Gaming Partners International CORP

Note 18. Income Taxes

New tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. As such, January 1, 2018 would be the first day of the taxable year for purposes of applying the effective date of the new tax legislation for provisions which are applicable to tax years beginning after December 31, 2017. New tax legislation provisions that are applicable for the tax year ended December 31, 2017 have been accounted for within the current period ended December 31, 2017.

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.

The Company has determined a reasonable estimate related to the reduction in the U.S. corporate income tax rate to 21%, which resulted in the Company reporting additional income tax expense of $0.3 million as a result of the Tax Act. This increase in tax expense is comprised of $0.3 million of deferred tax expense due to the remeasurement of deferred tax assets at the 21% tax rate, and $1.4 million of additional tax expense related to a one-time transition tax which is completely offset by associated deferred tax assets for foreign tax credits. The provisional amount could be impacted by the Company’s assessment of 100% bonus depreciation for qualified assets placed in service after September 27, 2017. A reasonable estimate cannot yet be made with respect to the global intangible low-taxed income (“GILTI”) in accordance with the enactment of the Tax Act. The Company requires additional time to analyze the impacts of the legislative change.

The following table provides an analysis of our provision for income taxes for the years ended December 31 (in thousands):

	2017		2016
Current:
U.S. Federal	$	(47)	$	1,035
U.S. State		182		43
Foreign		494		619
Total Current		629		1,697

Deferred:
U.S. Federal		759		666
U.S. State		48		59
Foreign		379		(79)
Total Deferred		1,186		646
Income tax provision (benefit)	$	1,815	$	2,343

Income before income taxes consisted of the following for the years ended December 31 (in thousands):

	2017		2016
Foreign	$	5,185	$	4,532
United States		256		2,994
Income before income taxes	$	5,441	$	7,526

A reconciliation of our income tax expense as compared to the tax expense calculated by applying the statutory federal tax rate to income before income taxes for the years ended December 31 is as follows:

	2017			2016
Computed expected income tax expense		34.0	%		34.0	%
State income taxes, net of federal benefits		1.2	%		1.0	%
Subpart F income adjustment		7.4	%		8.6	%
Foreign rate differential (excluding research credit)		(13.3)	%		(10.2)	%
Impact of the Tax Act		5.2	%		-
French research and low wage credit		(4.3)	%		(3.0)	%
Other, net		3.1	%		0.7	%
Income tax expense		33.4	%		31.1	%

The primary components of net deferred income tax assets at December 31 are as follows (in thousands):

	2017		2016
Deferred tax assets:
Tax credits	$	2	$	1,549
Property and equipment		-		357
Stock compensation		371		557
French deferred assets		367		410
Bad debt reserves and inventory		608		774
Accrued Expenses		188		321
Operating loss carry forwards		-		7
Other		6		16
Total deferred tax assets		1,542		3,991

Deferred tax liabilities:
Excess book basis in shares of GPI-SAS	$	-	$	1,547
French deferred liabilities		246		262
Property and equipment		80		-
Intangible assets		541		603
Total deferred tax liabilities		867		2,412
Deferred tax assets, net	$	675	$	1,579

We adopted FASB ASU No. 2016-09, regarding several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, in the current period on a prospective basis. As a result of the Company’s application of ASU No. 2016-09, certain excess tax benefits at the time of exercise are recognized as income tax benefits, while tax deficiencies of an option at the time of exercise or expiring unexercised are recognized as income tax expense in the statement of income. As of December 31, 2017, the adoption of ASU No. 2016-09 has not materially impacted our consolidated financial statements.

Unrepatriated earnings were approximately $6.2 million as of December 31, 2017. Except for the $2.0 million earnings from GPI SAS, these unrepatriated earnings are considered permanently reinvested, since it is management’s intention to reinvest these foreign earnings in future operations. We project that we will have sufficient cash flow in the U.S. and will not need to repatriate the foreign earnings from GPI Asia to finance U.S. operations. Except for the deemed dividends under Section 956 in 2015 and under Subpart F, we continue to assert that earnings from GPI Asia will be permanently reinvested.

We are subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, the tax years 2014 through 2017 remain open to examination under the statute of limitations by the U.S. Internal Revenue Service and various states for GPIC and GPI USA, by the French Tax Administration for GPI SAS, and by the Government of the Macau Special Administrative Region - Financial Services Bureau for GPI Asia. In 2015, the French Tax Administration started an examination of GPI SAS for tax years 2013 and 2012 that is on-going. In the first quarter of 2018, in connection with the FTA’s examination of GPI SAS for tax years 2013 and 2012, GPI paid €1.4 million to the FTA. While we were legally obligated to pay this amount, which represents the FTA’s calculation of the taxes owed, this payment does not represent a settlement nor the end of the examination and we are actively disputing the findings of the FTA. In addition to the on-going French Tax Administration examination of GPI SAS for tax years 2013 and 2012, the Company received notification in August 2017, of a federal income tax examination by the Internal Revenue Service for the 2015 tax year.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, including estimated interest and penalties, is as follows (in thousands):

	2017		2016

Balance at beginning of year	$	258	$	241
Foreign currency translation		36		17
Balance at end of year	$	294	$	258

All of the liability as of December 31, 2017 would affect our effective tax rate if recognized and amounts of interest and penalties are not expected to be significant. We anticipate that the balance of the unrecognized tax benefits will be eliminated within the next twelve months.