Entity information:

• Entity registrant name: CSG SYSTEMS INTERNATIONAL INC
• CIK: 0001005757
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1005757/000156459018003012/0001564590-18-003012-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1005757/000156459018003012/csgs-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1005757/000156459018003012/csgs-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001005757
• Generator: Donnelley Financial Solutions
• Total assets: 904,534,000
• Income tax expense (benefit): 26,346,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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Income Tax Provision/(Benefit). The components of net income before income taxes are as follows (in thousands):

 

The income tax provision consists of the following (in thousands):

 

 

The difference between our income tax provision computed at the statutory Federal income tax rate and our financial statement income tax is summarized as follows (in thousands):

 

We have undistributed earnings of approximately $39 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings; therefore, a provision has not been made for foreign withholding taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexities of the hypothetical calculation.  The Tax Cuts and Jobs Act (the “Tax Reform Act”), see further discussion below, effectively eliminates the U.S. tax consequences of unremitted earnings at December 31, 2017 due to inclusion of a deemed repatriation tax on such earnings. In addition, the Tax Reform Act establishes a participation exemption from the taxation of future dividends received from 10% owned foreign subsidiaries.

Deferred Income Taxes. Net deferred income tax assets as of December 31, 2017 and 2016 are as follows (in thousands):

 

The components of our net deferred income tax assets (liabilities) as of December 31, 2017 and 2016 are as follows (in thousands):

 

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2017, we believe that between: (i) carryback opportunities to past periods with taxable income; and (ii) sufficient taxable income to be generated in the future, we will realize 100% of the benefit of our U.S. Federal deferred income tax assets, thus no valuation allowance has been established. As of December 31, 2017, we have deferred income tax assets net of federal benefit related to state and foreign income tax jurisdictions of $5.0 million and $32.9 million, respectively, and have established valuation allowances against those deferred income tax assets of $2.4 million and $18.9 million, respectively.

As of December 31, 2017 and 2016, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $39 million and $45 million, respectively, which will begin to expire in 2024 and can be utilized through 2030. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired subsidiaries. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2017 and 2016, we have: (i) state NOL carryforwards of approximately $50 million and $63 million, respectively, which will expire beginning in 2018 and end in 2038; and (ii) foreign subsidiary NOL carryforwards of approximately $103 million and $87 million, respectively, which will expire beginning in 2018, with a portion of the losses available over an indefinite period of time.

Our 2004 Convertible Debt Securities, which we fully extinguished in 2011, were subject to special U.S. Treasury regulations governing contingent payment debt instruments. These regulations allowed us to take a tax deduction for interest expense on our U.S. Federal income tax return at a constant rate of 9.09% (subject to certain adjustments), compounded semi-annually, which represented the estimated yield on comparable non-contingent, non-convertible, fixed-rate debt instruments with terms and conditions otherwise similar to the 2004 Convertible Debt Securities. This interest expense tax deduction was greater than the interest expense reflected in the accompanying Income Statements, thus creating a deferred income tax liability. The extinguishment of the 2004 Convertible Debt Securities resulted in: (i) the holders of the 2004 Convertible Debt Securities not having the ability to achieve the 9.09% target yield, and (ii) a requirement for us to pay an amount equal to the cumulative deferred income tax liability to the U.S. tax authorities (without interest or penalties). During 2011, we paid cash of approximately $6 million related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in 2011. In 2017 and 2016, we paid cash of $5.6 million in each of the years related to the deferred income tax liabilities associated with the 2004 Convertible Debt Securities repurchased in 2009 and 2010. The remaining balance owed of $3.4 million will be paid by the end of next year.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. During the ordinary course of business, there are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

A reconciliation of the beginning and ending balances of our liability for unrecognized tax benefits is as follows (in thousands):

 

We recognize interest and penalty expense associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements.  In addition to the $1.9 million, $1.9 million, and $4.1 million of liability for unrecognized tax benefits as of December 31, 2017, 2016, and 2015, we had $0.5 million, $0.4 million, and $0.3 million, respectively, of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $1.9 million of unrecognized tax benefits as of December 31, 2017, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., and Australia are the main taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. During 2016, the U.S. Internal Revenue Service (“IRS”) completed its audits of our 2010 through 2012 tax years and in December 2016 we made an additional payment of approximately $8 million and entered into an agreement with the IRS closing the audits for those tax years. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $0.1 million over the next twelve months due to completion of audits and the expiration of statute of limitations.

We adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718) in the first quarter of 2017.  This ASU requires a change in the recognition of excess tax benefits and tax deficiencies, related to share-based payment transactions, which were recorded in equity, and now are recorded discrete to the quarter incurred as a component of income tax expense in the income statement.  The adoption of this ASU provided an approximately $3 million benefit to the income tax provision for the full year.

U.S. Tax Cuts and Job Act.  On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was passed into legislation. The Tax Reform Act amends the Internal Revenue Code, reducing the corporate income tax rate, changing or eliminating certain income tax deductions and credits and provides sweeping change to how U.S. companies are taxed on their international operations. The Tax Reform Act is generally effective for tax years beginning after December 31, 2017; however, certain provisions of the Tax Reform Act have effective dates beginning in 2017.

The Tax Reform Act reduces the U.S. maximum rate of income taxation from 35% to 21% applicable to taxable years beginning after December 31, 2017. We recorded an estimated benefit of $2.3 million from revaluation of our U.S.-based net deferred income tax liabilities in the fourth quarter of 2017 in accordance with ASC Topic 740. While the accounting is complete for many of the items comprising our deferred income tax liability, we have recorded provisional amounts for the tax effects of the tax law change for which the accounting is not complete, but for which a reasonable estimate can be determined. Such changes for which provisional amounts have been recorded include changes to depreciation and additional limitations on the deductibility of compensation paid to covered employees.

The Tax Reform Act includes provisions that change how earnings from foreign subsidiaries are taxed. This includes a one-time deemed repatriation tax on a U.S. shareholder’s pro rata share of certain foreign subsidiaries’ previously untaxed foreign earnings. We estimate that our liability for this deemed repatriation tax will be zero. There is no impact on our effective income tax rate for this item.

The Tax Reform Act includes other provisions such as the Base Erosion Anti-Avoidance Tax (or BEAT), Global Intangible Low-Taxed Income (“GILTI”), additional limitations on deduction of entertainment and local government lobbying expenses, and limitations on the deductibility of certain interest expenses net of interest income impacting tax years beginning after December 31, 2017; however, we do not believe these will have a material impact on our financial statements. Companies may elect as a matter of policy to establish deferred income tax assets and liabilities existing at December 31, 2017, which would have an effect in computing the GILTI in tax years 2018 and beyond. We do not plan to establish such deferred income tax assets and liabilities as a matter of policy.