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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 5 – Income Taxes

U.S. Tax Reform: Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted in the United States. The TCJA represents sweeping changes in U.S. tax law. Among the numerous changes in tax law, the TCJA permanently reduced the U.S. corporate income tax rate to 21% beginning in 2018; imposed a one-time transition tax on deferred foreign earnings; established a partial territorial tax system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign subsidiaries; limited deductions for net interest expense; expanded the U.S. taxation of foreign earned income to include "global intangible low-taxed income" ("GILTI") of foreign subsidiaries; and imposed a base erosion anti-abuse minimum tax ("BEAT").

As permitted by SAB No. 118, the tax expense recorded in the fourth fiscal quarter of 2017 due to the enactment of the TCJA was considered "provisional," based on reasonable estimates. As further described below, after additional analysis was completed in 2018, the Company identified additional amounts available to be repatriated to the U.S. and additional information regarding the foreign taxes payable and recorded additional provisional tax expense to accrue the incremental foreign income taxes and withholding taxes payable to foreign jurisdiction. The Company collected and analyzed detailed information about the earnings and profits of its non-U.S. subsidiaries, the related taxes paid, the amounts which could be repatriated, the foreign taxes which may be incurred on repatriation, and the associated impact of these items under the TCJA, including under regulatory guidance issued in 2018, throughout the measurement period. The measurement period ended as of December 31, 2018.

The amount of net tax expense recorded provisionally by the Company in the fourth fiscal quarter of 2017 and adjustments recorded during the measurement period in 2018 that are directly and indirectly related to the enactment of the TCJA are summarized as follows:

				Years ended December 31,
	Total			2018			2017
Remeasurement of net deferred tax liabilities	$	(76,027	)	$	(1,211	)	$	(74,816	)
Transition tax on unremitted foreign earnings		222,983			7,425			215,558
Incremental foreign taxes on assumed repatriation		232,282			19,282			213,000
Reversal of deferred taxes due to cancellation of 2015 repatriation plan		(118,887	)		-			(118,887	)
Total tax expense related to the enactment of the TCJA	$	260,351		$	25,496		$	234,855

As a result of the TCJA, the Company recognized a tax benefit of $76,027 to remeasure its net deferred tax liabilities at the lower, 21% rate.

The TCJA transitioned the U.S. from a worldwide tax system to a territorial tax system. Under previous law, companies could indefinitely defer U.S. income taxation on unremitted foreign earnings. The TCJA imposed a one-time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets, payable in defined increments over eight years. As a result of this requirement, the Company recognized provisional tax expense of $215,558 in 2017, and provisionally expected to pay $180,000, net of estimated applicable foreign tax credits, and after utilization of net operating loss and R&D and FTC Credit carryforwards. As a result of additional analysis completed during the measurement period, the Company accrued additional tax expense of $7,425 in 2018 and now expects to pay $184,467. The first installments of $14,757 were paid in 2019 and 2018. These previously deferred foreign earnings may now be repatriated to the United States without additional U.S. federal taxation. However, any such repatriation could incur withholding and other foreign taxes in the source and intervening foreign jurisdictions, and certain U.S. state taxes.

Due to the changes in taxation of dividends received from foreign subsidiaries, and also because of the need to finance the payment of the transition tax, the Company made the determination during the fourth fiscal quarter of 2017 that certain unremitted foreign earnings in Israel, Germany, Austria, and France are no longer permanently reinvested, and recorded provisional tax expense of $213,000 to accrue the incremental foreign income taxes and withholding taxes payable to foreign jurisdictions assuming the repatriation to the United States of these approximately $1,100,000 of available foreign earnings. As a result of additional analysis completed during the measurement period, the Company adjusted the amount of foreign unremitted earnings available from Israel, Germany, Austria, and France to approximately $1,200,000, identified additional information regarding foreign taxes payable, and accrued additional tax expense of $19,282.

The Company repatriated $188,742 and $724,000 to the United States, and paid withholding and foreign taxes of $38,814 and $156,767 in 2019 and 2018, respectively. Substantially all of the amounts repatriated in 2019 were used to repay certain intercompany indebtedness, to pay the U.S. transition tax, and to fund capital expansion projects. Substantially all of the amounts repatriated in 2018 were used to reduce the outstanding balance of the credit facility (see Note 6), to repay certain intercompany indebtedness, and to fund the repurchase of convertible senior debentures (see Note 6).

After completing these phases of cash repatriation, there is approximately $100,000 of unremitted foreign earnings that the Company has deemed not permanently reinvested and thus has accrued foreign withholding and other taxes. The Company continues to evaluate the timing of the reparation of these remaining amounts, and may decide to ultimately not repatriate some of these amounts

There are additional amounts of unremitted foreign earnings in other countries, which continue to be reinvested indefinitely, and the Company has made no provision for incremental foreign income taxes and withholding taxes payable to foreign jurisdictions related to these amounts. Determination of the amount of the unrecognized deferred foreign tax liability for these amounts is not practicable because of the complexities associated with its hypothetical calculation.

During the fourth fiscal quarter of 2015, the Company recognized income tax, including U.S. federal and state income taxes, incremental foreign income taxes, and withholding taxes payable to foreign jurisdictions, on $300,000 of foreign earnings. This tax expense was recognized in 2015 following an evaluation of the Company’s anticipated domestic cash needs over several years and the Company’s most efficient use of liquidity, and with consideration of the amount of cash that could be repatriated to the U.S. efficiently with lesser withholding taxes in foreign jurisdictions. The Company repatriated $38,000 and $46,000 pursuant to this program in 2017 and 2016, respectively. Prior to the enactment of the TCJA, the related deferred tax liability for the 2015 repatriation plan was $118,887. The Company terminated the 2015 cash repatriation plan and recorded a provisional income tax benefit to reverse this deferred tax liability, which was replaced by the liability for the transition tax and foreign income and withholding taxes described above.

The deferred tax liability related to these unremitted foreign earnings is based on the available sources of cash, applicable tax rates, foreign currency exchange rates, and other factors and circumstances, as of each balance sheet date. Changes in these underlying facts and circumstances result in changes in the deferred tax liability balance, which are recorded as tax benefit or expense. Deferred taxes are also reevaluated and adjusted for the impact of certain corporate legal entity reorganization activities that impact repatriation.

Certain provisions of the TCJA had a significant impact on the Company's effective tax rate for the years ended December 31, 2019 and 2018, and are expected to have a significant impact in future periods. Because the various provisions of the TCJA are interrelated, and because of changes in the Company’s operations and changes in the capital structure in response to the TCJA, the impact of any specific provision of the TCJA cannot be isolated. The Company recognized a significant amount of GILTI income in 2019 and 2018, but was able to utilize related foreign tax credits to reduce the impact on the effective tax rate. The Company has elected to account for GILTI tax in the period in which it is incurred and, therefore, does not provide any deferred taxes in the consolidated financial statements at December 31, 2019 or 2018. The inclusion of significant GILTI income was a contributing factor in allowing the Company to avoid a limitation on the deductibility of its U.S. interest expense in 2019 and 2018. The Company was subject to the BEAT minimum tax of $2,900 and $0 in 2019 and 2018, respectively. BEAT could increase the Company’s future tax by disallowing certain otherwise deductible payments from the U.S. to non-U.S. subsidiaries and imposing a minimum tax if greater than the regular tax.

The Company's repurchase of outstanding convertible debentures in 2019 and 2018 (see Note 6) reduced the Company's tax rate.

Income (loss) from continuing operations before taxes and noncontrolling interests consists of the following components:

	Years ended December 31,
	2019			2018			2017

Domestic	$	(10,992	)	$	(39,861	)	$	(40,171	)
Foreign		237,290			456,637			319,535
	$	226,298		$	416,776		$	279,364

Significant components of income taxes are as follows:

	Years ended December 31,
	2019			2018			2017

Current:
Federal	$	9,137		$	18,756		$	180,873
State and local		415			209			108
Foreign		113,779			263,247			65,566
		123,331			282,212			246,547
Deferred:
Federal		(13,731	)		(58,386	)		(101,896	)
State and local		(802	)		(3,117	)		1,538
Foreign		(47,290	)		(150,470	)		152,735
		(61,823	)		(211,973	)		52,377
Total income tax expense	$	61,508		$	70,239		$	298,924

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2019			2018

Deferred tax assets:
Pension and other retiree obligations	$	48,434		$	43,238
Inventories		19,318			9,795
Property and equipment		-			5,888
Net operating loss carryforwards		119,420			128,177
Tax credit carryforwards		76,140			72,708
Other accruals and reserves		29,273			19,645
Total gross deferred tax assets		292,585			279,451
Less valuation allowance		(194,797	)		(200,809	)
		97,788			78,642
Deferred tax liabilities:
Property and equipment		(2,391	)		-
Earnings not permanently reinvested		(16,448	)		(65,537	)
Convertible debentures		(25,219	)		(32,488	)
Other - net		(6,499	)		(7,370	)
Total gross deferred tax liabilities		(50,557	)		(105,395	)

Net deferred tax assets (liabilities)	$	47,231		$	(26,753	)

The Company makes significant judgments regarding the realizability of its deferred tax assets (principally net operating losses and tax credits). The carrying value of deferred tax assets is based on the Company’s assessment that it is more likely than not that the Company will realize these assets after consideration of all available positive and negative evidence. As of December 31, 2019, the Company has generated an excess U.S. foreign tax credit of $60,237. Because the Company does not anticipate sufficient U.S. foreign source income during the carryforward period, the Company has not recognized the benefit of the carryforward as of December 31, 2019.

A reconciliation of income tax expense at the U.S. federal statutory income tax rate to actual income tax provision is as follows:

	Years ended December 31,
	2019			2018			2017

Tax at statutory rate	$	47,523		$	87,523		$	97,777
State income taxes, net of U.S. federal tax benefit		(301	)		(2,298	)		1,070
Effect of foreign operations		9,242			5,736			(54,807	)
Tax on earnings not permanently reinvested		6,256			9,304			88,311
Unrecognized tax benefits		5,584			2,669			5,887
Repurchase of senior convertible debentures		(1,461	)		(52,312	)		-
TCJA - remeasurement of net deferred tax liabilities		-			(1,211	)		(74,816	)
TCJA - transition tax on unremitted foreign earnings		-			7,425			215,558
Foreign income taxable in the U.S.		6,090			15,055			20,436
Deferred tax rate impact of corporate reorganization		(12,121	)		-			-
Other		696			(1,652	)		(492	)
Total income tax expense	$	61,508		$	70,239		$	298,924

Income tax expense for the years ended December 31, 2019, 2018, and 2017 includes certain discrete tax items for changes in uncertain tax positions, valuation allowances, tax rates, and other related items. These items total $799 (tax benefit), $39,428 (tax benefit), and $230,618 in 2019, 2018, and 2017, respectively.

For the year ended December 31, 2019, the discrete items include $7,554 related to a tax-basis foreign exchange gain on the settlement of an intercompany loan, which previously had been accounted for at the historical foreign exchange rate (akin to an equity contribution) because the debtor entity did not have the intent or ability to repay such intercompany loan. Currency translation adjustments were recorded in accumulated other comprehensive income, and were not included in U.S. GAAP pre-tax income. The Company’s cash repatriation activity resulted in the ability to repay such intercompany loan. Upon settlement of this intercompany loan, the foreign entity realized a taxable gain. Discrete tax items also include a tax benefit of $1,601 resulting from the early extinguishment of convertible senior debentures, reflecting the reduction in deferred tax liabilities related to the special tax attributes of the debentures, $9,583 (tax benefit) of adjustments to remeasure of deferred taxes related to the cash repatriation program described above, and $2,831 of tax expense for changes in uncertain tax positions.

For the year ended December 31, 2018, the discrete items include $25,496 related to the enactment of the TCJA, as previously described, a tax benefit of $54,877 resulting from the early extinguishment of convertible senior debentures, reflecting the reduction in deferred tax liabilities related to the special tax attributes of the debentures, and $10,047 (tax benefit) of adjustments to remeasure the deferred taxes related to the cash repatriation program described above.

For the year ended December 31, 2017, the discrete items include $234,855 related to the enactment of the TCJA, as previously described; $5,802 (tax benefit) for the periodic remeasurement of the deferred tax liability related to the 2015 cash repatriation program described above, and $1,565 of net tax expense for changes in uncertain tax positions.

At December 31, 2019, the Company had the following significant net operating loss carryforwards for tax purposes:

			Expires

Austria	$	17,485	No expiration
Belgium		158,847	No expiration
Israel		10,707	No expiration
Italy		7,325	No expiration
Japan		7,675		2020 - 2029
Netherlands		12,159		2021 - 2026
The Republic of China (Taiwan)		19,130		2024- 2028

Pennsylvania		655,869		2020 - 2039

At December 31, 2019, the Company had the following significant tax credit carryforwards available:

			Expires

U.S. Foreign Tax Credit	$	60,237		2028 - 2029
California Research Credit		15,642	No expiration

Net income taxes paid were $185,654, $248,958, and $76,900 for the years ended December 31, 2019, 2018, and 2017, respectively. Net income taxes paid for the years ended December 31, 2019 and 2018 include $38,814 and $156,767, respectively, for repatriation activity and $14,757 in each period for the TCJA transition tax.

See Note 19 for a discussion of the tax-related uncertainties for the pre-spin-off period of Vishay Precision Group, Inc. (“VPG”), which was spun off on July 6, 2010.

The following table summarizes changes in the liabilities associated with unrecognized tax benefits:

	Years ended December 31,
	2019			2018			2017

Balance at beginning of year	$	21,241		$	17,056		$	16,805
Addition based on tax positions related to the current year		2,383			4,332			3,911
Addition based on tax positions related to prior years		16,190			2,066			1,837
Currency translation adjustments		1,211			(984	)		915
Reduction based on tax positions related to prior years		-			-			(1,473	)
Reduction for settlements		(3,121	)		(1,229	)		(4,077	)
Reduction for lapses of statute of limitation		(1,036	)		-			(862	)
Balance at end of year	$	36,868		$	21,241		$	17,056

All of the unrecognized tax benefits of $36,868 and $21,241, as of December 31, 2019 and 2018, respectively, would reduce the effective tax rate if recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2019 and 2018, the Company had accrued interest and penalties related to the unrecognized tax benefits of $3,561 and $2,887, respectively. During the years ended December 31, 2019, 2018, and 2017, the Company recognized $1,201, $1,470, and $2,479, respectively, in interest and penalties.

The Company and its subsidiaries file U.S. federal income tax returns, as well as tax returns in multiple states and foreign jurisdictions. The Company's U.S. federal income tax returns are generally subject to audit for years ending on or after December 31, 2016. The IRS may, however, ask for supporting documentation for net operating losses for the years ended December 31, 2013 - 2015, which were utilized in the year ended December 31, 2017. During the years ended December 31, 2019, 2018, and 2017, certain tax examinations were concluded and certain statutes of limitations lapsed. The tax provision for those years includes adjustments related to the resolution of these matters, as reflected in the table above. The tax returns of significant non-U.S. subsidiaries which are currently under examination include India (2004 through 2016), Italy (2017), Germany (2013 through 2016), and Israel (2016 and 2017). The Company and its subsidiaries also file income tax returns in other taxing jurisdictions in the U.S. and around the world, many of which are still open to examination.

The timing of the resolution of income tax examinations is highly uncertain, as are the amounts and timing of tax payments that result from such examinations. These events could cause large fluctuations in the balance sheet classification of current and non-current unrecognized tax benefits. The Company believes that in the next 12 months it is reasonably possible that certain income tax examinations will conclude or the statutes of limitation on certain income tax periods open to examination will expire, or both. Given the uncertainties described above, the Company can only determine an estimate of potential decreases in unrecognized tax benefits ranging from $322 to $4,085.