Entity information:
INCOME TAXES
The geographic distribution of pretax income from continuing operations is as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Domestic
 
$
29,088

 
$
13,776

 
$
13,237

Foreign
 
169,103

 
114,300

 
92,205

 
 
$
198,191

 
$
128,076

 
$
105,442


    
The provision for income taxes from continuing operations is summarized as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Federal
 
$
26,550

 
$
3,187

 
$
5,823

State
 
601

 
351

 
335

Foreign
 
9,621

 
3,081

 
5,950

Total current provision
 
$
36,772

 
$
6,619

 
$
12,108

Deferred:
 
 
 
 
 
 
Federal
 
$
28,297

 
$
3,110

 
$
569

State
 
(1,000
)
 
1,564

 
870

Foreign
 
(1,979
)
 
(165
)
 
8,413

Total deferred provision
 
25,318

 
4,509

 
9,852

Total provision for income taxes
 
$
62,090

 
$
11,128

 
$
21,960


The Company's effective income tax rate is lower than the 35% U.S. statutory tax rate primarily because of benefits from lower-taxed global operations. In 2017, our effective tax rate was also impacted by the effect of the recently enacted U.S. Tax Act, offset partially by a benefit related to the continued wind down of our solar inverter business. The following reconciles our effective tax rate on income from continuing operations to the federal statutory rate of 35%:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Income taxes per federal statutory rate
 
$
69,348

 
$
44,826

 
$
37,498

State income taxes, net of federal deduction
 
1,794

 
963

 
1,204

Change in valuation allowance
 
841

 
(85
)
 
6,503

Transition tax - U.S. Tax Reform
 
61,690

 
—

 
—

Corporate tax rate change - U.S. Tax Reform
 
11,177

 
—

 
—

Tax benefit associated with inverter business wind down
 
(33,837
)
 
—

 
—

Stock based compensation
 
(5,263
)
 
1,117

 
(166
)
Tax Amortization
 
(2,558
)
 
—

 
—

Tax effect of foreign operations
 
(47,482
)
 
(31,651
)
 
(22,495
)
Uncertain tax positions
 
4,948

 
1,636

 
2,122

Tax credits
 
(658
)
 
(4,495
)
 
(969
)
Other permanent items, net
 
2,090

 
(1,183
)
 
(1,737
)
 
 
$
62,090

 
$
11,128

 
$
21,960


    
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:
 
 
Years Ended December 31,
 
 
2017
 
2016
Deferred tax assets
 
 
 
 
Stock based compensation
 
$
1,295

 
$
2,281

Net operating loss and tax credit carryforwards
 
40,572

 
36,145

Pension obligation
 
3,363

 
2,338

Excess and obsolete inventory
 
841

 
3,031

Deferred revenue
 
4,519

 
11,998

Employee bonuses and commissions
 
1,112

 
1,908

Other
 
2,118

 
3,624

Deferred tax assets
 
53,820

 
61,325

Less: Valuation allowance
 
(32,267
)
 
(26,120
)
Net deferred tax assets
 
21,553

 
35,205

Deferred tax liabilities
 
 
 
 
Depreciation and amortization
 
2,605

 
2,266

Foreign other
 
3,448

 
1,538

Other
 
62

 
212

Deferred tax liabilities
 
6,115

 
4,016

Net deferred tax assets
 
$
15,438

 
$
31,189


As of December 31, 2017, the Company has recorded a valuation allowance on a portion of its U.S. domestic deferred tax assets of approximately $2.8 million related to state net operating losses. The remaining valuation allowance on deferred tax assets approximates $29.5 million and is associated primarily with operations in Germany, the UK, and India including losses that are both operating and capital in nature. As of December 31, 2017, there is not sufficient positive evidence to conclude that such deferred tax assets will be recognized. The December 31, 2017 valuation allowance balance reflects an increase of $6.1 million during the year.  The current rate reconciliation includes $0.8 million of such increase and is primarily attributable to an increase in the state valuation allowance for revisions to estimates of 2017 state income, and forecasted state income, offset by a reduction in the state effective tax rate on deferred tax balances.  The balance of the current year valuation allowance increase is associated with foreign activity.   Several of our foreign entities have full valuation allowances against their deferred tax balances.  Movement during 2017 in these deferred tax balances attributable to rate changes, prior year taxable income adjustments, and movement attributable to annual operating activities requires a corresponding adjustment to the related valuation allowance balances.  The changes in valuation allowance associated with these foreign items are included in the rate reconciliation as a component of the tax effects of foreign operations.
As of December 31, 2017, the Company had foreign and state tax loss carryforwards of approximately $174.0 million, and $116.6 million, respectively.  The Company plans to utilize its U.S. federal net operating loss carryforwards against the recently enacted transition tax. The U.S. state tax loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state laws.  The U.S. state losses will expire from 2019 to 2037 and the majority of the foreign operating losses have no expiration date. Additionally, the majority of the foreign losses are subject to full valuation allowance. The majority of the foreign operating losses have no expiration date.
In 2017, we began operating under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through June 30, 2027, and may be extended if certain additional requirements are met. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of the tax holiday in 2017 decreased the tax benefit recognized on the current start up tax loss in that jurisdiction by approximately $6.0 million and decreased our income from continuing operations by $0.15 per diluted share.
Our accounting for the following elements of the Tax Act is based upon our current understanding of the Tax Act and its estimated impact. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and deferred tax liabilities, we have recorded a provisional net decrease of $11.1 million with a corresponding adjustment to deferred income tax expense for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysis related to the Tax Act, including, but not limited to our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
The Transition Tax is a one-time tax on previously untaxed accumulated earnings and profits (E&P) of our foreign subsidiaries. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $61.8 million. However, we are continuing to gather additional information to more precisely compute the amount of the Transition Tax. The Transition Tax may be paid over a period of 8 years; 8% per year for years 1 - 5, 15% for year 6, 20% for year 7 and 25% for year 8. We intend to utilize our U.S. net operating loss carryforward to reduce the ultimate cash tax obligation and have currently reflected a total tax payable of $16 million with $1 million classified as a current liability and $15 million classified as Other long term liabilities in the Balance Sheet at December 31, 2017.
We previously considered the earnings in our foreign subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. Total estimated foreign earnings totaled $524.9 million at December 31, 2017.  The Company continues to assert that such foreign earnings are indefinitely invested in operations outside the U.S. While the Transition Tax results in a reduction to undistributed foreign earnings to tax in the future, an actual repatriation from our foreign subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We will record the tax effects of any change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate.
We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing these positions in the financial statements. The reconciliation of our total gross unrecognized tax benefits is as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Balance at beginning of period
 
$
11,401

 
$
10,049

 
$
8,001

Additions based on tax positions taken during a prior period
 
1,258

 
104

 
433

Additions based on tax positions taken during the current period
 
4,433

 
2,318

 
3,413

Reductions related to a lapse of applicable statute of limitations
 
(1,102
)
 
(1,070
)
 
(1,798
)
Balance at end of period
 
$
15,990

 
$
11,401

 
$
10,049


The full $16.0 million of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We had $1.0 million and $0.8 million of accrued interest and penalties at December 31, 2017 and 2016, respectively. We do not anticipate a material change to the amount of unrecognized tax positions within the next 12 months.
With few exceptions, the Company is no longer subject to federal state or foreign income tax examinations by tax authorities for years before 2014.