INCOME TAXES
The domestic and foreign source component of income (loss) from continuing operations before income taxes was:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (8,888 | ) | | $ | (5,244 | ) | | $ | (21,246 | ) |
Foreign | 7,176 |
| | 6,357 |
| | 6,094 |
|
Total | $ | (1,712 | ) | | $ | 1,113 |
| | $ | (15,152 | ) |
Significant components of the provision for income taxes from continuing operations were:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | |
| | |
|
Federal | $ | (686 | ) | | $ | (28 | ) | | $ | (264 | ) |
State | (50 | ) | | (23 | ) | | 33 |
|
Foreign | 611 |
| | 504 |
| | 360 |
|
Total current (benefit) expense | $ | (125 | ) | | $ | 453 |
| | $ | 129 |
|
| | | | | |
Deferred: | | | |
| | |
|
Federal | $ | (324 | ) | | $ | 203 |
| | $ | 164 |
|
State | (28 | ) | | 27 |
| | 11 |
|
Foreign | 41 |
| | 35 |
| | 160 |
|
Total deferred (benefit) expense | $ | (311 | ) | | $ | 265 |
| | $ | 335 |
|
| | | | | |
Income tax expense | $ | (436 | ) | | $ | 718 |
| | $ | 464 |
|
GAAP requires all items be considered, including items recorded in other comprehensive income, in determining the amount of tax benefit that results from a loss from continuing operations that should be allocated to continuing operations.
Significant components of deferred tax assets and deferred tax liabilities included in the accompanying consolidated balance sheets in Other long-term assets and Other liabilities, respectively, as of December 31, 2017, 2016, and 2015 were:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Long-term deferred tax assets (liabilities): | | | |
| | |
|
Fixed assets | $ | 1,770 |
| | $ | 2,511 |
| | $ | 2,077 |
|
Prepaid expenses | (411 | ) | | (569 | ) | | (554 | ) |
Accrued stock compensation | 2,781 |
| | 4,641 |
| | 4,114 |
|
Accrued restructuring costs | 2 |
| | — |
| | 303 |
|
Work opportunity credit carryforward | 5,233 |
| | 5,226 |
| | 5,234 |
|
Operating loss carryforward | 10,663 |
| | 16,231 |
| | 18,066 |
|
Intangibles and goodwill | (64 | ) | | (77 | ) | | (53 | ) |
Derivative Instruments | (48 | ) | | 354 |
| | 202 |
|
Cumulative Translation adjustment | (965 | ) | | (1,381 | ) | | (1,178 | ) |
Other | 137 |
| | 297 |
| | 39 |
|
Net long-term deferred tax assets | $ | 19,098 |
| | $ | 27,233 |
| | $ | 28,250 |
|
| | | | | |
Valuation allowance | (18,939 | ) | | (27,384 | ) | | (28,162 | ) |
| | | | | |
Total net deferred tax asset (liability) | $ | 159 |
| | $ | (151 | ) | | $ | 88 |
|
We consider all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. In order to fully realize the U.S. deferred tax assets, we will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.
We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration or not subject to taxation in the US or in the local country. In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries in those operations. Generally, the earnings of our foreign subsidiaries become subject to U.S. taxation based on certain provisions in U.S. tax law such as the recently enacted territorial transition tax under section 965 and under certain other circumstances. Exceptions may be made on a year-by-year basis to repatriate current year earnings of certain foreign subsidiaries based on cash needs in the U.S.
At December 31, 2017, 2016, and 2015, U.S. income and foreign withholding taxes have not been provided for on approximately $0, $0, and $1,300, respectively, of unremitted earnings of subsidiaries operating outside of the U.S. These earnings are estimated to represent the excess of the financial reporting over the tax basis in our investments in those subsidiaries and would become subject to U.S. income tax if they were remitted to the U.S.
Differences between U.S. federal statutory income tax rates and our effective tax rates for the years ended December 31, 2017, 2016, and 2015 for continuing operations were:
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| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of state taxes (net of federal benefit) | 24.4 | % | | -12.2 | % | | 1.7 | % |
Rate differential on foreign earnings | 109.5 | % | | -146.0 | % | | 10.9 | % |
Foreign income taxed in the U.S. | -261.4 | % | | 133.9 | % | | -8.3 | % |
Uncertain tax positions | 77.9 | % | | 107.1 | % | | -4.9 | % |
Unremitted foreign earnings of subsidiary | 16.0 | % | | 19.7 | % | | — | % |
Tax expense allocation to OCI | 29.8 | % | | -2.7 | % | | — | % |
Effect of U.S tax rate change | -466.4 | % | | — | % | | — | % |
Valuation allowance | 463.1 | % | | -67.1 | % | | -40.4 | % |
Other permanent differences | -12.4 | % | | — | % | | — | % |
Stock based compensation | 30.4 | % | | — | % | | — | % |
True-up of deferred items | -20.1 | % | | — | % | | — | % |
Other, net | -0.4 | % | | -3.2 | % | | 2.9 | % |
Total | 25.4 | % | | 64.5 | % | | -3.1 | % |
As of December 31, 2017, we had gross federal net operating loss carry forwards of approximately $49,942 expiring beginning in 2030 and gross state net operating loss carry forwards of approximately $70,014 expiring beginning in 2018.
The Tax Cuts and Jobs Act (the “Act”), signed into law on December 22, 2017, makes significant modifications to U.S. federal income tax laws including reducing the corporate tax rate to 21 percent starting January 1, 2018 and transitioning the U.S. to a territorial tax regime. Consequently, we have recorded an adjustment to the Company’s net deferred tax liability of $582 and a corresponding net adjustment to deferred income tax (benefit) of $(582) for the year ended December 31, 2017. The passage of the Act will result in a one-time reduction in the Company’s deferred tax assets related to net operating loss carryforwards of approximately $6,452 with a corresponding reduction in the Company’s valuation allowance of $6,452. Also, the Tax provides there will still be US tax consequences of our foreign operations in future periods due to the recently enacted global intangible low tax income (GILTI) provisions and other US tax provisions even though the U.S. is transitioning to a territorial tax regime. We are still evaluating the impact of these provisions and we are not yet able to reasonably estimate the effect of this provision of the Act on our results in future periods.
Based on the Company's current interpretation and subject to the release of the related regulations and any future interpretive guidance, the Company believes the effects of the change in tax law incorporated herein are substantially complete. Additional information that may affect our income tax accounts and disclosures would include further clarification and guidance on how the Internal Revenue Service will implement tax reform, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform.
We have been granted “Tax Holidays” as an incentive to attract foreign investment by the governments of Honduras, Jamaica, and certain qualifying locations in the Philippines. Generally, a Tax Holiday is an agreement between us and a foreign government under which we receive certain tax benefits in that country. In Honduras, we have been granted approval for an indefinite exemption from income taxes. The tax holidays for our qualifying Philippines facilities expire at staggered dates through 2019. Our Tax Holidays could be eliminated if there are future changes in our operations or the governmental authorities approve legislation to modify the Tax Holidays in the various taxing jurisdictions. The aggregate reduction in income tax expense for the years ended December 31, 2017, 2016, and 2015 was $1,338, $1,136, and $1,106.
Under accounting standards for uncertainty in income taxes (ASC 740-10), a company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” in the accounting standards for income taxes refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.
The following table indicates the changes to our unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015. The term “unrecognized tax benefits” in the accounting standards for income taxes refers to the differences between a tax position taken or expected to be taken in a tax return and the benefit measured and recognized in the financial statements. If recognized, all of these benefits would impact our income tax expense, before consideration of any related valuation allowance.
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized, January 1, | $ | 4,155 |
| | $ | 2,962 |
| | $ | 2,215 |
|
Additions based on tax positions taken in current year | $ | 2,872 |
| | $ | 1,193 |
| | $ | 888 |
|
Reductions based on tax positions taken in prior year | $ | (4,155 | ) | | $ | — |
| | $ | (141 | ) |
Unrecognized, December 31, | $ | 2,872 |
| | $ | 4,155 |
| | $ | 2,962 |
|
We file numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state jurisdictions, as well as in Canada, the Philippines, Costa Rica and Honduras. Our U.S. federal returns and most state returns for tax years 2014 and forward are subject to examination. Canadian returns for tax years 2012 and forward are subject to examination. Our returns in the Philippines in 2014, Costa Rica in 2013 and Honduras in 2013 are subject to examination. In December 2014, our Canadian subsidiary was notified that its income tax returns for the years ended December 31, 2013 and 2012 are under examination. The Company has received a notice of assessment, but we do not believe it is more likely than not that we owe the taxes that have been assessed. Therefore, we filed an appeal in June 2017 and have not accrued a liability related to this matter. Because the Canadian Revenue Agency considers us a large corporation (a corporation which has taxable capital employed in Canada over $10 million), we were required to pay half of the reassessment, of $0.4 million, which is recorded in other long-term assets on our balance sheet. We do not anticipate receiving a decision on our appeal in the next twelve months. Also, in May 2016, our Philippine subsidiary received notification that its income tax return for the year ended December 31, 2014 is under examination. The Company has received an assessment notice for a de minimis amount that it has accrued and is in the process of resolving this examination.