Note 16. Income Taxes

 

Income before income taxes is as follows:

 

 

Provision for income taxes is as follows:

 

 

Reconciliations of income taxes at the United States Federal statutory rate to the effective income tax rate are as follows:

 

 

Significant components of long‑term deferred income taxes are as follows:

 

 

Changes in tax rates and tax laws are accounted for in the period of enactment. Our deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled. On December 22, 2017, the Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law and has resulted in significant changes to the U.S. corporate income tax system. The 2017 Tax Act eliminates the deferral of U.S. income tax on the historical un-repatriated earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on undistributed foreign earnings. The Transition Toll Tax is assessed on the U.S. shareholder's share of the foreign corporation's accumulated foreign earnings that have not previously been taxed. Earnings in the form of cash and cash equivalents will be taxed at a rate of 15.5% and all other earnings will be taxed at a rate of 8.0%. As of December 31, 2017, we have accrued income tax liabilities of $0.4 million under the Transition Toll Tax after utilization of foreign tax credits and research and development credits. The Transition Toll Tax will be paid over an eight-year period, starting in 2018, and will not accrue interest.

Our preliminary estimate of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the 2017 Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the 2017 Tax Act may require further adjustments and changes in our estimates. The final determination of the Transition Toll Tax and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.

The 2017 Tax Act includes a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as global intangible low-taxed income. These changes are effective beginning in 2018.

At December 31, 2017, the Company had $90.3 million of deferred tax assets worldwide relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences, which are available to reduce income taxes in future years. Management has considered the weight of all available evidence in determining whether a valuation allowance remains to be required against its deferred tax assets at December 31, 2017. After consideration of both positive and negative evidence, management has concluded that it is more likely than not that a substantial portion of its deferred tax assets will be realized. The positive evidence considered was three year U.S. historical cumulative profitability, projected future taxable income and length of carry-forward periods of net operating losses and tax credits. The primary negative evidence to be considered is the volatile semiconductor industry that the Company operates in. The Company has continued to maintain a $7.1 million valuation allowance in the U.S. against certain tax credits and state net operating losses due to the uncertainty of their realization based on long-term Company forecasts and the expiration dates on these attributes. If future operating results of the U.S. or these foreign jurisdictions significantly exceed expectations it is reasonably possible that there could be a further reduction in the valuation allowance in the future. Further reduction of the valuation allowance, in whole or in part, would result in a non-cash income tax benefit during the period of reduction.

At December 31, 2017, the Company has federal and state net operating loss carryforwards of $298.9 million and foreign net operating loss carryforwards of $2.9 million expiring principally between 2018 and 2034.

The Company has research and development and other tax credit carryforwards of $21.2 million at December 31, 2017 that can be used to reduce future federal and state income tax liabilities. These tax credit carryforwards expire principally between 2017 and 2037.

It is Company policy to provide taxes for the total anticipated tax impact of the undistributed earnings of our wholly-owned foreign subsidiaries, as such earnings are not expected to be reinvested indefinitely. The Company anticipates that certain state taxes resulting from remitting such earnings will be offset by net operating loss or credit carryforwards to the extent available. In addition, the Company does not anticipate incurring a foreign withholding tax on remitting such earnings since it does not intend to remit the earnings as dividends.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company and most foreign subsidiaries are subject to income tax examinations by tax authorities for all years dating back to 2011. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

At December 31, 2017, the Company had unrecognized tax benefits related to uncertain tax positions of approximately $9.1 million, of which approximately $8.0 million reduced the Company’s deferred tax assets and the offsetting valuation allowance and $1.1 million was recorded in other long-term liabilities. During the first quarter of 2017, the statute of limitations associated with two tax positions previously taken by the Company expired. The related tax reserve of $0.3 million and accrued interest of $0.2 million that had been recorded were reversed during the twelve months ended December 31, 2017. The Company recognized a benefit of $0.1 million in interest and penalties related to unrecognized tax benefits for the year-ended December 31, 2017.

 

A reconciliation of the beginning and ending balance of unrecognized tax benefits are as follows: