NOTE 8 — INCOME TAXES
The Company (a “C” Corporation) provides for income taxes based on the Federal and state statutory rates on taxable income. U.S. and foreign components of income before incomes taxes for the years ended December 31, 2017, 2016 and 2015 are presented below:
| For the years ended December 31, | ||||||||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||
| Domestic | $ | (10,423 | ) | $ | (8,696 | ) | $ | (3,700 | ) | |||
| Foreign | 12,896 | 10,555 | 20,793 | |||||||||
| Total | $ | 2,473 | $ | 1,859 | $ | 17,093 | ||||||
The income tax provisions at December 31, 2017, 2016 and 2015 are comprised of the following:
| For the years ended December 31, | ||||||||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||
| Current | ||||||||||||
| Federal | $ | (15 | ) | $ | - | $ | (38 | ) | ||||
| State | 529 | 51 | (3 | ) | ||||||||
| Foreign - Other | 1,062 | 164 | 805 | |||||||||
| Total current | 1,576 | 215 | 764 | |||||||||
| Deferred | ||||||||||||
| Federal | 8,168 | (3,015 | ) | (3,140 | ) | |||||||
| State | 242 | (426 | ) | (247 | ) | |||||||
| Foreign - Other | 16 | 26 | (26 | ) | ||||||||
| Total deferred | 8,426 | (3,415 | ) | (3,413 | ) | |||||||
| Income tax expense (benefit) | $ | 10,002 | $ | (3,200 | ) | $ | (2,649 | ) | ||||
The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, transitions the U.S international taxation from a worldwide tax system to a territorial system, and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion tax, respectively. In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.
One-time transition tax
The Tax Act requires us to increase our U.S. taxable income for accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability as a reduction of net operating loss carryforwards totaling $14.5 million. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
Deferred tax effects
The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, we have remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax benefit of $1.8 million to reflect the reduced U.S. tax rate and other effects of the Tax Act. Although the tax rate reduction is known, we have not collected the necessary data to complete our analysis of the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional.
The net tax expense recognized in 2017 related to the Tax Act was $12.7 million. As we complete our analysis of the Tax Act and incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we may identify additional effects not reflected as of December 31, 2017.
A reconciliation of the U.S. federal statutory income tax (benefit) expense to the Company’s effective income tax provision is as follows:
| For the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Tax provision at statutory rate – federal | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| U.S. tax reform toll charge | 562.2 | % | 0.0 | % | 0.0 | % | ||||||
| Tax rate change deferred revaluation | (63.3 | %) | 0.0 | % | 0.0 | % | ||||||
| Tax provision at effective state and local rates | 23.9 | % | (21.1 | %) | (1.5 | %) | ||||||
| Foreign tax rate differential | (158.3 | %) | (216.4 | %) | (46.5 | %) | ||||||
| GAAP gain on transfer of assets | 0.0 | % | 0.0 | % | (15.3 | %) | ||||||
| Transaction costs | 0.0 | % | 0.0 | % | 8.3 | % | ||||||
| Subpart F income | 0.0 | % | 0.0 | % | 5.2 | % | ||||||
| Nondeductible expenses | 6.5 | % | 51.7 | % | 0.0 | % | ||||||
| Uncertain tax provisions | 1.2 | % | 0.2 | % | 0.2 | % | ||||||
| Valuation allowance | 2.8 | % | 22.1 | % | 0.6 | % | ||||||
| Prior period adjustments | 11.2 | % | (37.7 | %) | 0.0 | % | ||||||
| Stock compensation | (9.5 | %) | 0.0 | % | 0.0 | % | ||||||
| Tax credits | (7.3 | %) | 0.0 | % | 0.0 | % | ||||||
| Other | 0.0 | % | (5.9 | %) | (1.5 | %) | ||||||
| Total effective income tax rate | 404.4 | % | (172.1 | %) | (15.5 | %) | ||||||
The Company, through its subsidiaries and affiliated entities in the U.S., the Cayman Islands, Ecuador and Australia are subject to US Federal, US state, Ecuadorian Federal and Australian Federal income taxes. The Cayman Islands do not impose federal or local income taxes.
Deferred tax assets (liabilities) as of December 31, 2017 and 2016 are comprised of the following:
| As of December 31, | ||||||||
| (In thousands) | 2017 | 2016 | ||||||
| Net operating loss carryforward | $ | 16,292 | $ | 15,032 | ||||
| Property and equipment | (8,880 | ) | (236 | ) | ||||
| Valuation allowance | (8,863 | ) | (8,795 | ) | ||||
| Stock-based compensation | 9 | 124 | ||||||
| Intangibles | (1,022 | ) | (1,923 | ) | ||||
| Other | 20 | (84 | ) | |||||
| Deferred tax (liabilities) assets | $ | (2,444 | ) | $ | 4,118 | |||
The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers: (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; (iii) taxable income in prior carryback year(s) if carryback is permitted under applicable tax law; and (iv) tax planning strategies. As of December 31, 2017, the Company had deferred tax assets related to Australian loss carryforwards of approximately $22.7 million and capital loss carryforwards of $6.8 million, which may be carried forward indefinitely. The Company also had deferred tax assets related to U.S. loss carryforwards of $26.8 million, which begin to expire in 2027. The timing and manner in which the Company will utilize the net operating loss carryforwards in any year, or in total, may be limited in the future as a result of changes in the Company’s ownership and any limitations imposed by the jurisdictions in which the Company operates.
As a result of the transition to the territorial tax regime effectuated by the Tax Act described above, any potential dividends from our foreign subsidiaries would no longer be subject to tax in the United States. We continue to assert our prior position regarding the repatriation of historical foreign earnings from our Ecuadorian and Australian subsidiaries. We currently have no intention to remit any additional undistributed earnings of our Ecuadorian and Australian subsidiaries in a taxable manner. We no longer remain permanently reinvested in the earnings of our Cayman subsidiary. No taxes have been accrued as a result of this change because no taxes are expected to be imposed by either the United States or the Cayman Islands upon such a remittance.
The Company is subject to income taxes in the U.S. and various state and foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to these liabilities.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits and does not include related interest and penalties for the years ended December 31, 2017, 2016 and 2015:
| For the years ended December 31, | ||||||||||||
| (In thousands) | 2017 | 2016 | 2015 | |||||||||
| Beginning of year | $ | 447 | $ | 473 | $ | 447 | ||||||
| Current year positions | - | (26 | ) | 26 | ||||||||
| Prior year positions | (26 | ) | - | - | ||||||||
| End of year | $ | 421 | $ | 447 | $ | 473 | ||||||
The amount of uncertain tax positions that, if recognized, would impact the effective tax rate at December 31, 2017 and 2016 was $0.3 million. Any changes in the next twelve months are not anticipated to have significant impact on the results of operations, financial position or cash flows of the Company.
The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2017, 2016 and 2015, interest and penalties included in income tax expense were not significant.
The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. Currently, there are no U.S. federal, state or foreign jurisdiction tax audits pending. The Company’s corporate U.S. federal and state tax returns for the current year and the three prior years remain subject to examination by tax authorities and the Company’s foreign tax returns for the current year and the four prior years remain subject to examination by tax authorities.