Entity information:

17. Income Taxes

The Company’s income tax expenses are composed of domestic and foreign income taxes depending on the relevant tax jurisdictions. Domestic income (loss) before taxes and income tax expenses are generated or incurred in the United States, where the parent company resides.

 

The components of income tax expense are as follows (in thousands):

 

     Year Ended December 31,  
     2017     2016     2015  

Income (loss) before income taxes

       

Domestic

    $ 27,461     $ (1,738 )    $ 32,903  

Foreign

      58,630       (24,133 )      (132,857 ) 
  

 

 

    

 

 

    

 

 

  
   $ 86,091     $ (25,871 )    $ (99,954 ) 
  

 

 

    

 

 

    

 

 

  

Current income taxes expense (benefit)

       

Domestic

    $ (359 )    $ (6 )    $ 25  

Foreign

      3,680       3,386       (14,301 ) 

Uncertain tax position liability (domestic)

      (476 )      12       10  

Uncertain tax position liability (foreign)

      (1,635 )      339       (1,220 ) 
  

 

 

    

 

 

    

 

 

  
     1,210       3,731       (15,486 ) 
  

 

 

    

 

 

    

 

 

  

Deferred income taxes expense (benefit)

       

Foreign

      (55 )      13       399  
  

 

 

    

 

 

    

 

 

  

Total income tax expense (benefit)

    $ 1,155     $ 3,744     $ (15,087 ) 
  

 

 

    

 

 

    

 

 

  

Effective tax rate

      1.3 %      (14.5 )%      15.1 % 
  

 

 

    

 

 

    

 

 

  

The differences between the annual effective tax rates and the U.S. federal statutory rate of 35.0% primarily result from the non-income based withholding tax attributable to intercompany interest income of the Company’s Dutch subsidiary, application of lower tax rates associated with certain earnings from the Company’s operations outside the U.S., the parent Company’s interest income, which is non-taxable for US tax purposes and the change of deferred tax assets and valuation allowance. The statutory income tax rate of the Company’s Korean operating subsidiary was approximately 24.2% in 2017, 2016 and 2015.

The decrease in income tax expense in 2017 was primarily attributable to a decrease in the Company’s uncertain tax positions. The significant increase in income tax expense in 2016 is related to the reversal of withholding tax payable with respect to the waiver of the accrued interest on the loans granted to our Korean subsidiary by our Dutch subsidiary in 2015. The Company’s Korean and Dutch subsidiaries agreed that the Company’s Dutch subsidiary waived and released a partial amount of unpaid interest of $174 million on its intercompany loans granted to the Company’s Korean subsidiary in order to decrease the cumulative losses of the Company’s Korean subsidiary to enhance the subsidiary’s credit standing under the local banking rules. This transaction created a taxable income for the Company’s Korean subsidiary but did not result in a liability because of the utilization of expired loss carryforwards, which is deductible only against gains from cancellation of debt. The loss was not tax deductible for the Company’s Dutch subsidiary. This transaction also resulted in taxable loss for the Company’s Luxemburg subsidiary and this tax benefit was offset by an increase in the change in valuation allowance. In connection with the waiver of unpaid interest, the related withholding tax was reversed, resulting in the recognition of income tax benefit of $17.8 million as of December 31, 2015.

 

The provision for domestic and foreign income taxes incurred is different from the amount calculated by applying the statutory tax rate to the net income before income taxes. The significant items causing this difference are as follows (in thousands):

 

     Year Ended December 31,  
     2017      2016      2015  

Provision computed at statutory rate

    $ 30,223      $ (9,055 )     $ (34,984 ) 

Change in statutory tax rates

      13,438        —        —  

Difference in foreign tax rates

      (12,344 )       1,995        24,359  

Permanent differences

         

Derivative assets adjustment

      1,937        (149 )       (143 ) 

TPECs, hybrid and other interest

      (7,526 )       (10,353 )       (27,273 ) 

Permanent impairment

      —        —        (62,334 ) 

Thin capitalization

      1,888        2,120        2,457  

Permanent foreign currency gain (loss)

      (838 )       (54 )       11,575  

Penalty

      4,001        689        —  

Non-deductible bad debt expense

      —        —        89  

Other permanent differences

      633        50        (69 ) 

Withholding tax

      3,339        3,092        (14,457 ) 

Foreign exchange rate adjustment

      16,075        (1,838 )       (8,954 ) 

Change in valuation allowance

      (56,744 )       10,095        95,757  

Tax credits claimed

      (659 )       (706 )       (875 ) 

Tax credits expired

      2,638        1,578        —  

Uncertain tax positions liability

      (2,111 )       351        (1,211 ) 

Change in net operating loss carry-forwards

      6,878        —        —  

Others

      327        5,929        976  
  

 

 

     

 

 

     

 

 

  

Income tax expense (benefit)

    $ 1,155      $ 3,744      $ (15,087 ) 
  

 

 

     

 

 

     

 

 

  

The tax expense of $13,438 thousand in 2017 due to change in statutory tax rates was primarily related to a remeasurement of deferred tax assets and liabilities using the reduced U.S. federal statutory rate of 21.0% from 35.0% effective January 1, 2018. For further description of the rate change, see “United States Tax Reform” below.

The $4,001 thousand tax impact of the penalty in 2017 was related to the $3,000 thousand civil penalty imposed by the SEC as discussed in Note 19, “Commitments and Contingencies—SEC Enforcement Staff Review”, and certain taxes and penalties assessed by the KNTS as a result of a tax audit as discussed in “Other Matter” below. The change in net operating loss carry-forwards of $6,878 thousand in 2017 was attributable to the Company’s revised tax positions, which primarily related to periods with respect to which the Company previously restated its financial statements as a result of the independent investigation commenced by the Company’s Audit Committee in January 2014 (the “Restatement”).

The permanent differences above include non-taxable Tracking Preferred Equity Certificates (TPECs) and interest income from other financial instruments for US tax purposes and non-deductible interest expense according to the thin capitalization rule for Korean tax purposes. The permanent impairment of $62,334 thousand in 2015 was related to the loss recognized by the Company’s Luxemburg subsidiary in connection with the cancellation of debt as described above, which was not recognized for US tax purposes.

 

A summary of the composition of net deferred income tax assets (liabilities) as of December 31, 2017 and 2016 are as follows (in thousands):

 

     Year-Ended December 31,  
     2017      2016  

Deferred tax assets

      

Inventory reserves

    $ 1,630      $ 1,822  

Derivative assets

      (1,253 )       110  

Accrued expenses

      2,826        2,803  

Product warranties

      52        113  

Other reserves

      356        372  

Property, plant and equipment

      9,759        13,314  

Intangible assets

      35        103  

Accumulated severance benefits

      36,245        31,478  

Foreign currency translation losses

      20,067        53,130  

NOL carry-forwards

      175,543        167,590  

Tax credit

      20,583        20,249  

Other long-term payable

      1,801        2,079  

Others

      3,546        4,885  
  

 

 

     

 

 

  

Total deferred tax assets

      271,190        298,048  

Less: Valuation allowance

      (251,132 )       (281,473 ) 
  

 

 

     

 

 

  
     20,058        16,575  
  

 

 

     

 

 

  

Deferred tax liabilities

      

Foreign currency translation gains

      18,187        14,338  

Prepaid expense

      1,464        1,644  

Others

      143        410  
  

 

 

     

 

 

  

Total deferred tax liabilities

      19,794        16,392  
  

 

 

     

 

 

  

Net deferred tax assets

    $ 264      $ 183  
  

 

 

     

 

 

  

Reported as

      

Current deferred income tax assets

    $ —      $ 37  

Non-current deferred income tax assets

    $ 264      $ 193  

Current deferred income tax liabilities

    $ —      $ (46 ) 

Non-current deferred income tax liabilities

    $ —      $ (1 ) 

The valuation allowances at December 31, 2017 and 2016 are primarily attributable to deferred tax assets for the uncertainty in taxable income at certain of the Company’s foreign subsidiaries, including its Korean operating subsidiary.

 

Changes in valuation allowance for deferred tax assets for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):

 

     Year Ended December 31,  
     2017      2016      2015  

Beginning balance

    $ 281,473      $ 279,867      $ 194,739  

Charged to expense

      (54,816 )       10,095        95,757  

NOL/tax credit claimed/expired

      (1,928 )       (872 )       (1,197 ) 

Translation adjustments

      26,403        (7,617 )       (9,432 ) 
  

 

 

     

 

 

     

 

 

  

Ending balance

    $ 251,132      $ 281,473      $ 279,867  
  

 

 

     

 

 

     

 

 

  

The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate future taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in which the Company operates and the overall future industry outlook.

As of December 31, 2017, 2016 and 2015, the Company had net deferred tax assets of $264 thousand, $183 thousand and $171 thousand, respectively, related to the Company’s Japanese subsidiary. As of December 31, 2017, 2016 and 2015, the Company recorded a valuation allowance of $251,132 thousand, $281,473 thousand and $279,867 thousand on its deferred tax assets related to temporary differences, net operating loss carry-forwards and tax credits of domestic and foreign subsidiaries. The Company recorded these valuation allowances on deferred tax assets based on its assessment that the negative evidence of expected losses in early future years outweighs the positive evidence of historical income.

As of December 31, 2017, the Company had approximately $770,233 thousand of net operating loss carry-forwards available to offset future taxable income, of which $281,383 thousand is associated with the Company’s Korean subsidiary, which expires in part at various dates through 2026. The net operating loss of $310,975 thousand associated with the Company’s Luxembourg subsidiary is mainly attributable to certain expenses incurred in connection with its shareholding in the Company’s Dutch subsidiary. Although this net operating loss amount is carried forward indefinitely, it will be recaptured on future capital gain. The remaining net operating loss mainly relates to the US parent company and its domestic subsidiary, which expires in part at various dates through 2037. The Company utilized net operating loss of $417 thousand, $279 thousand and $121 thousand, for the years ended December 31, 2017, 2016 and 2015, respectively. The Company also has Korean, Dutch and U.S. tax credit carry-forwards of approximately $5,639 thousand, $14,936 thousand and $9 thousand, respectively, as of December 31, 2017. The Korean tax credits expire at various dates starting from 2018 to 2022, and the Dutch tax credits are carried forward to be used for an indefinite period of time.

United States Tax Reform

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act in the U.S. was enacted (the “Tax Reform”). The Tax Reform reduces the U.S. federal statutory rate to 21.0% from 35.0% effective January 1, 2018. The Tax Reform contains several key provisions that might affect the Company’s assessment on its deferred taxes as of December 31, 2017, which include the remeasurement of deferred taxes, recognition of liabilities for taxes on mandatory deemed repatriation and certain other foreign income, and reassessment of the realizability of deferred tax assets. ASC 740 requires that the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.

As of December 31, 2017, the Company remeasured its deferred tax assets and liabilities at the reduced rate of 21.0%, assessed the realizability of remeasured deferred tax assets, which resulted in a reduction of its net deferred tax assets by $13,438 thousand. However, there was no net impact on the Company’s income tax expense due to a full allowance against the deferred tax assets. In addition, the Company recorded a tax benefit of $381 thousand due to certain minimum tax amounts being refundable under the Tax Reform. The Company is currently evaluating the newly enacted rule relating to the mandatory deemed repatriation tax.

Uncertainty in Income Taxes

The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income- or non-income tax examinations by tax authorities of these jurisdictions for all open tax years.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of each period is as follows (in thousands):

 

     Year Ended December 31,  
     2017     2016     2015  

Unrecognized tax benefits, balance at the beginning

    $ 2,459     $ 2,139     $ 3,495  

Additions based on tax positions related to the current year

      10       371       351  

Additions (reductions) for tax positions of prior years

      (676 )      317       (135 ) 

Lapse of statute of limitations

      (735 )      (670 )      (1,318 ) 

Additions (reductions) of interest and penalties

      (712 )      334       (108 ) 

Translation adjustments

      137       (32 )      (146 ) 
  

 

 

    

 

 

    

 

 

  

Unrecognized tax benefits, balance at the ending

    $ 483     $ 2,459     $ 2,139  
  

 

 

    

 

 

    

 

 

  

For the year ended December 31, 2017, the Company recorded $676 thousand income tax benefit by reversing a withholding tax payable related to interests on intercompany balances as a result of the tax audit as discussed in “Other Matter” below. The Company also recorded a reduction of $712 thousand of interest and penalties in 2017, primarily due to a change in certain tax regulations at the Company’s subsidiary in Taiwan. Total interest and penalties accrued as of December 31, 2017, 2016 and 2015 were $8 thousand, $691 thousand and $359 thousand, respectively.

 

A tabular reconciliation of the total amounts of uncertain tax positions at the beginning and end of each period is as follows (in thousands):

 

     Year Ended December 31,  
     2017     2016     2015  

Uncertain tax positions, balance at the beginning

    $ 11,894     $ 13,330     $ 14,969  

Additions based on tax positions related to the current year

      (366 )      942       1,789  

Additions (reductions) for tax positions of prior years

      (8,923 )      317       —  

Lapse of statute of limitations

      (2,218 )      (2,380 )      (2,142 ) 

Translation adjustments

      675       (315 )      (1,287 ) 
  

 

 

    

 

 

    

 

 

  

Uncertain tax positions, balance at the ending

    $ 1,062     $ 11,894     $ 13,330  
  

 

 

    

 

 

    

 

 

  

Other Matter

In September 2017, the Company’s Korean subsidiary was notified that the KNTS would be examining its income- and non-income-based taxes for its 2012 to 2014 tax years. The KNTS conducted its audit, primarily focusing on non-income-based VAT transactions associated with the Restatement periods.

As a result, the aggregate tax and penalty assessment by the KNTS was $6,030 thousand, of which $3,336 thousand had already been accrued by the Company in its financial statements in connection with the Restatement filed in 2015. Such amount also included $548 thousand related to employee withholding amounts and associated penalties, and to the extent any such tax obligation was that of the Company’s Korean subsidiary’s employees, the Company expects to seek reimbursement of the applicable amounts from those employees. In addition, KNTS assessed an administrative fine of $2,034 thousand in connection with the above-described tax audit.

During the fourth quarter of 2017, the Company recorded the $4,179 thousand related to this additional tax assessment and associated penalties and administrative fine as selling, general and administrative expenses in its consolidated statements of operations for the year ended December 31, 2017 and recorded the $548 thousand related to employee withholding amounts as other receivables in our consolidated balance sheets as of December 31, 2017 as the Company expects to seek reimbursement of the applicable amounts from those employees.