INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES [ABSTRACT]

INCOME TAXES

(10)INCOME TAXES

The sources of pre-tax operating income are as follows (in thousands):

	Year Ended December 31,
	2020		2019		2018
Domestic	$	129,620	$	39,864	$	(13,926)
Foreign		40,648		70,547		70,164
Total	$	170,268	$	110,411	$	56,238

The Company’s selection of an accounting policy with respect to both the GILTI and BEAT rules is to compute the related taxes in the period the entity becomes subject to either. A reasonable estimate of the effects of these provisions has been included in the 2020 annual financial statements.

Minimal changes in indefinite reinvestment assertion were made during the year. The Company has completed its analysis in regard to the full tax impact related to prior changes in indefinite reinvestment reassertion and any related taxes have been recorded. No additional income taxes have been provided for any remaining outside basis difference inherent in the Company’s foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. Determination of any unrecognized deferred tax liability related to the outside basis difference in investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act did not materially affect our fourth quarter income tax provision, deferred tax assets and liabilities, or related taxes payable. We are continuing to assess the future implications of these provisions within the CARES Act but do not expect there to be a material impact on our financial statements at this time.

The components of the Company’s Provision for (benefit from) income taxes are as follows (in thousands):

	Year Ended December 31,
	2020		2019		2018
Current provision for (benefit from)
Federal	$	22,763	$	5,289	$	2,771
State		9,871		2,826		2,754
Foreign		13,496		18,938		18,933
Total current provision for (benefit from)		46,130		27,053		24,458
Deferred provision for (benefit from)
Federal		(2,390)		2,515		(943)
State		(254)		118		(138)
Foreign		(2,549)		(4,009)		(6,894)
Total deferred provision for (benefit from)		(5,193)		(1,376)		(7,975)
Total provision for (benefit from) income taxes	$	40,937	$	25,677	$	16,483

The following reconciles the Company’s effective tax rate to the federal statutory rate (in thousands):

	Year Ended December 31,
	2020		2019		2018
Income tax per U.S. federal statutory rate (21%, 21%, 21%)	$	35,756	$	23,186	$	11,810
State income taxes, net of federal deduction		6,923		3,144		2,003
Change in valuation allowances		3,903		9,832		2,191
Foreign income taxes at different rates than the U.S.		(783)		(3,356)		(3,758)
Foreign withholding taxes		106		600		785
Losses in international markets without tax benefits		(1,656)		(2,651)		(68)
Nondeductible compensation under Section 162(m)		656		668		615
Liabilities for uncertain tax positions		2,882		661		1,105
Permanent difference related to foreign exchange gains		(71)		36		136
(Income) losses of foreign branch operations		(10)		55		475
Non-taxable earnings of noncontrolling interest		(1,964)		(1,294)		(594)
Foreign dividend less foreign tax credits		(1,723)		(1,681)		(1,748)
Decrease (increase) to deferred tax asset - change in tax rate		(48)		(2,848)		(1,944)
State and Federal income tax credits and NOL's		(3,918)		(1,176)		19
Foreign earnings taxed currently in U.S.		1,936		2,172		3,976
Taxes related to prior year filings		(1,718)		(1,643)		(1,659)
Taxes related to acquisition accounting		1,317		978		2,110
Other		(651)		(1,006)		1,029
Income tax per effective tax rate	$	40,937	$	25,677	$	16,483
Effective tax rate percentage		24.0%		23.3%		29.3%

The Company’s deferred income tax assets and liabilities are summarized as follows (in thousands):

	Year Ended December 31,
	2020		2019
Deferred tax assets, gross
Accrued workers compensation, deferred compensation and employee benefits	$	8,574	$	7,999
Allowance for credit losses, insurance and other accruals		4,463		3,393
Amortization of deferred lease liabilities		20,352		25,757
Net operating losses		20,508		19,222
Equity compensation		1,660		1,442
Customer acquisition and deferred revenue accruals		6,868		9,047
Federal and state tax credits, net		2,383		1,263
Unrealized losses on derivatives		1,187		1,421
Impairment of equity investment		4,064		4,142
Partnership Investment		526		2,435
Other		5,444		1,322
Total deferred tax assets, gross		76,029		77,443
Valuation allowances		(18,697)		(17,051)
Total deferred tax assets, net		57,332		60,392
Deferred tax liabilities
Depreciation and amortization		(10,734)		(6,095)
Unrealized gain on derivatives		(2,959)		(1,491)
Contract acquisition costs		(3,182)		(5,740)
Intangible assets		(15,880)		(22,585)
Operating lease assets		(16,763)		(21,413)
Other		(480)		(407)
Total deferred tax liabilities		(49,998)		(57,731)
Net deferred tax assets	$	7,334	$	2,661

Quarterly, the Company assesses the likelihood by jurisdiction that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized.

As of December 31, 2020 the Company had approximately $1.2 million of net deferred tax liabilities in the U.S. and $8.5 million of net deferred tax assets related to certain international locations whose recoverability is dependent upon their future profitability. As of December 31, 2020 the deferred tax valuation allowance was $18.7 million and related primarily to tax losses in foreign jurisdictions which do not meet the “more-likely-than-not” standard under current accounting guidance.

When there is a change in judgment concerning the recovery of deferred tax assets in future periods, a valuation allowance is recorded into earnings during the quarter in which the change in judgment occurred. In 2020, the Company made adjustments to its deferred tax assets and corresponding valuation allowances. The net change to the valuation allowance consisted of the following: a $1.1 million increase related to capital loss carry forwards and other credit carry forwards not expected to be utilized in New Zealand and the United Kingdom, a $3.6 million increase in valuation allowance in the United Kingdom, Ireland, Canada, Luxembourg, Turkey, the United States and Australia for deferred tax assets that do not meet the “more-likely-than-not” standard, a $1.1 million release of valuation allowance in the U.S. related to capital loss carry forwards not expected to be utilized, and a $1.9 million release of valuation allowance in Luxembourg, Ireland, and various other jurisdictions related to the utilization or write-off of deferred tax assets.

Activity in the Company’s valuation allowance accounts consists of the following (in thousands):

	Year Ended December 31,
	2020		2019		2018
Beginning balance	$	17,051	$	10,867	$	9,526
Additions of deferred income tax expense		4,650		7,373		2,913
Reductions of deferred income tax expense		(3,004)		(1,189)		(1,572)
Ending balance	$	18,697	$	17,051	$	10,867

As of December 31, 2020, after consideration of all tax loss and tax credit carry back opportunities, the Company had tax affected tax loss carry forwards worldwide expiring as follows (in thousands):

2021	$	2
2022		3
2023		183
2024		4
After 2024		11,229
No expiration		9,087
Total	$	20,508

The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the governments of the Philippines and Costa Rica. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted multiple agreements, with an initial period of four years and additional periods for varying years, expiring at various times between 2020 and 2022. The aggregate benefit to income tax expense for the years ended December 31, 2020, 2019 and 2018 was approximately $4.4 million, $8.4 million and $8.2 million, respectively, which had a favorable impact on diluted net income per share of $0.09, $0.18 and $0.18, respectively.

Accounting for Uncertainty in Income Taxes

In accordance with ASC 740, the Company has recorded a reserve for uncertain tax positions. The total amount of interest and penalties recognized in the accompanying Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2020, 2019 and 2018 was approximately $3.0 million, $2.1 million and $1.4 million, respectively.

The Company had a reserve for uncertain tax benefits, on a net basis, of $7.5 million and $4.8 million for the years ended December 31, 2020 and 2019, respectively.

The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the three years ended December 31, 2020 is presented below (in thousands):

Balance as of December 31, 2017	$	3,298
Additions for current year tax positions		3,600
Reductions in prior year tax positions		(2,114)
Balance as of December 31, 2018		4,784
Additions for current year tax positions		—
Reductions in prior year tax positions		—
Balance as of December 31, 2019		4,784
Additions for current year tax positions		2,725
Reductions in prior year tax positions		—
Balance as of December 31, 2020	$	7,509

At December 31, 2020, the amount of uncertain tax benefits including interest, that, if recognized, would reduce tax expense was $10.5 million. Within the next 12 months, it is expected that the amount of unrecognized tax benefits may be reduced by $3.9 million as a result of the expiration of various statutes of limitation or other confirmations of tax positions.

The Company and its domestic and foreign subsidiaries (including Percepta LLC and its domestic and foreign subsidiaries) file income tax returns as required in the U.S. federal jurisdiction and various state and foreign jurisdictions. The following table presents the major tax jurisdictions and tax years that are open as of December 31, 2020 and subject to examination by the respective tax authorities:

Tax Jurisdiction	Tax Year Ended
United States	2017 to present
Australia	2016 to present
India	2015 to present
Canada	2016 to present
Mexico	2015 to present
Philippines	2017 to present

The Company’s U.S. income tax returns filed for the tax years ending December 31, 2017 to present, remain open tax years. The Company has been notified of the intent to audit, or is currently under audit of, income taxes for the United States for tax year 2017 and 2018, and the Philippines for tax years 2017 and 2018. During 2020, the Company confirmed the closure of the Canadian audit for tax years 2009 and 2010, and the state of New York for tax years 2015 through 2017 with no material changes to the financial statements. Although the outcome of examinations by taxing authorities are always uncertain, it is the opinion of management that the resolution of these audits will not have a material effect on the Company’s Consolidated Financial Statements.