INCOME TAXES

12 Months Ended

Dec. 31, 2022

INCOME TAXES [ABSTRACT]

INCOME TAXES

(10)INCOME TAXES

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

	Year Ended December 31,
	2022		2021		2020
Domestic	$	52,887	$	108,160	$	129,620
Foreign		91,561		99,724		40,648
Total	$	144,448	$	207,884	$	170,268

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 2022 annual financial statements.

No significant 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. The Company generally intends to limit distributions from non-U.S. subsidiaries to cash balances available in foreign jurisdictions.

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. The Company has an estimated $266 million of outside basis differences as of December 31, 2022. 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.

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

	Year Ended December 31,
	2022		2021		2020
Current provision for (benefit from)
Federal	$	10,816	$	20,697	$	22,763
State		5,245		8,006		9,871
Foreign		22,055		20,161		13,496
Total current provision for (benefit from)		38,116		48,864		46,130
Deferred provision for (benefit from)
Federal		(3,128)		(7,017)		(2,390)
State		(192)		(402)		(254)
Foreign		(7,681)		8,250		(2,549)
Total deferred provision for (benefit from)		(11,001)		831		(5,193)
Total provision for (benefit from) income taxes	$	27,115	$	49,695	$	40,937

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

	Year Ended December 31,
	2022		2021		2020
Income tax per U.S. federal statutory rate (21%, 21%, 21%)	$	30,334	$	43,655	$	35,756
State income taxes, net of federal deduction		2,717		4,588		6,923
Change in valuation allowances		(3,278)		12,567		3,903
Foreign income taxes at different rates than the U.S.		1,202		(1,416)		(783)
Foreign withholding taxes		(2)		(93)		106
Losses in international markets without tax benefits		—		—		(1,656)
Nondeductible compensation under Section 162(m)		841		1,494		656
Taxes related to equity compensation		(907)		(4,282)		(587)
Liabilities for uncertain tax positions		(1,435)		(790)		2,882
Permanent difference related to foreign exchange gains		139		3,362		(71)
Impacts of foreign branch operations		2,315		(187)		(10)
Non-taxable earnings of noncontrolling interest		(2,638)		(3,085)		(1,964)
Foreign dividend less foreign tax credits		(1,616)		(1,142)		(1,723)
Decrease (increase) to deferred tax asset - change in tax rate		—		—		(48)
State and Federal income tax credits and NOL's		(4,604)		(4,531)		(3,918)
Foreign earnings taxed currently in U.S.		2,978		1,930		1,936
Taxes related to prior year filings		(432)		(1,192)		(1,718)
Taxes related to acquisition accounting		—		—		1,317
Other		1,501		(1,183)		(64)
Income tax per effective tax rate	$	27,115	$	49,695	$	40,937
Effective tax rate percentage		18.8%		23.9%		24.0%

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

	Year Ended December 31,
	2022		2021
Deferred tax assets, gross
Accrued workers compensation, deferred compensation and employee benefits	$	9,715	$	8,441
Allowance for credit losses, insurance and other accruals		4,109		4,767
Amortization of deferred lease liabilities		18,475		15,816
Net operating losses		18,312		18,006
Equity compensation		1,912		2,302
Customer acquisition and deferred revenue accruals		18,749		20,069
Federal and state tax credits, net		3,247		2,759
Unrealized losses on derivatives		—		22
Impairment of equity investment		1,047		4,064
Depreciation and amortization		7,896		—
Partnership Investment		102		106
Other		3,931		5,052
Total deferred tax assets, gross		87,495		81,404
Valuation allowances		(24,944)		(29,620)
Total deferred tax assets, net		62,551		51,784
Deferred tax liabilities
Depreciation and amortization		—		(10,291)
Unrealized gain on derivatives		(27)		—
Contract acquisition costs		(19)		(1,831)
Intangible assets		(28,848)		(21,202)
Operating lease assets		(15,594)		(12,481)
Other		(3,208)		(184)
Total deferred tax liabilities		(47,696)		(45,989)
Net deferred tax assets	$	14,855	$	5,795

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, 2022 the Company had approximately $10.3 million of net deferred tax assets in the U.S. and $4.5 million across their foreign operations. As of December 31, 2022 the deferred tax valuation allowance was $24.9 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 2022, 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 $1.3 million increase related to interest expense limitation carry forwards, state net operating losses and foreign tax credits not expected to be utilized in the United States; a $1.0 million increase in valuation allowance in Mexico, Netherlands, Canada and various other jurisdictions for deferred tax assets that do not meet the “more-likely-than-not” standard; and a $6.9 million release of valuation allowance in Canada, the United Kingdom, the Netherlands, 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,
	2022		2021		2020
Beginning balance	$	29,620	$	18,697	$	17,051
Additions of deferred income tax expense		2,248		14,660		4,650
Reductions of deferred income tax expense		(6,924)		(3,737)		(3,004)
Ending balance	$	24,944	$	29,620	$	18,697

As of December 31, 2022, after consideration of all tax loss carry back opportunities, the Company had tax affected tax loss carry forwards worldwide expiring as follows (in thousands):

2023	$	12
2024		9
2025		47
2026		50
After 2026		7,624
No expiration		10,570
Total	$	18,312

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 under local laws which result in an overall reduced tax rate. These incentives have varying benefit year over year and expire at various times beginning in 2030. The aggregate benefit to income tax expense for the years ended December 31, 2022, 2021 and 2020 was approximately $1.6 million, $6.3 million and $4.4 million, respectively, which had a favorable impact on diluted net income per share of $0.04, $0.13 and $0.09, 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, 2022, 2021 and 2020 was approximately $1.8 million, $2.8 million and $3.0 million, respectively.

The Company had a reserve for uncertain tax benefits, on a net basis, of $6.6 million and $6.9 million for the years ended December 31, 2022 and 2021, respectively.

The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the three years ended December 31, 2022 is presented below (in thousands):

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
Additions for current year tax positions		220
Reductions in prior year tax positions		(826)
Balance as of December 31, 2021		6,903
Additions for current year tax positions		143
Reductions in prior year tax positions		(479)
Balance as of December 31, 2022	$	6,567

At December 31, 2022, the amount of uncertain tax benefits including interest, that, if recognized, would reduce tax expense was $8.4 million. Within the next 12 months, it is expected that the amount of unrecognized tax benefits may be reduced by $7.8 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, 2022 and subject to examination by the respective tax authorities:

Tax Jurisdiction	Tax Year Ended
United States	2017 to Present
Australia	2018 - Present
India	2017 - Present
Canada	2018 - Present
Mexico	2017 - Present
Philippines	2018 - 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, the Philippines for tax year 2020, the state of California in the United States for tax years 2017 and 2018, and India for tax years 2017 through 2020. 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.