Entity information:

Note 13—Income Taxes

Income Tax Expense

The components of the income tax expense are:

 

     Year Ended December 31,  
     2017      2016      2015  
     (in thousands)  

Current:

         

Federal

    $ —        $ 23      $ 305  

State

      495        43        141  

Foreign

      2,638        4,386        7,619  
  

 

 

     

 

 

     

 

 

  

Total current

      3,133        4,452        8,065  
  

 

 

     

 

 

     

 

 

  

Deferred:

         

Federal

      (2,020 )       458        (5,456 ) 

State

      (8 )       419        (288 ) 

Foreign

      2,367        496        88  
  

 

 

     

 

 

     

 

 

  

Total deferred

      339        1,373        (5,656 ) 
  

 

 

     

 

 

     

 

 

  

Income tax expense

    $ 3,472      $ 5,825      $ 2,409  
  

 

 

     

 

 

     

 

 

  

 

 

The following table sets forth the components of income (loss) before income taxes:

 

     Year Ended December 31,  
     2017      2016      2015  
     (in thousands)  

Income (loss) before income taxes:

         

United States

    $ (15,019 )     $ (18,361 )     $ (27,741 ) 

Foreign

      2,294        12,889        13,490  
  

 

 

     

 

 

     

 

 

  
     $(12,725)      $(5,472)      $(14,251)  
  

 

 

     

 

 

     

 

 

  

Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35.0% to income (loss) before taxes as follows:

 

     Year Ended December 31,  
     2017      2016      2015  
     (in thousands)  

United States statutory federal income tax rate

    $ (4,454 )     $ (1,915 )     $ (4,988 ) 

Non-deductible expenses

      (294 )       290        131  

Non-taxable financial income and expense

      —          —          (1,498 ) 

Noncash compensation

      (30 )       761        349  

U.S. tax on foreign earnings, net of tax credits

      (1,283 )       587        50  

Changes in valuation allowances

      (5,956 )       6,681        10,358  

Tax credits

      (699 )       (4,403 )       410  

State taxes

      224        53        (130 ) 

Effect of operating in foreign jurisdictions

      2,101        1,818        1,216  

Deemed repatriation transition tax

      3,807        —          —    

Reduction of federal corporate tax rate

      8,190        —          —    

Changes in prior year estimates

      (26 )       293        (58 ) 

Changes in uncertain tax benefits

      1,798        1,243        (3,430 ) 

Revisions of deferred tax accounts

      (10 )       313        98  

Other

      104        104        (99 ) 
  

 

 

     

 

 

     

 

 

  

Income tax expense

    $ 3,472      $ 5,825      $ 2,409  
  

 

 

     

 

 

     

 

 

  

 

Deferred Tax Assets and Liabilities

The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities are as follows:

 

     December 31,  
     2017      2016  
     (in thousands)  

Deferred tax assets:

      

Net operating loss carryforwards

    $ 15,598      $ 16,474  

Federal, state and foreign tax credits

      17,833        21,972  

Depreciation and amortization

      13,009        17,907  

Unrealized loss on functional currency

      565        444  

Allowance for doubtful accounts

      704        1,390  

Accruals not currently deductible

      1,027        2,101  

Stock-based compensation

      812        1,012  

Intercompany Interest

      1,985        2,044  

Other

      351        78  

Valuation allowance

      (45,129 )       (50,298 ) 
  

 

 

     

 

 

  

Total deferred tax assets

      6,755        13,124  
  

 

 

     

 

 

  

Deferred tax liabilities:

      

Depreciation and amortization

      (605 )       (1,055 ) 

Tax on foreign earnings

      —          (2,140 ) 

Other

      (280 )       (142 ) 
  

 

 

     

 

 

  

Total deferred tax liabilities

      (885 )       (3,337 ) 
  

 

 

     

 

 

  

Net deferred tax assets

    $ 5,870      $ 9,787  
  

 

 

     

 

 

  

At December 31, 2017, on an as filed basis, the Company has U.S. domestic net operating loss carry forwards of approximately $9.0 million which will begin to expire in varying amounts in 2036, state net operating loss carry forwards of approximately $8.1 million which will expire in varying amounts beginning in 2023, and foreign net operating losses of $54.5 million of which almost all can be carried forward for an unlimited period. As of December 31, 2017, the Company, on an as filed basis, has U.S. domestic foreign tax credit carry forwards of $13.6 million which begin expiring in varying amounts in 2020. The amount reported on an as filed basis can differ from the amount recorded in the deferred tax assets of the Company’s financial statements due to the utilization or creation of assets in recording uncertain tax benefits.

In assessing deferred tax assets, the Company considers whether a valuation allowance should be recorded for some or all of the deferred tax assets which may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Among other items, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. As of December 31, 2017, a valuation allowance of $45.1 million had been recorded. $27.5 million related to US federal and local deferred tax assets, $11.4 million related to Norway assets, $4.2 million related to Australia assets, $1.9 million related to United Kingdom assets, and $0.1 million related to other insignificant foreign jurisdictions that were not more likely than not to be realized. While the Company expects to realize the remaining net deferred tax assets, changes in future taxable income or in tax laws may alter this expectation and result in future increases to the valuation allowance.

Previously the Company considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested, with the exception of its Qatar subsidiary, and accordingly recorded no deferred income taxes other than deferred income taxes related to Qatar. Prior to the Transition Tax, the Company had an excess of the amount for financial reporting over the tax basis in its foreign subsidiaries. While the Transition Tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis in its foreign subsidiaries and subjected undistributed foreign earnings to tax, an actual repatriation from its non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes.

 

As of December 31, 2017, the Company continues to consider the excess amount for financial reporting over the tax basis of investments in its foreign subsidiaries to be indefinitely reinvested outside the United States. This determination is based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and on its specific plan for reinvestment of the foreign subsidiaries’ undistributed earnings, with the exception of RigNet Qatar W.L.L. The Company has not provided for deferred taxes where the determination of any deferred taxes on the amount the Company considers indefinitely reinvested is not practicable.

The Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and has determined that it will be repatriating approximately $10.4 million from RigNet Qatar W.L.L. The Company has made a reasonable estimate of the tax effects of such repatriation, and determined that after the effects of the Transition Tax no additional liability should be recorded. Under SAB 118, we have provided a reasonable estimate of the Tax Act’s impact on its unremitted earnings. During the measurement period, the Company will continue to gather additional information to compute the full tax effects of the Tax Act on its unremitted earnings.

Because the Company has asserted that all foreign undistributed earnings, excluding Qatar’s earnings, are permanently reinvested, no provision is recorded for the deferred tax liability related to other comprehensive income.

Corporate Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21 percent, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, and (3) global intangible low taxed income (GILTI) that must be included in the gross income of the controlled foreign corporations (CFCs)’s U.S. shareholder.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. For various reasons that are discussed below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. If the Company was able to make reasonable estimates of the effects of elements for which its analysis is not yet complete, the Company recorded provisional adjustments. If the Company was not yet able to make reasonable estimates of the impact of certain elements, the Company has not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.

The Company’s accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:

Reduction of US Federal Corporate Tax Rate: The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. The Company has recorded a provisional decrease of $8.2 million to deferred tax expense for the year ended December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, its calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of its foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $3.8 million, of which the Company has current losses and foreign tax credits that will offset this obligation. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax.

 

Global Intangible Low Taxed Income (GILTI): The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by CFCs must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the period cost method) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the deferred method). At this point, the Company has not selected a method. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify the Company’s structure and/or the Company’s business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements.

Uncertain Tax Benefits

The Company evaluates its tax positions and recognizes only tax benefits that, more likely than not, will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized upon settlement. At December 31, 2017, 2016 and 2015, the Company’s uncertain tax benefits totaling $18.8 million, $21.8 million and $19.3 million, respectively, are reported as other liabilities in the consolidated balance sheets. Changes in the Company’s gross unrecognized tax benefits are as follows:

 

     Year Ended December 31,  
     2017      2016      2015  
     (in thousands)  

Balance, January 1,

    $ 13,244      $ 15,718      $ 15,454  

Additions for the current year tax

      —          794        1,501  

Additions related to prior years

      110        602        —    

Reductions related to settlements with taxing authorities

      —          (3,701 )       (154 ) 

Reductions related to lapses in statue of limitations

      (327 )       (169 )       (1,083 ) 

Reductions related to prior years

      (3,390 )       —          —    
  

 

 

     

 

 

     

 

 

  

Balance, December 31,

    $ 9,637      $ 13,244      $ 15,718  
  

 

 

     

 

 

     

 

 

  

As of December 31, 2017, the Company’s gross unrecognized tax benefits which would impact the annual effective tax rate upon recognition were $9.6 million. In addition, as of December 31, 2017, the Company has recorded related assets, net of a valuation allowance of $2.3 million. The related asset might not be recognized in the same period as the contingent tax liability and like interest and penalties does have an impact on the annual effective tax rate. The Company has elected to include income tax related interest and penalties as a component of income tax expense. As of December 31, 2017, 2016 and 2015, the Company has accrued penalties and interest of approximately $9.2 million, $8.8 million and $7.3 million, respectively. The Company has recognized $0.3 million, $1.6 million and $0.1 million of interest and penalties in income tax expense for the years ended December 31, 2017, 2016 and 2015, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, accruals will be reduced and reflected as a reduction to income tax expense.

The Company believes that it is reasonably possible that a decrease of up to $2.5 million in unrecognized tax benefits, including related interest and penalties, may be necessary within the coming year due to lapse in statute of limitations.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. All of the Company’s federal filings are still subject to tax examinations. With few exceptions, the Company is no longer subject to the foreign income tax examinations by tax authorities for years before 2007.