20. INCOME TAXES
Income tax provision
The table below presents the components of income before income taxes for the years ended June 30, 2017, 2016 and 2015:
| 2017 | 2016 | 2015 | |||||||
| South Africa | $ | 129,786 | $ | 119,097 | $ | 137,138 | |||
| United States | (20,902 | ) | (5,915 | ) | (7,286 | ) | |||
| Other | 5,572 | 13,055 | 10,566 | ||||||
| Income before income taxes | $ | 114,456 | $ | 126,237 | $ | 140,418 | |||
Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2017, 2016 and 2015:
| 2017 | 2016 | 2015 | |||||||
| Current income tax | $ | 45,857 | $ | 88,807 | $ | 48,795 | |||
| South Africa | 35,986 | 31,815 | 39,901 | ||||||
| United States | 4,686 | 50,750 | 3,109 | ||||||
| Other | 5,185 | 6,242 | 5,785 | ||||||
| Deferred taxation (benefit) charge | (40 | ) | (161 | ) | (2,292 | ) | |||
| South Africa | (473 | ) | 3,044 | 398 | |||||
| United States | 1,123 | (274 | ) | 485 | |||||
| Other | (690 | ) | (2,931 | ) | (3,175 | ) | |||
| Foreign tax credits generated – United States | (3,345 | ) | (46,566 | ) | (2,367 | ) | |||
| Income tax provision | $ | 42,472 | $ | 42,080 | $ | 44,136 | |||
There were no changes to the enacted tax rate in the years ended June 30, 2017, 2016, and 2015.
The movement in the valuation allowance for the year ended June 30, 2017, is primarily attributable to a decrease resulting from the utilization of foreign tax credits and an increase related to a valuation allowance created for net operating loss carryforwards for the Company's German subsidiaries. The movement in the valuation allowance for the year ended June 30, 2016, relates primarily to an increase in the valuation allowance resulting from the generation of unused foreign tax credits during the year. The movement in the valuation allowance for the year ended June 30, 2015, relates primarily to the release of the valuation allowance resulting from the utilization of foreign tax credits during the year.
Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended June 30, 2017, 2016 and 2015, taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax credits as a result of the inclusion of the dividends in its taxable income in 2016. Net1 has applied certain of these foreign tax credits against its current income tax provision for the year ended June 30, 2017, 2016 and 2015.
A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company's effective tax rate, for the years ended June 30, 2017, 2016 and 2015 is as follows:
| 2017 | 2016 | 2015 | ||||
| Income tax rate reconciliation: | ||||||
| Income taxes at fully-distributed South African tax rates | 28.00 | % | 28.00 | % | 28.00 | % |
| Non-deductible items | 1.01 | % | 0.38 | % | 2.36 | % |
| Foreign tax rate differential | 0.00 | % | 7.42 | % | 0.06 | % |
| Foreign tax credits | (0.05 | %) | (36.88 | %) | (1.68 | %) |
| Taxation on deemed dividends in the United States | 8.00 | % | 34.60 | % | 3.46 | % |
| Movement in valuation allowance | 0.07 | % | (0.09 | %) | (0.08 | %) |
| Prior year adjustments | 0.07 | % | (0.09 | %) | (0.69 | %) |
| Income tax provision | 37.10 | % | 33.34 | % | 31.43 | % |
Net1 received dividends from one of its South African subsidiaries during the year ended June 30, 2017, which resulted in an increase in taxation on dividends received. No significant foreign tax credits were generated during the year ended June 30, 2017, and the Company utilized foreign tax credits generated in prior years. The utilization of these foreign tax credits used in prior years is included in the movement in the valuation allowance. The non-deductible items during the year ended June 30, 2017, includes transaction related expenses, including legal and consulting fees incurred that are not deductible for tax purposes. Net1 received substantial dividends from one of its South African subsidiaries during the year ended June 30, 2016, which resulted in an increase in the amount of foreign tax credits generated and an increase in taxation on dividends received. A portion of these foreign tax credits generated were not used during the year and a valuation allowance has been created for unused foreign tax credits. The non-deductible items during the year ended June 30, 2015, include primarily legal and consulting fees incurred that are not deductible for tax purposes. The foreign tax rate differential represents the difference between statutory tax rates in South Africa and foreign jurisdictions, primarily the United States.
Deferred tax assets and liabilities
Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities as of June 30, and their classification, were as follows:
| 2017 | 2016 | |||||
| Total deferred tax assets | ||||||
| Net operating loss carryforwards | $ | 4,946 | $ | 1,982 | ||
| Provisions and accruals | 4,413 | 4,245 | ||||
| FTS patent | 475 | 496 | ||||
| Intangible assets | 829 | 733 | ||||
| Foreign tax credits | 32,574 | 36,750 | ||||
| Other | 5,717 | 7,448 | ||||
| Total deferred tax assets before valuation allowance | 48,954 | 51,654 | ||||
| Valuation allowances | (38,967 | ) | (38,834 | ) | ||
| Total deferred tax assets, net of valuation allowance | 9,987 | 12,820 | ||||
| Total deferred tax liabilities: | ||||||
| Intangible assets | 9,141 | 11,799 | ||||
| Other | 6,655 | 6,624 | ||||
| Total deferred tax liabilities | 15,796 | 18,423 | ||||
| Reported as | ||||||
| Current deferred tax assets | 5,330 | 6,956 | ||||
| Long term deferred tax liabilities | 11,139 | 12,559 | ||||
| Net deferred income tax liabilities | $ | 5,809 | $ | 5,603 |
Increase in total deferred tax liabilities
Net operating loss carryforwards
Net operating loss carryforwards have increased primarily as a result of the losses incurred by the Company's German subsidiaries.
Intangible assets
Deferred tax liabilities – intangible assets have moderately decreased during the year ended June 30, 2017, as a result of the amortization of KSNET, Masterpayment and Transact24 intangible assets.
Foreign tax credits and valuation allowances
The decrease in foreign tax credits as of June 30, 2017, resulted from the utilization of foreign tax credits generated in previous years against taxes payable associated with the dividends received by Net1 during the year ended June 30, 2017.
Increase in valuation allowance
At June 30, 2017, the Company had deferred tax assets of $10.0 million (2016: $12.8 million), net of the valuation allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At June 30, 2017, the Company had a valuation allowance of $39.0 million (2016: $38.9 million) to reduce its deferred tax assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2017 and 2016, is presented below:
| Net | ||||||||||||||
| Foreign | operating | |||||||||||||
| tax | loss carry- | FTS | ||||||||||||
| Total | credits | forwards | patent | Other | ||||||||||
| July 1, 2015 | $ | 22,550 | $ | 20,211 | $ | 1,088 | $ | 254 | $ | 997 | ||||
| Charged to statement of operations | 16,537 | 16,537 | - | - | - | |||||||||
| Utilized | (128 | ) | - | (128 | ) | - | - | |||||||
| Foreign currency adjustment | (125 | ) | - | (29 | ) | (96 | ) | - | ||||||
| June 30, 2016 | $ | 38,834 | $ | 36,748 | $ | 931 | $ | 158 | $ | 997 | ||||
| Reversed to statement of operations | (4,302 | ) | (4,174 | ) | (128 | ) | - | - | ||||||
| Charged to statement of operations | 4,684 | - | 3,107 | - | 1,577 | |||||||||
| Foreign currency adjustment | (249 | ) | - | (211 | ) | (38 | ) | - | ||||||
| June 30, 2017 | $ | 38,967 | $ | 32,574 | $ | 3,699 | $ | 120 | $ | 2,574 |
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2017, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
| Year of expiration | U.S. net operating | |
| loss carry | ||
| forwards | ||
| 2024 | $ | 2,242 |
Net1 did not generate any additional foreign tax credits during the year ended June 30, 2017. During the year ended June 30, 2016, Net1 generated additional foreign tax credits related to the cash dividends received. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of June 30, 2017 and 2016, respectively. The unused foreign tax credits generated expire after ten years in 2026, 2024, 2023, 2022, 2021 and 2020.
Uncertain tax positions
As of June 30, 2017 and 2016, the Company has unrecognized tax benefits of $0.5 million and $1.9 million, respectively, all of which would impact the Company's effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Germany, Hong Kong, India, the United Kingdom, Botswana, and in the U.S. federal jurisdiction. As of June 30, 2017, the Company's South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2013. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations. The Company does not expect the change related to unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.
The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2017, 2016 and 2015:
| 2017 | 2016 | 2015 | |||||||
| Unrecognized tax benefits - opening balance | $ | 1,930 | $ | 2,322 | $ | 1,160 | |||
| Gross decreases - tax positions in prior periods | (2,109 | ) | (609 | ) | - | ||||
| Gross increases - tax positions in current period | 440 | 641 | 1,311 | ||||||
| Lapse of statute limitations | - | - | - | ||||||
| Foreign currency adjustment | 214 | (424 | ) | (149 | ) | ||||
| Unrecognized tax benefits - closing balance | $ | 475 | $ | 1,930 | $ | 2,322 |
As of each of June 30, 2017 and 2016, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million, respectively, on its balance sheet.