12. Income Taxes
The Company’s geographical breakdown of its loss before provision for income taxes is as follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
20,331 |
|
|
$ |
(72,139 |
) |
|
$ |
(50,892 |
) |
|
Foreign |
|
|
2,999 |
|
|
|
3,032 |
|
|
|
2,692 |
|
|
Loss before provision for taxes |
|
$ |
23,330 |
|
|
$ |
(69,107 |
) |
|
$ |
(48,200 |
) |
The components of the provision for income taxes are as follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
State |
|
|
56 |
|
|
|
62 |
|
|
|
34 |
|
|
Foreign |
|
|
2,139 |
|
|
|
1,654 |
|
|
|
857 |
|
|
Total current provision |
|
|
2,195 |
|
|
|
1,716 |
|
|
|
891 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4 |
|
|
|
130 |
|
|
|
63 |
|
|
State |
|
|
13 |
|
|
|
6 |
|
|
|
(1 |
) |
|
Foreign |
|
|
(1,751 |
) |
|
|
(680 |
) |
|
|
(271 |
) |
|
Total deferred provision |
|
|
(1,734 |
) |
|
|
(544 |
) |
|
|
(209 |
) |
|
Total |
|
$ |
461 |
|
|
$ |
1,172 |
|
|
$ |
682 |
|
Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax is as follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax benefit at federal statutory tax rate |
|
$ |
7,929 |
|
|
$ |
(23,496 |
) |
|
$ |
(16,388 |
) |
|
Tax benefit at state statutory tax rate |
|
|
67 |
|
|
|
(1,008 |
) |
|
|
(499 |
) |
|
Foreign tax rate differential |
|
|
(123 |
) |
|
|
57 |
|
|
|
(826 |
) |
|
Change in federal statutory tax rate and valuation allowance under U.S. Tax Reform |
|
|
(185 |
) |
|
|
- |
|
|
|
- |
|
|
Losses not benefitted/(benefitted) |
|
|
(15,440 |
) |
|
|
17,701 |
|
|
|
9,738 |
|
|
Subsidiary earnings taxed in the US |
|
|
717 |
|
|
|
- |
|
|
|
- |
|
|
Meals and entertainment |
|
|
309 |
|
|
|
222 |
|
|
|
44 |
|
|
Stock compensation |
|
|
6,006 |
|
|
|
7,857 |
|
|
|
8,492 |
|
|
Foreign exchange (gains) and losses, net |
|
|
(776 |
) |
|
|
- |
|
|
|
- |
|
|
Reserve for tax exposure |
|
|
1,893 |
|
|
|
- |
|
|
|
- |
|
|
Nondeductible expenses and other |
|
|
64 |
|
|
|
(161 |
) |
|
|
121 |
|
|
Provision for income taxes |
|
$ |
461 |
|
|
$ |
1,172 |
|
|
$ |
682 |
|
The U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted on December 22, 2017. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
The Company is still evaluating the provisions of the Tax Reform and amounts reflected in the financial statements for the year ended December 31, 2017 are provisional. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed in 2018.
The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, we have remeasured our U.S. deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes will reverse, resulting in a reduction of our net deferred tax assets, by approximately $24.9 million, which is offset by the change in valuation allowance by $25.1 million. The net impact of $0.2 million of deferred tax benefit is principally related to the remeasurement of our deferred tax liabilities associated with indefinite-lived intangible assets that are deemed to reverse at the new 21% tax rate. Absent this deferred tax liability, we are in a net deferred tax asset position that is offset by a full valuation allowance.
The Tax Act also includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. We have not yet completed the analysis of the earnings and profits of our foreign subsidiaries. However, we estimate that, as a result of foreign tax credits and net operating loss carryforward available to the Company, the impact of the one-time mandatory repatriation tax would not be material.
The Tax Act includes numerous provisions, including the repatriation provisions that would have significant impact of our U.S. deferred tax assets, which are generally subject to a full valuation allowance. Although we have made a reasonable estimate of the gross amounts of the deferred tax assets disclosed, a final determination of the Tax Act’s impact on the deferred tax assets and related valuation allowance requirements remain incomplete pending a full analysis of the provisions and their interpretations.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, a limitation of the utilization of net operating losses generated after fiscal 2018 to 80 percent of taxable income, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or “GILTI”). We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Reserves and accruals |
|
$ |
2,014 |
|
|
$ |
2,817 |
|
|
Deferred revenue |
|
|
6,466 |
|
|
|
10,379 |
|
|
Stock-based compensation |
|
|
3,747 |
|
|
|
7,361 |
|
|
Net operating loss carryforwards |
|
|
35,404 |
|
|
|
47,452 |
|
|
Loss on OCI |
|
|
231 |
|
|
|
370 |
|
|
Depreciation and amortization |
|
|
565 |
|
|
|
721 |
|
|
Other |
|
|
(3 |
) |
|
|
67 |
|
|
Gross deferred tax assets |
|
|
48,424 |
|
|
|
69,167 |
|
|
Valuation allowance |
|
|
(46,125 |
) |
|
|
(68,227 |
) |
|
Total deferred tax assets |
|
|
2,299 |
|
|
|
940 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
- |
|
|
|
(21 |
) |
|
Depreciation and amortization |
|
|
(610 |
) |
|
|
(964 |
) |
|
Total deferred tax liabilities |
|
|
(610 |
) |
|
|
(985 |
) |
|
Net deferred tax liability |
|
$ |
1,689 |
|
|
$ |
(45 |
) |
Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets and Imperva Israel net operating loss generated. The Company’s valuation allowance (decreased) increased by ($22.1) million, $14.8 million, and $13.0 million in the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of approximately $142.9 million and $70.9 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2022 through 2037 if not utilized. Most state net operating loss carryforwards will expire at various dates beginning in 2018 through 2037.
Net operating loss carryforwards reflected above may be subject to limitations due to ownership changes as provided in the Internal Revenue Code and similar state provisions.
The Company has not provided U.S. income tax on certain foreign earnings that are deemed to be indefinitely invested outside the U.S. For fiscal years 2017, 2016, and 2015 the amount of accumulated unremitted earnings from the Company’s foreign subsidiaries is approximately $20.5 million, $9.7 million and $13.6 million, respectively. The amount of taxes attributable to the undistributed earnings is not practicably determinable.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1 |
|
$ |
2,282 |
|
|
$ |
1,154 |
|
|
$ |
672 |
|
|
Additions based on tax positions taken during the current period |
|
|
2,047 |
|
|
|
761 |
|
|
|
401 |
|
|
Reductions based on tax positions taken during the prior period |
|
|
(28 |
) |
|
|
(42 |
) |
|
|
(50 |
) |
|
Additions based on tax positions taken during a prior period |
|
|
- |
|
|
|
409 |
|
|
|
131 |
|
|
Decrease related to lapse of applicable statute of limitations |
|
|
(181 |
) |
|
|
- |
|
|
|
- |
|
|
Balance at December 31 |
|
$ |
4,120 |
|
|
$ |
2,282 |
|
|
$ |
1,154 |
|
As of December 31, 2017, 2016 and 2015, the Company had gross unrecognized tax benefits of approximately $4.1 million, $2.3 million and $1.2 million, respectively, all of which would impact the effective tax rate if recognized. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2017 and 2016, the Company accrued interest of $0.1 million and $0.2 million in income tax expense, respectively.
The Company's material income tax jurisdictions are the United States (federal), California and Israel. The Israeli Tax Authorities have now settled the audit of income tax returns of the Israeli subsidiary for the tax years 2006 through 2010. As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2002 and forward for federal purposes and 2008 and forward for California purposes. The Israeli Tax Authorities have settled the audit of income tax returns of the Israeli subsidiaries for the tax years 2006 through 2010. The Israeli tax authorities issued assessment orders to court for 2011 and 2012 tax years. Tax years 2013 onwards are open for examination.
The Company's Israeli subsidiaries ("Israeli subsidiaries") research and development intercompany services activity ("R&D activity") have a "Beneficiary Enterprise" status for a separate investment program that was elected by the Israel subsidiaries starting 2012 under the Law for Encouragement of Capital Investments, 1959 (the "Investments Law), amended from time to time. The entitlement to the above benefits is conditional upon the Israeli subsidiaries fulfilling the conditions stipulated by the Investments Law and regulations published there under.