Note 9. Income Taxes



Tax Summary



The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessments of estimated current and future taxes to be paid. The Company is subject to income taxes in numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.



The summary of income / (loss) before provision for income taxes and noncontrolling interests consisted of the following (in thousands):





The provision / (benefit) for income taxes consisted of the following (in thousands):





A reconciliation of income tax expense from continuing operations and the U.S. federal statutory income tax expense were as follows (in thousands):





On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted into federal law. The Company has recorded tax expense of $27.2 million in the fourth quarter of fiscal 2017, primarily due to the remeasurement of its net deferred tax assets.



Deferred income taxes are primarily provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The tax effects of each type of temporary difference and carryforward that give rise to a significant portion of deferred tax assets / (liabilities) are summarized as follows (in thousands):







As of December 31, 2017 and 2016, the amount of valuation allowance that existed was $54.7 and $44.5 million respectively. The valuation allowance increased $10.2 million due to U.S. tax reform affecting the potential realizability of the Company's foreign tax credits. The Company also established a valuation allowance on one of its European subsidiary's deferred tax assets in the third quarter due to cumulative losses at this entity. The Company continually monitors all available evidence to determine if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The Company also continues to maintain valuation allowances in certain international jurisdictions, and certain state tax credits, which the Company anticipates will expire before the Company can utilize them.  



As of December 31, 2017, the Company has U.S. net operating loss (“NOL”) carryforwards of $81.1 million that expire during the years 2030 through 2033, state NOL carryforwards of $13.6 million and state credit carryforwards of $23.3 million that expire during the years 2018 to 2035. The Company also has tax credit carryforwards of $45.1 million related to federal research, alternative minimum tax and foreign tax credits.



The Company’s international subsidiaries have NOL carryforwards of $99.9 million and other local income tax NOL carryforwards of $5.9 million at December 31, 2017, many of which are unlimited, while others expire as soon as 2018.



The TCJA includes significant changes to the U.S. corporate income tax system. Among other items, the TCJA lowers the corporate income tax rate to 21% from the current 35% and creates a new modified territorial tax system exempting foreign profits from U.S. taxation with some exceptions. The TCJA also requires a one-time deemed repatriation of accumulated foreign earnings for the year ended December 31, 2017. To determine the amount of the deemed repatriation and any associated repatriation tax, the Company must determine, in addition to other factors, the amount of post-1986 profits or losses of each foreign subsidiary, as well as the amount of foreign income taxes paid on such profits or losses. The Company has made a reasonable estimate that no transition tax is due; however, this represents a provisional estimate. The Company is gathering additional information to more precisely compute the amount of its deemed repatriation, if any. The Company does not believe U.S. tax law imposing minimum income taxes on foreign excess returns or base erosion earnings stripping payments to foreign affiliates will have any impact on the Company.



The Company has not made a provision for foreign income or withholding taxes related to investments in foreign subsidiaries that are indefinitely reinvested. Any excess of the amount for financial reporting over the tax basis in these investments is not significant as of December 31, 2017.



Unrecognized Tax Benefits

A reconciliation of the beginning and ending amounts of unrecognized tax benefits are as follows (in thousands):





Included in the balance of unrecognized tax benefits at December 31, 2017, 2016, and 2015 are $7.2 million, $6 million, and $10.3 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. These amounts are primarily associated with uncertainty over qualifying research expenses that generate U.S. Federal research credits and U.S. transfer pricing charges to foreign affiliates. Also included in the balance of unrecognized tax benefits at December 31, 2017, 2016 and 2015 are $5.6 million, $4.4 million, and $3.7 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.



The Company recognizes interest and penalties related to tax benefits as income tax expense. As of December 31, 2017, 2016 and 2015, the Company accrued for the payment of income tax related interest and penalties $0.2 million, $0.2 million and $1.4 million, respectively. The amount of interest and penalty tax expense /or (benefit) was ($0.1) million, ($0.7) million and $0.4 million for the years ended December 31, 2017, 2016, and 2015, respectively.



The Company completed an IRS audit of tax year 2015 in the year 2017 which resulted in no tax adjustments. There are no further IRS audits scheduled. The U.S. statute of limitation extends to the 2008 tax year because the net operating loss carryforward deductions from this year have not been fully utilized. The Company is under audit in Germany for tax years 2013-2015. In October 2016, the German Federal Fiscal Court ruled against the Company's appeal of disallowed interest deductions taken in tax years 2004 and 2005. The court ruled the interest payments made by the Company’s German subsidiary to its parent were non-deductible dividends. The Company was fully reserved for its position. The Company believes appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.