has provided for $9,474 in tax for the Transition Tax discussed above which has been offset by its 2017 net operating loss. As the Company’s previously unremitted earnings have now been subjected to U.S. federal income tax, any repatriation of these earnings to the U.S. would not be expected to incur significant additional taxes related to such amounts. However, the Company’s estimates are provisional and subject to further analysis.



Including interest and penalties, the Company increased its unrecognized benefits by $218 for the year ended December 31, 2017 and increased its unrecognized tax benefits by $10,077 for the year ended December 31, 2016. The Company does not anticipate any additional unrecognized tax benefits during the next 12 months that would result in a material change to its consolidated financial position. The Company includes interest and penalties in the Consolidated Financial Statements as a component of income tax expense.









Tax years 2003 through 2017 remain subject to examination by the U.S. Internal Revenue Service, with most of the years open to examination due to the generation and utilization of various tax credits. State income tax returns are generally subject to examination for a period of three to four years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia (2013), Belgium (2014), Brazil (2012), China (2014), France (2014), Germany (2013), India (2013), Israel (2013), Italy (2012), Japan (2012), Korea (2012), Mexico (2012), Netherlands (2012), Switzerland (2012), the United Kingdom (2016) and Uruguay (2012).



The following presents the changes in the balance of the Company’s deferred income tax asset valuation allowance: