Entity information:
19. Income Taxes

In December 2017, the U.S. President signed into law the Tax Act, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing the transition tax on certain accumulated earnings and profits of foreign corporate subsidiaries that may electively be paid over eight years, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. For the year ended December 31, 2017, the provisions of the Tax Act that most significantly affected our Company included the reduction in the corporate income tax rate and the transition tax.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 to (i) clarify certain aspects of accounting for income taxes under ASC 740 in the reporting period the Tax Act was signed into law when information is not yet available or complete and (ii) provide a measurement period up to one year to complete the accounting for the Tax Act. As of December 31, 2017, we had not completed our accounting for the Tax Act; however, in certain cases, as described below, we made reasonable estimates of the effects of the Tax Act on our existing deferred income tax balances and the transition tax and recorded an aggregate provisional tax expense of $408.1 million for the year ended December 31, 2017. In other cases, we were not able to make a reasonable estimate of such tax effects and continued to account for the affected items, including state income taxes to the extent there is uncertainty regarding conformity to the federal tax system, based on previous tax laws.

As a result of the Tax Act, we remeasured certain deferred tax assets and liabilities based on the tax rate applicable to when the temporary differences are expected to reverse, which is generally 21%. However, we continue to evaluate certain aspects of the Tax Act, which could potentially affect the remeasurement of these deferred tax balances and result in additional tax expense. For the year ended December 31, 2017, the provisional tax expense related to the remeasurement of our deferred tax assets and liabilities was $6.6 million.

The transition tax was based on our total post-1986 foreign earnings and profits, which we previously deferred from U.S. income taxes. For the year ended December 31, 2017, we recorded a provisional transition tax of $401.5 million. After the utilization of existing tax credits and current year tax losses, we expect to pay U.S. federal taxes of approximately $101.3 million for the transition tax, which we will elect to pay over an eight-year period. We have not completed our evaluation of the transition tax, and the provisional amount may change as we finalize our calculations of post-1986 foreign earnings and profits previously deferred from U.S. income taxes. The imposition of the transition tax may eliminate the need for U.S. federal deferred income taxes on unremitted earnings and profits of our foreign corporate subsidiaries. However, the transition tax does not eliminate the potential for deferred taxes related to withholding taxes, state taxes, or other income taxes that might be incurred from the reversal of a foreign entity’s outside basis difference. As we finalize and complete our plans for the reinvestment or repatriation of unremitted foreign earnings and are able to calculate the resulting tax effects, we expect to record the associated tax effects, if any, and disclose such plans within the measurement period.

Because of the complexity of the new GILTI, BEAT, and FDII provisions of the Tax Act, we continue to evaluate the associated accounting under ASC 740. Accordingly, we may elect an accounting policy to (i) record 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 (ii) factor such amounts into our measurement of deferred income taxes (the “deferred method”). Our election of an accounting policy with respect to the new GILTI tax provisions will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the effect is expected to be. Because our future U.S. inclusions in taxable income related to GILTI depend on our organizational structure, our estimates of future operating results, and also our intent and ability to modify our organizational structure and/or our operations, we are not yet able to reasonably estimate the effects of this provision of the Tax Act. As a result, we did not record any adjustments related to potential GILTI taxes for the year ended December 31, 2017 and did not make a policy election regarding whether to record deferred income taxes on GILTI.

The BEAT provisions of the Tax Act impose a minimum tax related to certain deductible payments made to related foreign persons. In addition, the Tax Act disallows certain interest and royalty deductions for payments made to related parties depending on their countries’ tax treatment of the payments. The new FDII provision allows a U.S. corporation to deduct 37.5% of its foreign-derived intangible income. Our evaluation of the income tax effects of these items and the provisional amounts recorded for the year ended December 31, 2017 requires additional analysis of historical records and further interpretation of the Tax Act from yet to be issued U.S. Treasury regulations and guidance from state tax authorities about the application of these new tax laws.

The U.S. and non-U.S. components of our income or loss before income taxes for the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):
 
 
2017
 
2016
 
2015
U.S. income
 
$
(22,868
)
 
$
(426,791
)
 
$
227,150

Non-U.S. income
 
224,983

 
(110,460
)
 
506,180

Income (loss) before taxes and equity in earnings of unconsolidated affiliates
 
$
202,115

 
$
(537,251
)
 
$
733,330


The components of our income tax expense or benefit for the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):
 
 
2017
 
2016
 
2015
Current expense (benefit):
 
 
 
 
 
 
Federal
 
$
116,956

 
$
(14,389
)
 
$
31,988

State
 
3,009

 
1,303

 
6,644

Foreign
 
11,099

 
(29,009
)
 
23,215

Total current expense (benefit)
 
131,064

 
(42,095
)
 
61,847

Deferred expense (benefit):
 
 

 
 

 
 

Federal
 
226,570

 
90,319

 
20,731

State
 
5,335

 
(9,536
)
 
5,904

Foreign
 
9,027

 
(15,521
)
 
(56,153
)
Total deferred expense (benefit)
 
240,932

 
65,262

 
(29,518
)
Total income tax expense
 
$
371,996

 
$
23,167

 
$
32,329



We use the deferral method of accounting for investment tax credits under which the credits are recognized as reductions in the carrying value of the related assets. The use of the deferral method also results in a basis difference from the recognition of a deferred tax asset and an immediate income tax benefit for the future tax depreciation of the related assets. Such basis differences are accounted for pursuant to the income statement method. During 2015, we generated a $19.2 million investment tax credit from placing a project in service.

Our Malaysian subsidiary has been granted a long-term tax holiday that expires in 2027. The tax holiday, which generally provides for a full exemption from Malaysian income tax, is conditional upon our continued compliance with meeting certain employment and investment thresholds, which we are currently in compliance with and expect to continue to comply with through the expiration of the tax holiday in 2027.

Our income tax results differed from the amount computed by applying the relevant U.S. statutory federal corporate income tax rate of 35.0% to our income or loss before income taxes for the following reasons for the years ended December 31, 2017, 2016, and 2015 (in thousands):
 
 
2017
 
2016
 
2015
 
 
Tax
 
Percent
 
Tax
 
Percent
 
Tax
 
Percent
Statutory income tax expense (benefit)
 
$
70,740

 
35.0
 %
 
$
(188,038
)
 
35.0
 %
 
$
256,659

 
35.0
 %
Provisional effect of Tax Act
 
408,090

 
201.9
 %
 
—

 
—
 %
 
—

 
—
 %
Changes in valuation allowance
 
9,534

 
4.7
 %
 
2,412

 
(0.4
)%
 
(7,799
)
 
(1.1
)%
Foreign tax rate differential
 
(22,048
)
 
(10.9
)%
 
6,833

 
(1.3
)%
 
(20,967
)
 
(2.8
)%
State tax, net of federal benefit
 
4,397

 
2.2
 %
 
(8,655
)
 
1.6
 %
 
8,855

 
1.2
 %
Non-deductible expenses
 
2,703

 
1.3
 %
 
324

 
—
 %
 
4,161

 
0.6
 %
Share-based compensation
 
1,161

 
0.6
 %
 
(23,283
)
 
4.3
 %
 
—

 
—
 %
Change in tax contingency
 
959

 
0.5
 %
 
(34,541
)
 
6.4
 %
 
—

 
—
 %
Foreign dividend income
 
540

 
0.3
 %
 
248,013

 
(46.2
)%
 
—

 
—
 %
Goodwill
 
—

 
—
 %
 
22,468

 
(4.2
)%
 
—

 
—
 %
Effect of private letter ruling
 
—

 
—
 %
 
—

 
—
 %
 
(41,694
)
 
(5.7
)%
Tax credits
 
(18,445
)
 
(9.1
)%
 
(15,435
)
 
2.9
 %
 
(2,566
)
 
(0.4
)%
Return to provision adjustments
 
(35,191
)
 
(17.4
)%
 
11,757

 
(2.2
)%
 
6,596

 
0.9
 %
Effect of tax holiday
 
(46,643
)
 
(23.1
)%
 
4,640

 
(0.9
)%
 
(154,650
)
 
(21.1
)%
Other
 
(3,801
)
 
(1.9
)%
 
(3,328
)
 
0.7
 %
 
(16,266
)
 
(2.2
)%
Reported income tax expense
 
$
371,996

 
184.1
 %
 
$
23,167

 
(4.3
)%
 
$
32,329

 
4.4
 %


During the years ended December 31, 2017, 2016 and 2015, we made net tax payments of $1.2 million, $1.9 million, and $30.8 million, respectively.

In May 2017, the U.S. federal income tax authority accepted our election to classify certain of our German subsidiaries as disregarded entities of First Solar, Inc. effective as of January 1, 2017. Accordingly, we recorded an estimated benefit of $42.1 million through the tax provision to establish a deferred tax asset for excess foreign tax credits generated as a result of the associated election.

In July 2016, we received a letter from a foreign tax authority confirming our residency status in that jurisdiction. In accordance with the letter, we reversed a liability associated with an uncertain tax position related to the income of a foreign subsidiary. Accordingly, we recorded a benefit of $35.4 million through the tax provision from the reversal of such liability.

In April 2015, we received a private letter ruling in a foreign jurisdiction related to the timing of the deduction for certain of our obligations. In accordance with the private letter ruling, we will begin treating these obligations as deductible when we actually make payments on the obligations, which are expected to occur subsequent to the expiration of the tax holiday. Accordingly, we recorded a benefit of $41.7 million through the tax provision to establish a deferred tax asset associated with the future deductibility of these obligations.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for U.S. GAAP financial reporting purposes and the amounts calculated for preparing our income tax returns in accordance with tax regulations. The items that gave rise to our deferred taxes as of December 31, 2017 and 2016 were as follows (in thousands):
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
Goodwill
 
$
12,140

 
$
42,168

Compensation
 
9,442

 
18,289

Accrued expenses
 
62,345

 
83,349

Tax credits
 
954

 
62,254

Net operating losses
 
124,281

 
86,328

Inventory
 
7,601

 
6,830

Deferred expenses
 
2,057

 
3,276

Property, plant and equipment
 
35,104

 
64,150

Long-term contracts
 
4,554

 
47,795

Other
 
11,630

 
10,034

Deferred tax assets, gross
 
270,108

 
424,473

Valuation allowance
 
(143,818
)
 
(123,936
)
Deferred tax assets, net of valuation allowance
 
126,290

 
300,537

Deferred tax liabilities:
 
 

 
 

Capitalized interest
 
(1,722
)
 
(6,821
)
Acquisition accounting / basis difference
 
(5,880
)
 
(6,848
)
Restricted investments and derivatives
 
(10,680
)
 
(12,429
)
Investments in foreign subsidiaries
 
(9,555
)
 
(582
)
Equity in earnings
 
(40,339
)
 
(35,585
)
Other
 
(7,541
)
 
(322
)
Deferred tax liabilities
 
(75,717
)
 
(62,587
)
Net deferred tax assets and liabilities
 
$
50,573

 
$
237,950



Changes in the valuation allowance against our deferred tax assets were as follows during the years ended December 31, 2017, 2016, and 2015 (in thousands):
 
 
2017
 
2016
 
2015
Valuation allowance, beginning of year
 
$
123,936

 
$
121,524

 
$
129,323

Additions
 
27,591

 
13,933

 
368

Reversals
 
(7,709
)
 
(11,521
)
 
(8,167
)
Valuation allowance, end of year
 
$
143,818

 
$
123,936

 
$
121,524



We maintained a valuation allowance of $143.8 million and $123.9 million as of December 31, 2017 and 2016, respectively, against certain of our deferred tax assets, as it is more likely than not that such amounts will not be fully realized. In 2017, the valuation allowance increased by $19.9 million primarily due to (i) current year operating losses in certain jurisdictions and (ii) an increase in deferred tax assets with a full valuation allowance due to a change in foreign exchange rates. These increases were partially offset by the partial release of valuation allowances in jurisdictions with current year operating income.

As of December 31, 2017, we had federal and aggregate state net operating loss carryforwards of $11.7 million and $20.3 million, respectively. As of December 31, 2016, we had federal and aggregate state net operating loss carryforwards of $5.8 million and $12.1 million, respectively. If not used, the federal net operating loss carryforwards will begin to expire in 2030, and the state net operating loss carryforwards will begin to expire in 2028. The utilization of our net operating loss carryforwards is subject to an annual limitation under Section 382 of the Internal Revenue Code due to changes in ownership. Based on our analysis, we do not believe such annual limitation will impact our realization of the net operating loss carryforwards as we anticipate utilizing them prior to expiration. During the year ended December 31, 2017, we utilized substantially all of our gross federal and state R&D credit carryforwards, U.S. foreign tax credit carryforwards, and investment tax credits to reduce the liability associated with the transition tax under the Tax Act.

A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):
 
 
2017
 
2016
 
2015
Unrecognized tax benefits, beginning of year
 
$
89,256

 
$
141,755

 
$
162,029

Increases related to prior year tax positions
 
3,827

 
—

 
484

Decreases related to prior year tax positions
 
—

 
(6,119
)
 
(2,693
)
Decreases from lapse in statute of limitations
 
(11,840
)
 
(14,421
)
 
(13,827
)
Decreases relating to settlements with authorities
 
(2,494
)
 
(35,416
)
 
(20,485
)
Increases related to current tax positions
 
5,424

 
3,457

 
16,247

Unrecognized tax benefits, end of year
 
$
84,173

 
$
89,256

 
$
141,755



If recognized, $81.8 million of unrecognized tax benefits, excluding interest and penalties, would reduce our annual effective tax rate. Due to the uncertain and complex application of tax laws and regulations, it is possible that the ultimate resolution of uncertain tax positions may result in liabilities that could be materially different from these estimates. In such an event, we will record additional tax expense or benefit in the period in which such resolution occurs. Our policy is to recognize any interest and penalties that we may incur related to our tax positions as a component of income tax expense. During 2017, we recognized interest and penalties of $5.5 million related to unrecognized tax benefits. We did not recognize any interest or penalties related to unrecognized tax benefits during 2016 or 2015. It is reasonably possible that an additional $10.0 million of uncertain tax positions will be recognized within the next 12 months due to the expiration of the statute of limitations associated with such positions.

We are subject to audit by U.S. federal, state, local, and foreign tax authorities. During the year ended December 31, 2017, we settled certain examinations in Germany, which resulted in a discrete tax expense of $2.5 million. During the year ended December 31, 2015, we settled a tax audit in Spain, which resulted in a discrete tax expense of $3.0 million. We are currently under examination in India, Chile, Singapore, and the state of California. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed by our tax audits are not resolved in a manner consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.

The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the most significant jurisdictions in which we operate:
 
 
Tax Years
Australia
 
2012 - 2016
India
 
2012 - 2017
Malaysia
 
2012 - 2016
United States
 
2008 - 2009; 2012 - 2016


In certain of the jurisdictions noted above, we operate through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, tax years are not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.