Income Taxes

On December 22, 2017, the Tax Act was signed into law. The Tax Act reduced the corporate tax rate from 35% to 21%, included a one-time transition tax on unremitted foreign earnings and profits applicable for our fiscal year ended December 31, 2017 and limited tax deductions for interest expense for periods beginning January 1, 2018 which caused a release of valuation allowance. In 2017, we recognized a net benefit for the impact of the Tax Act with components as follows:



	(In thousands)
One-time transition tax before credits	$	162,750
Tax credits	(128,395		)
Remeasure deferred tax assets	36,794
Release valuation allowance	(112,703		)
Net impact of the Tax Act	$	(41,554	)

In accordance with SEC staff issued Staff Accounting Bulletin No. 118, we have not finalized our accounting and have made a provisional estimate of the impacts of the Tax Act. (See Note 1).

Geographic sources of income (loss) before taxes and equity in earnings of unconsolidated affiliate are as follows:



	For the Year Ended December 31,
	2017		2016			2015
	(In thousands)
United States	$	14,935	$	(12,385	)	$	(39,684	)
Foreign	288,935		227,542			107,596
Income before taxes and equity in earnings of unconsolidated affiliate	$	303,870	$	215,157		$	67,912

The provision for income taxes includes current federal, state and foreign taxes payable and those deferred because of temporary differences between the financial statement and the tax bases of assets and liabilities.

The components of the provision (benefit) for income taxes are as follows:



	For the Year Ended December 31
	2017			2016			2015
	(In thousands)
Current:
Federal	$	—		$	—		$	—
State	11			22			11
Foreign	81,969			49,577			28,721
	81,980			49,599			28,732
Deferred:
Federal	(36,943		)	—			—
State	(4,611		)	—			—
Foreign	(1,444		)	(1,746		)	(697		)
	(42,998		)	(1,746		)	(697		)
Income tax expense	$	38,982		$	47,853		$	28,035

The reconciliation between the U.S. federal statutory income tax rate of 35% and our income tax expense is as follows:



	For the Year Ended December 31
	2017			2016			2015
	(In thousands)
U.S. federal tax at 35%	$	106,354		$	75,305		$	23,769
State taxes, net of federal benefit	2,193			836			2,622
Foreign income taxed at different rates	(51,412		)	(17,907		)	(11,756		)
Foreign exchange (loss) gain	29,756			(1,127		)	(5,680		)
Change in valuation allowance	(4,703		)	(7,362		)	18,259
Adjustments related to prior years	3,329			(2,648		)	(912		)
U.S. tax reform (the Tax Act)	(41,554		)	—			—
Income tax credits generated	(7,296		)	(40,301		)	(1,919		)
Repatriation of foreign earnings and profits	719			25,604			91
Expiration of net operating losses and credits	166			15,092			74
Non-deductible loss on acquisition of J-Devices (Note 3)	—			—			4,725
Other	1,430			361			(1,238		)
Income tax expense	$	38,982		$	47,853		$	28,035

The change in valuation allowance, excluding the impact of the Tax Act, for 2017, 2016 and 2015 is primarily the result of changes in net operating loss and tax credit carryforwards for which no tax expense or benefit has been recognized. The benefit of foreign income taxed at different rates has increased as foreign income before tax has increased. In 2016, we recognized taxable income and associated foreign income tax credits from the repatriation of foreign earnings and profits in connection with the merger of our Japanese subsidiaries. In 2015, we recognized a loss in connection with our increased ownership interest in J-Devices which is not deductible for income tax purposes.

The following is a summary of the components of our deferred tax assets and liabilities:



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	53,130		$	111,899
Income tax credits	23,998			41,900
Property, plant and equipment	35,479			21,860
Accrued liabilities	68,091			68,563
Receivable	32,719			—
Unrealized foreign exchange loss	1,924			531
Other	12,682			14,583
Total deferred tax assets	228,023			259,336
Valuation allowance	(83,338		)	(165,367		)
Total deferred tax assets net of valuation allowance	144,685			93,969
Deferred tax liabilities:
Property, plant and equipment	15,754			20,407
Deferred gain	939			2,655
Unrealized foreign exchange gain	8,383			990
Other	4,566			4,836
Total deferred tax liabilities	29,642			28,888
Net deferred tax assets	$	115,043		$	65,081
Recognized as:
Other assets	117,608			66,831
Other non-current liabilities	(2,565		)	(1,750		)
Total	$	115,043		$	65,081

Valuation allowance against deferred tax assets consist of the following:



	December 31,
	2017		2016
	(In thousands)
Valuation allowance:
U.S.	$	43,719	$	164,479
Portugal	39,009		—
Other	610		888
Total valuation allowance	$	83,338	$	165,367

U.S. deferred tax assets and liabilities were remeasured down to the new U.S. federal tax rate of 21% as a result of the Tax Act. In connection with our acquisition of Nanium, we acquired a receivable which resulted in the creation of a deferred tax asset. The decrease in our valuation allowance included the reversal of the valuation allowance against most of our U.S. deferred tax assets in connection with the Tax Act offset by the valuation allowance against the deferred tax assets of our Portuguese deferred tax assets, acquired in 2017.

As a result of certain capital investments, export commitments and employment levels, income from operations in Korea, Malaysia, the Philippines, Singapore and Taiwan was subject to reduced income tax rates and, in some cases, was exempt from income taxes. We recognized $6.2 million, $5.6 million and $3.3 million in tax benefits as a result of the tax holidays in 2017, 2016 and 2015, respectively. The benefit of the tax holidays on diluted earnings per share was approximately $0.03, $0.02 and $0.01 for 2017, 2016 and 2015, respectively.

Our net operating loss carryforwards (“NOL’s”) are as follows:



	December 31,
	2017		2016		Expiration
	(In thousands)
U.S. Federal NOL’s	$	220,445	$	292,715	2021-2037
U.S. State NOL’s	121,095		138,218		2018-2036
Foreign NOL’s	2,967		3,378		2018-2025

We monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance. In evaluating our ability to recover our deferred tax assets in the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. For most of our U.S. and foreign deferred tax assets, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets.

In prior years, the deferred tax assets along with the U.S. federal and state net operating losses available for carryforward have been fully reserved with valuation allowances. During the fourth quarter of 2017, we determined it was more likely than not that we will have sufficient taxable income to allow us to realize most of our U.S. deferred tax assets, including a substantial portion of our U.S. net operating loss carryforward. Our evaluation considered, among other factors, limitations on the deductibility of interest expense in connection with the Tax Act. At December 31, 2017, a portion of our U.S. federal net operating loss carryforward continues to be reserved with a valuation allowance due to an estimate of the net operating loss carryforward not expected to be realized due to GILTI, due to ownership change limitations from a prior year acquisition as well as certain state net operating loss carryforwards expected to expire unused. Our ability to utilize our U.S. net operating loss carryforwards may be limited in the future if we experience an ownership change as defined by the Internal Revenue Code.

At December 31, 2017, we have various tax credits available to be carried forward including U.S. foreign income tax credits totaling $12.6 million which expire in 2026. The deferred tax assets associated with the U.S. foreign income tax credits expected to expire unused have been fully reserved with a valuation allowance. Income tax credits generated by certain of our foreign subsidiaries in 2017, 2016 and 2015 have been recognized in our income tax provision.

As a result of the deemed repatriation provision of the Tax Act, U.S. income taxes have been provided on approximately $1.1 billion of the undistributed earnings of our foreign subsidiaries at December 31, 2017. However, we have not provided foreign withholding taxes or state income taxes on the undistributed earnings of our foreign subsidiaries, over which we have sufficient influence to control the distribution of such earnings and have determined that substantially all such earnings have been reinvested indefinitely. These earnings could become subject to foreign withholding tax if they are remitted as dividends. We estimate that repatriation of these foreign earnings would generate withholding taxes and state income taxes of approximately $80.5 million.

We operate in and file income tax returns in various U.S. and foreign jurisdictions which are subject to examination by tax authorities. We have tax returns that are open to examination in various jurisdictions for tax years 2010-2017. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations related to the amount and/or timing of income, deductions and tax credits. There can be no assurance that the outcome of examinations will be favorable. Our unrecognized tax benefits are subject to change as examinations of specific tax years are completed in the respective jurisdictions. Current examinations include our 2012 and 2013 Philippine income tax returns, 2013-2015 Portuguese income tax returns, and 2010-2014 Malaysian income tax returns.

A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:



	For the Year Ended December 31
	2017			2016			2015
	(In thousands)
Balance at January 1	$	23,149		$	23,332		$	12,670
Additions based on tax positions related to the current year	1,419			1,822			12,727
Additions for tax positions of prior years	2,661			689			3,341
Reductions for tax positions of prior years	(1		)	(2,589		)	(4,815		)
Reductions from lapse of statutes of limitations	(17		)	(105		)	(591		)
Balance at December 31	$	27,211		$	23,149		$	23,332

The net increase in our unrecognized tax benefits was $4.1 million from December 31, 2016 to December 31, 2017. The increases were primarily related to income attribution and income characterization. At December 31, 2017, all of our gross unrecognized tax benefits would reduce our effective tax rate, if recognized.

The liability related to our unrecognized tax benefits is $24.8 million as of December 31, 2017, and is reported as a component of other non-current liabilities. The unrecognized tax benefits presented in the table above also include positions that have reduced deferred tax assets. The balance of accrued and unpaid interest and penalties is $4.2 million as of December 31, 2017 and is included as a component of other non-current liabilities in connection with our unrecognized tax benefits.