14. Income Taxes

 

The components of the provision for income taxes were as follows:

 

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act), also commonly referred to as “U.S. tax reform” was enacted.  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 earnings.  On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. Generally Accepted Accounting Principles 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 Act.  As of December 31, 2017, in accordance with SAB 118, the Company has made a reasonable estimate of: (i) the one-time transition tax, and (ii) the effects on the Company’s existing deferred tax balances, but has not completed its full accounting for the tax effects of enactment of the Act.  The Company anticipates U.S. regulatory agencies will issue further regulations during 2018, which may alter this estimate.  The Company is continuing to analyze its earnings and profits in foreign jurisdictions and its deferred tax balances. 

 

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Act.  The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.  The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treating any taxes on GILTI inclusions as period cost are both acceptable methods, subject to an accounting policy election.  The Company is still evaluating the GILTI provisions and has not yet elected an accounting policy for GILTI.  The final determination of the tax effects of enactment of the Act will be completed within the measurement period of up to one year from the enactment date as permitted by SAB 118, and any adjustments to provisional amounts that are identified during the measurement period will be recorded in the reporting period in which the adjustment is determined.

 

The Company recognized income tax expense of $0.6 million during the year ended December 31, 2017 associated with the Act’s items it could reasonably estimate.  This expense reflects (i) a one-time net transition tax of $6.8 million, which the Company will elect to pay over an eight-year period on unremitted foreign earnings and profits, partially offset by (ii) the revaluation of its net deferred tax liability based on a U.S. federal tax rate of 21%.  The Company is still analyzing the Act and refining its provisional amounts, which could potentially impact the measurement of its tax balances.

 

As of December 31, 2017, the Company estimates that it will make tax payments on its estimated long-term transition tax payable of $0.5 million in the years 2018 through 2022, $1.0 million in 2023, $1.4 million in 2024, and $1.7 million in 2025. 

 

Income before income tax provision includes income generated by operations outside the U.S. of $12.0 million, $9.6 million, and $28.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.  The Company previously considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes.  Prior to the Act’s transition tax, the Company had aggregate undistributed foreign earnings of $100.1 million.  While the transition tax subjected $79.9 million of undistributed foreign earnings to tax, an actual repatriation from the non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes.  The Company is currently analyzing its global working capital and cash requirements and the potential tax liabilities attributable to a repatriation but has yet to determine whether it plans to change its prior assertion and repatriate earnings.  Accordingly, the Company has not recorded any deferred taxes attributable to its investments in foreign subsidiaries.  The Company will record the tax effects of any change in the prior assertion in the period that it completes its analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable.

 

In 2017, the Company completed the incorporation of its former U.S. Belgium branch to a Belgium controlled foreign corporation, which was part of an overall single integrated plan of reorganization that included the Company’s acquisition of the New Business in November 2016.  This resulted in the Company recognizing tax expense of $2.4 million in 2017.  In 2016, the U.S. Internal Revenue Code Section 987 Treasury Regulations were finalized and the Company recognized a benefit of $0.5 million.  In 2015, the Company completed a U.S. research and development tax credit study for the prior years 2012—2014, and the Company recognized a benefit of $1.4 million.

 

The differences between the U.S. federal statutory tax rate and the Company’s effective income tax rate are as follows:

 

 

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of December 31, 2017:

 

 

 

The components of deferred taxes consist of the following:

 

 

 

A valuation allowance is established when it is more likely than not that a portion of the deferred tax assets will not be realized.  The valuation allowance is adjusted based on the changing facts and circumstances, such as the expected expiration of an operating loss carryforward.  The Company’s valuation allowance as of December 31, 2017 of $2.1 million pertains to an uncertainty related to the realization of foreign and state net operating loss carryforwards, U.S. passive foreign tax credits, and state tax credits.  The Company’s valuation allowance as of December 31, 2016 of $2.5 million pertained to an uncertainty related to the realization of foreign net operating loss carryforwards, domestic capital loss carryforwards, U.S. passive foreign tax credits, and state tax credits. 

 

The Company has classified uncertain tax positions as non-current income tax liabilities unless the amount is expected to be paid within one year.  The following is a reconciliation of the unrecognized income tax benefits:

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.  In 2017, the Company accrued interest and penalties of approximately $41 thousand on prior year uncertain tax positions and reversed approximately $65 thousand of interest and penalties due to the expiration of the statute of limitations.  In 2016, the Company accrued interest and penalties of approximately $23 thousand on prior year uncertain tax positions and reversed approximately $3 thousand of interest and penalties due to the expiration of the statute of limitations.  As of both December 31, 2017 and 2016, the amount accrued for the payment of interest and penalties is approximately $0.3 million.

 

Total uncertain tax positions recorded as a component of accrued pension and other liabilities within its consolidated balance sheets were approximately $0.9 million as of both December 31, 2017 and 2016.  As of December 31, 2017 and 2016, approximately $0.7 million and $0.6 million, respectively, of unrecognized tax benefits would reduce the Company’s effective tax rate if recognized.  At this time, the Company believes that it is reasonably possible that approximately $0.3 million of the estimated unrecognized tax benefits as of December 31, 2017 will be recognized within the next twelve months based on the expiration of statutory review periods all of which will impact the effective tax rate.

 

As of December 31, 2017, the following tax years remain subject to examination for the major jurisdictions where the Company conducts business: