SUPERIOR INDUSTRIES INTERNATIONAL INC

NOTE 14 - INCOME TAXES

Income before income taxes from domestic and international jurisdictions is comprised of the following:


Year Ended December 31,	2017			2016		2015
(Dollars in thousands)
Income before income taxes:
Domestic	$	(63,716	)	$	18,499	$	25,069
Foreign		64,582			36,222		10,214

	$	866		$	54,721	$	35,283

The provision for income taxes is comprised of the following:


Year Ended December 31,	2017			2016			2015
(Dollars in thousands)
Current taxes
Federal	$	6,121		$	(5,017	)	$	(10,900	)
State		(390	)		450			481
Foreign		(12,564	)		(10,639	)		(2,099	)

Total current taxes		(6,833	)		(15,206	)		(12,518	)

Deferred taxes
Federal		(4,387	)		(1,199	)		(961	)
State		1,492			(332	)		(576	)
Foreign		2,853			3,397			2,716

Total deferred taxes		(42	)		1,866			1,179

Income tax provision	$	(6,875	)	$	(13,340	)	$	(11,339	)

The following is a reconciliation of the U.S. federal tax rate to our effective income tax rate:


Year Ended December 31,	2017			2016			2015
Statutory rate		(35.0	)%		(35.0	)%		(35.0	)%
State tax provisions, net of federal income tax benefit		263.4			(6.3	)		3.8
Tax credits		88.9			0.6			0.9
Foreign income taxes at rates other than the statutory rate		1,206.6			11.7			2.3
Valuation allowance and other		(138.0	)		5.1			(5.6	)
Changes in tax liabilities, net		(11.3	)		0.5			6.4
Share based compensation		(61.5	)		(1.2	)		(4.4	)
Transaction costs		(372.2	)		—			—
Tax Reform		(1,918.7	)		—			—
Non taxable income		152.6			—			—
Other		31.3			0.2			(0.5	)

Effective income tax rate		(793.9	)%		(24.4	)%		(32.1	)%

Our effective income tax rate for 2017 was 793.9 percent. The effective tax rate was higher than the U.S. federal statutory rate primarily due to non-deductible acquisition costs related to the Uniwheels acquisition, and provisional estimates recorded for the transition tax on offshore earnings and a deferred tax expense resulting from the reduction of our deferred tax assets. The reduction in deferred tax assets was due to the change in the U.S. statutory federal income tax rate from 35% to 21% for years subsequent to 2017 arising from the newly enacted U.S. Tax Cuts and Jobs Act.

Our effective income tax rate for 2016 was 24.4 percent. The effective tax rate was lower than the U.S. federal statutory rate primarily as a result of income in jurisdictions where the statutory rate is lower than the U.S. rate and tax benefits due to the release of tax liabilities related to uncertain tax positions.

Our effective income tax rate for 2015 was 32.1 percent. The effective tax rate was lower than the U.S. federal statutory rate primarily as a result of net decreases in the liability for uncertain tax positions partially offset by the reversal of deferred tax assets related to share-based compensation shortfalls.

Tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred liabilities are as follows:


December 31,	2017			2016
(Dollars in thousands)
Deferred income tax assets:
Accrued liabilities	$	2,445		$	6,120
Hedging and foreign currency losses		2,034			9,475
Deferred compensation		8,628			11,723
Inventory reserves		2,954			3,563
Net loss carryforwards and credits		69,018			3,123
Competent authority deferred tax assets and other foreign timing differences		6,939			5,135
Other		(830	)		462

Total before valuation allowance		91,188			39,601
Valuation allowance		(7,634	)		(3,123	)

Net deferred income tax assets		83,554			36,478

Deferred income tax liabilities:
Intangibles, property, plant and equipment and other		(57,791	)		(11,268	)

Deferred income tax liabilities		(57,791	)		(11,268	)

Net deferred income tax assets	$	25,763		$	25,210

The classification of our net deferred tax asset is shown below:


December 31,	2017			2016
(Dollars in thousands)
Long-term deferred income tax assets	$	54,302		$	28,838
Long-term deferred income tax liabilities		(28,539	)		(3,628	)

Net deferred tax asset	$	25,763		$	25,210

Realization of any of our deferred tax assets at December 31, 2017 is dependent on the company generating sufficient taxable income in the future. The determination of whether or not to record a full or partial valuation allowance on our deferred tax assets is a critical accounting estimate requiring a significant amount of judgment on the part of management. In determining when to release the valuation allowance established against our deferred income tax assets, we consider all available evidence, both positive and negative. We perform our analysis on a jurisdiction by jurisdiction basis at the end of each reporting period. The increase in the valuation allowance of $4.5 million relates to State net operating loss carryforwards the company is not more likely than not to utilize prior to expiration, as well as, German loss carryforwards that are frozen under the Domination and Profit and Loss Transfer Agreement with UNIWHEELS AG.

The U.S. Tax Cuts and Jobs Act (“Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act, allows filers to use prior year methodologies or estimates of the anticipated current impact of the Act in the preparation of their 2017 financial statements. At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, it has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In all cases, the Company will continue to make and refine its calculations as additional data is gathered and further analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law and certain aspects of the Act are clarified by the taxing authorities. Any adjustments to these provisional amounts will be reported as a component of tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

We recognized the impact of the Act for the year ended December 31, 2017. The impact primarily consists of a $7.3 million related to re-measurement of U.S. deferred tax assets due to the lowering of the corporate tax rate described above and $9.3 million of expense for the estimate of the impact of one-time transition tax on the mandatory repatriation of earnings of foreign subsidiaries. The Company anticipates additional guidance and clarification regarding the implementation of the transition tax will be issued by federal and state taxing authorities and this estimate is, therefore, subject to future refinement.

As of December 31, 2017, we have cumulative U.S. state and Germany NOL carryforwards of $87.0 million that expire in the years 2018 to 2037. Also, we have $58.0 million of tax credit carryforwards, primarily in Poland, which expire in the years 2021 to 2026.

Historically, U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of the Company’s investment in its non-U.S. subsidiaries derived from foreign earnings that are indefinitely reinvested outside the U.S. At December 31, 2017, unremitted earnings of the $164.3 million have been included in the computation of the transition tax associated with the Act. The Company remains indefinitely reinvested with respect to its initial investment and any associated potential withholding tax on earnings of its non-U.S. subsidiaries subject to the transition tax, as well as with respect to future earnings that will primarily fund the operations of the subsidiary; however, the Company continues to evaluate its position under SAB 118.

We account for our uncertain tax positions in accordance with U.S. GAAP. A reconciliation of the beginning and ending amounts of these tax benefits is as follows:


Year Ended December 31,	2017			2016			2015
(Dollars in thousands)
Beginning balance	$	3,446		$	7,318		$	7,193
Increases (decreases) due to foreign currency translations		—			—			—
Increases (decreases) as a result of positions taken during:		—			—			—
Prior periods		—			(3,872	)		1,238
Current period		29,773			—			1,798
Settlements with taxing authorities		—			—			—
Expiration of applicable statutes of limitation		(165	)		—			(2,911	)

Ending balance ⁽¹⁾	$	33,054		$	3,446		$	7,318

⁽¹⁾	Increases in uncertain tax positions are primarily due to acquisition of UNIWHEELS AG. These uncertain tax positions offset certain deferred tax assets of UNIWHEELS AG.

Our policy regarding interest and penalties related to uncertain tax positions is to record interest and penalties as an element of income tax expense. At the end of 2017, 2016 and 2015 the company had liabilities of $2.4 million, $1.8 million and $2.1 million of potential interest and penalties associated with uncertain tax positions. Included in the unrecognized tax benefits is $1.8 million that, if recognized, would favorably affect our annual effective tax rate. Within the next twelve-month period we do not expect a decrease in unrecognized tax benefits.

Income tax returns are filed in multiple jurisdictions and are subject to examination by tax authorities in various jurisdictions where the Company operates. The Company has open tax years from 2013 to 2017 with various significant tax jurisdictions.