NOTE 14—INCOME TAXES

The components of income before income taxes for the years ended December 31, 2017, 2016 and 2015 consists of the following:

 

The components of the 2017, 2016 and 2015 income tax provision are as follows:

The differences between the effective tax rates reflected in the total provision for income taxes and the U.S. federal statutory rate of 35% for the year ended December 31, 2017, 2016 and 2015 were as follows:

(1)Primarily valuation allowance increase related to foreign loss carryover tax benefits of $0.9 million plus foreign tax credit carryover of $0.7 million, and other foreign tax items of $0.2 million.

(2)During the years ended December 31, 2017 and December 31, 2015, the Company reversed an unrealized tax benefit liability of $0.5 million and $0.8 million, respectively, established at the time of the acquisition of Alsbridge and Compass.  An associated tax indemnity receivable was also reversed and recorded in selling, general and administrative expenses.

On December 22, 2017, the TCJ Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the TCJ Act in its year-end income tax provision in accordance with its understanding of the TCJ Act and guidance available as of the date of this filing. As a result of the enactment of the TCJ Act, the Company has recorded a provisional net expense of $2.1 million during the fourth quarter of 2017. This total tax law impact amount, which is included in the provision for income taxes in the Consolidated Statement of Comprehensive Income, consists of two provisional components: (i) transition tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the transition tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The transition tax provides the Company additional foreign source income for the company to utilize foreign tax credit carryovers whose tax benefit was unrecognized because it was offset by a valuation allowance. The tax benefit recorded is $0.3 million.  The Company continues to record liabilities on its unremitted earnings. As a result of moving to a territorial tax system, deferred withholding and earnings distribution taxes of $0.9 million remains in the Company’s deferred tax liabilities, and (ii) a $1.5 million net expense resulting from the remeasurement of the companies U.S. deferred tax balances.

The Tax Act also creates a new Global Intangible Low-Taxed Income (“GILTI”) tax regime. Under GILTI, income earned after December 31, 2017 by certain non-United States subsidiaries must be included currently in the gross income of the United States parent company. Because of the complexity of the new GILTI tax rules and lack of guidance as to how to calculate the tax, we are continuing to evaluate this provision of the Tax Act and its impact on ISG. In accordance with accounting guidance on income taxes, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet been able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the accounting treatment whether to record deferred taxes attributable to the GILTI tax. The Company has not recorded any amounts related to potential GILTI tax in the Company’s Financial Statements.

Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in the reporting period that includes December 22, 2017 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 TCJ Act. The guidance in SAB 118 also allows companies to adjust the provisional amounts during a one-year measurement period. All income tax effects recorded in the Company’s Financial Statements as a result of the Tax Reform Act are provisional in accordance with SAB 118, as the Company has not yet completed its evaluation of the impact of the new law. Any subsequent adjustment will be recorded to current tax expense in the quarter of fiscal 2018 when the analysis is complete.

Other provisions in the legislation effective for future years, such as interest deductibility and changes to executive compensation plans, may have material implications to the Company’s consolidated financial statements.

 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows:

 A valuation allowance was established at December 31, 2017 and 2016 due to estimates of future utilization of net operating loss carryovers in the U.S. and certain foreign jurisdictions, derived primarily from acquisitions and recorded through purchase accounting. The valuation allowance at December 31, 2017 and 2016 also primarily includes a full valuation for the Company’s foreign tax credit carryovers and foreign taxes on its controlled foreign corporation.

Uncertain tax positions

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more‑likely‑than‑not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more‑likely‑than‑not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more‑likely‑than‑not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. It is the Company’s policy to accrue for interest and penalties related to its uncertain tax positions within income tax expense.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows:

We do not expect our unrecognized tax benefits to significantly change in the next twelve months.

The Company has recognized through income tax expense approximately $1.0 million of interest and penalties related to uncertain tax positions. The amount of unrecognized tax benefit, if recognized, that would impact the effective tax rate is $4.1 million. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or non‑U.S. income tax examinations by tax authorities for years before 2011.