CISION LTD.

11. Income Taxes

For the years ended December 31, 2017, 2016 and 2015, the U.S. and foreign components of loss before income taxes were as follows:

(in thousands)	2017		2016		2015
U.S.	$	(134,132)	$	(140,443)	$	(60,980)
Foreign		499		(13,660)		(33,171)
Total loss before income taxes	$	(133,633)	$	(154,103)	$	(94,151)

For the years ended December 31, 2017, 2016 and 2015, the benefit from income taxes consisted of the following:

(in thousands)	2017		2016		2015
Current expense
Federal	$	2,052	$	419	$	570
State		3,892		1,260		714
Foreign		8,406		9,123		3,128
Total current expense		14,350		10,802		4,412
Deferred benefit
Federal		(16,204)		(54,550)		(2,442)
State		(364)		(5,805)		1,632
Foreign		(8,373)		(6,138)		(7,209)
Total deferred benefit		(24,941)		(66,493)		(8,019)
Total benefit from income taxes	$	(10,591)	$	(55,691)	$	(3,607)

The Company’s effective tax rate for the years ended December 31, 2017, 2016 and 2015 was a benefit of 7.9%, 36.1% and 3.8%, respectively. The Company is a Cayman entity with a 0% statutory tax rate with subsidiaries in various jurisdictions including the U.S., Canada, France, and the United Kingdom. The Company’s effective tax rate differed from the Cayman statutory rate as a result of the foreign statutory rates in each of its subsidiaries, as well as certain nondeductible expenses, including transaction costs, interest expense and stock-based compensation. In addition, differences were caused by U.S. state income taxes, as well as the need for valuation allowance for certain U.S. and United Kingdom deferred tax assets.

For the years ended December 31, 2017, 2016 and 2015, the Company’s effective tax rate was as follows:

	2017 %			2016 %			2015 %
Income tax at Cayman Islands statutory rate		0.0			0.0			0.0
State income taxes, net of U.S. federal benefit		(0.8)			1.9			(2.2)
Expense from different foreign tax rates		37.5			34.1			28.1
Change in valuation allowance		(13.8)			10.2			(17.2)
Nondeductible expenses		(4.8)			(9.7)			(5.2)
Tax Act		(8.9)			—			—
Other		(1.3)			(0.4)			0.3
Effective tax rate		7.9	%		36.1	%		3.8	%

The Company’s deferred tax components consisted of the following at December 31, 2017 and 2016:

(in thousands)	2017		2016
Deferred tax assets
Net operating loss carryforwards	$	41,303	$	42,206
Allowance for doubtful accounts		915		2,043
Accrued expenses		2,899		6,936
Deferred interest		51,817		47,943
Deferred revenue		2,537		2,526
Transaction costs		2,218		3,215
Tax credits		5,750		4,065
Other		6,143		4,008
Total deferred tax assets		113,582		112,942
Valuation allowance		(46,666)		(3,437)
Net deferred tax assets		66,916		109,505
Deferred tax liabilities
Capitalized software development costs		(4,410)		(5,707)
Fixed assets		(13)		(3,075)
Goodwill and intangible assets		(113,246)		(182,251)
Deferred financing costs		(10,304)		—
Other		(1,560)		(1,681)
Total deferred tax liabilities		(129,533)		(192,714)
Net deferred tax liability	$	(62,617)	$	(83,209)
Disclosed as
Deferred tax asset – long-term	$	—	$	—
Deferred tax liability – long-term		(62,617)		(83,209)
Net deferred tax liability – long-term	$	(62,617)	$	(83,209)

On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things.

Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission issued SAB 118, which requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act to the extent such reasonable estimate has been determined. Accordingly, the Company recorded the following reasonable estimates of the tax impact in its consolidated financial statements as of and for the year ended December 31, 2017.

A provisional tax expense of $5.5 million, including $2.1 million of associated withholding taxes, for the Tax Act’s one-time transition tax on the Company’s Canadian subsidiaries’ accumulated, unremitted earnings dating back to 1986.

A provisional tax expense of $6.4 million to the net change in deferred tax liabilities due to the reduction of the U.S. federal tax rate from 35% to 21% net of the additional valuation allowance required as a result of the new limitations on interest deductibility.

The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The Company will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.

The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimate due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits and foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable estimate.

Pursuant to SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Accordingly, the Company accrued the transition tax and to the net change in deferred tax liabilities including additional valuation allowance based on the reasonable estimate guidance. The Company will continue to refine its estimate of the impact of the U.S. Tax Act and will record any resulting tax adjustments during the year ended December 31, 2018. Additionally, the Company currently believes it will use its net operating loss carryforwards to offset the transition tax, exclusive of the Canadian withholding tax.

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 deductible. The Company assessed the realizability of deferred tax assets and whether it is more likely than not that a portion, or all, of the deferred tax assets can be realized. Management considers the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. During 2015, management concluded that a valuation allowance was required for the U.S. Federal deferred tax assets, net of federal deferred tax liabilities excluding deferred tax liabilities relating to indefinite lived intangibles. In 2016, management concluded that the valuation allowance on the U.S. federal deferred tax assets was no longer required as a result of the deferred tax liabilities established in the acquisition of PR Newswire. The reversal of such deferred tax liabilities will allow for the realizability of the U.S. deferred tax assets. In 2017, management concluded that a valuation allowance of $26.8 million was required for U.S. federal interest expense carryforwards under Internal Revenue Code Section 163(j) and for $0.7 million of interest expense carryforwards under United Kingdom tax law. The remaining $19.2 million of the valuation allowance is for foreign net operating losses for entities that have cumulative losses.

At December 31, 2017, the Company has not provided for income taxes on $42.0 million of undistributed earnings of its foreign subsidiaries, other than certain Canadian subsidiaries, as the earnings are considered permanently reinvested. As part of the Tax Act (as discussed above), the U.S. Company accrued a $5.5 million transition tax related to its Canadian subsidiaries. This amount includes an estimated $2.1 million of Canadian withholding taxes on the future repatriation of cash from Canada to the U.S. The U.S. does not currently have accumulated earnings and profits and the majority of the other foreign jurisdictions can generally distribute their earnings to the Company without additional taxation. Accordingly, the Company has determined that the deferred tax liability associated with a distribution of the undistributed earnings would be immaterial.

As of December 31, 2017, the Company has net operating loss carryforwards for federal and state tax purposes of approximately $86.2 million and $47.9 million, respectively, which will expire between 2031 and 2036. The Company also has $1.4 million of federal and state tax credits that will expire at varying times between 2025 and 2033. The Company has $2.3 million of federal alternative minimum tax credits that it now expects to have refunded over the next 4 years as a result of the Tax Act. The Company has foreign net operating losses of $79.6 million of which the majority do not expire.

Certain of the Company’s federal and state NOL carryforwards are subject to annual limitations under Section 382 of Internal Revenue Code. Based on the purchase price for the U.S. companies, the limitations imposed under Section 382 will not preclude the Company from realizing these NOLs.

The following table presents changes in unrecognized tax benefits:

(in thousands)	2017		2016		2015
Beginning balance	$	2,944	$	2,634	$	2,224
Additions based on tax provisions related to the current year		903		210		410
Additions based on tax positions related to prior years		—		100		—
Reductions to tax positions of prior years		(111)		—		—
Reductions for expiration of statute of limitations		—		—		—
Settlements		—		—		—
Ending balance	$	3,736	$	2,944	$	2,634

Company recognizes the effects of uncertain income tax positions only if those positions are more likely than not of being sustained. The Company has recorded a liability for uncertain tax positions associated primarily with tax credits and transfer pricing in the amount of $3.7 million and $2.9 million as of December 31, 2017 and 2016, respectively.

The Company does not expect unrecognized tax benefits to change significantly over the next twelve months, and the entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the consolidated financial statements as a component of the income tax provision, and has accrued $1.1 million for interest and penalties as of December 31, 2017. The current year reduction of $0.1 million is related to the rate reduction in the Tax Act. The Company files income tax returns in the U.S. and various states, the United Kingdom, Canada, France and other foreign jurisdictions and is subject to U.S. federal, state, and foreign tax examinations for years ranging from 2011 to 2017.