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 periods beginning January 1, 2018. In 2017, we recognized a $41.6 million net benefit consisting of the one-time transition tax net of tax credits generated, remeasurement of deferred taxes, and the release of valuation allowance against U.S. deferred tax assets for the provisional estimate of the impact of the Tax Act. During the quarter ended December 31, 2018, we adjusted our provisional estimate of the impact of the Tax Act, primarily in connection with clarifications provided in proposed foreign tax credit regulations issued during 2018, resulting in an income tax expense in the quarter of $22.3 million. Our accounting for the impact of the Tax Act is now complete in accordance with SEC staff issued SAB No. 118.

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



	For the Year Ended December 31,
	2018		2017		2016
	(In thousands)
United States	$	5,535	$	26,040	$	(10,880	)
Foreign	180,280		281,456		240,575
Income before taxes	$	185,815	$	307,496	$	229,695

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,
	2018			2017			2016
	(In thousands)
Current:
Federal	$	22,003		$	—		$	—
State	39			11			22
Foreign	47,318			81,969			49,577
	69,360			81,980			49,599
Deferred:
Federal	5,468			(34,787		)	—
State	2,993			(4,072		)	—
Foreign	(21,571		)	(3,330		)	1,443
	(13,110		)	(42,189		)	1,443
Income tax expense	$	56,250		$	39,791		$	51,042

The reconciliation between the U.S. federal statutory income tax rate of 21% for 2018 and 35% for 2017 and 2016 and our income tax expense is as follows:



	For the Year Ended December 31,
	2018			2017			2016
	(In thousands)
U.S. federal statutory income tax rate	$	39,021		$	107,623		$	80,393
State taxes, net of federal benefit	1,677			2,624			850
Foreign income taxed at different rates	6,741			(50,243		)	(19,279		)
Foreign exchange (loss) gain	(3,797		)	29,756			(1,127		)
Change in valuation allowance	(12,662		)	(6,763		)	(7,903		)
Adjustments related to prior years	267			3,329			(2,648		)
U.S. tax reform (the Tax Act)	22,284			(41,554		)	—
Income tax credits generated	(18,106		)	(7,296		)	(40,301		)
Repatriation of foreign earnings and profits	387			719			25,604
Expiration of net operating losses and credits	19,462			166			15,092
Other	976			1,430			361
Income tax expense	$	56,250		$	39,791		$	51,042

The change in valuation allowance for 2018, 2017 and 2016, excluding the impact of the Tax Act, is primarily the result of changes in net operating loss and tax credit carryforwards for which no tax expense or benefit has been recognized. Prior to 2018, the benefit of foreign income taxed at different rates increased as foreign income before tax has increased. The decrease in the U.S. federal statutory income tax rate to 21% in 2018 has reduced the impact of foreign income taxed at different rates than the U.S. rate.

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



	December 31,
	2018			2017
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	13,207		$	53,130
Income tax credits	107,532			23,998
Property, plant and equipment	38,050			35,479
Deferred interest expense	5,415			—
Accrued liabilities	68,402			68,091
Receivable	31,729			32,719
Unrealized foreign exchange loss	1,410			1,924
Other	14,545			12,682
Total deferred tax assets	280,290			228,023
Valuation allowance	(118,560		)	(83,251		)
Total deferred tax assets net of valuation allowance	161,730			144,772
Deferred tax liabilities:
Property, plant and equipment	14,605			15,754
Deferred gain	11,651			939
Unrealized foreign exchange gain	1,695			8,383
Unbilled receivables	9,515			8,217
Other	5,805			4,566
Total deferred tax liabilities	43,271			37,859
Net deferred tax assets	$	118,459		$	106,913
Recognized as:
Other assets	118,697			111,353
Other non-current liabilities	(238		)	(4,440		)
Total	$	118,459		$	106,913

Valuation allowance against deferred tax assets consist of the following:



	December 31,
	2018		2017
	(In thousands)
Valuation allowance:
U.S.	$	77,580	$	43,719
Foreign	40,980		39,532
Total valuation allowance	$	118,560	$	83,251

The use of our federal net operating loss carryforward to offset the one-time transition tax required by the Tax Act resulted in a reduction in deferred tax assets for net operating loss carryforwards and created deferred tax assets for foreign income tax credit carryforwards. The increase in our valuation allowance includes the estimate of the portion of our foreign tax credit carryforwards generated in connection with the one-time transition tax included in the Tax Act projected to expire unused.

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 $1.9 million, $6.2 million and $5.6 million in tax benefits as a result of the tax holidays in 2018, 2017 and 2016, respectively. The benefit of the tax holidays on diluted earnings per share was approximately $0.01, $0.03 and $0.02 for 2018, 2017 and 2016, respectively.

Our net operating loss carryforwards (“NOLs”) are as follows:



	December 31,
	2018		2017		Expiration
	(In thousands)
U.S. Federal NOLs	$	25,272	$	220,445	2021-2024
U.S. State NOLs	108,011		121,095		2019-2036
Foreign NOLs	10,686		2,967		2019-2028

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 foreign net operating loss carryforwards, we consider it more likely than not that we will not have sufficient taxable income to allow us to realize these deferred tax assets.

At December 31, 2017, a portion of our U.S. federal net operating loss carryforward was reserved with a valuation allowance due to an estimate of the net operating loss carryforward not expected to be realized. At December 31, 2018, a portion of our remaining U.S. federal net operating loss carryforward was reserved with a valuation allowance due to ownership change limitations from a prior year acquisition as well as certain state net operating loss carryforwards expected to expire unused.

Our tax credit carryforwards are as follows:



	December 31,
	2018		2017		Expiration
	(In thousands)
U.S. Foreign Tax Credits	$	84,056	$	12,637	2026-2027
U.S. Other Tax Credits	1,117		7,104		2026-2038
Foreign Tax Credits	22,359		4,257		2019-2028

At December 31, 2018, a portion of our U.S. foreign tax credit carryforward was reserved with a valuation allowance for the amount expected to expire unused.

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. The income tax expense from the deemed repatriation was offset by net operating loss carryforwards and income tax credits resulting in a transition tax payable of $21.8 million. Under an election of the Tax Act, the remaining transition tax is payable over eight years beginning with tax year 2017, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. 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 $91.8 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 2012-2018. 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, and 2014-2016 Singapore tax returns.

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



	For the Year Ended December 31,
	2018			2017			2016
	(In thousands)
Balance at January 1	$	27,211		$	23,149		$	23,332
Additions based on tax positions related to the current year	401			1,419			1,822
Additions for tax positions of prior years	636			2,661			689
Reductions for tax positions of prior years	(2,958		)	(1		)	(2,589		)
Reductions from lapse of statutes of limitations	(22		)	(17		)	(105		)
Balance at December 31	$	25,268		$	27,211		$	23,149

The net decrease in our unrecognized tax benefits was $1.9 million from December 31, 2017 to December 31, 2018. The decrease was primarily related to the closure of an audit. At December 31, 2018, all of our gross unrecognized tax benefits would reduce our effective tax rate, if recognized. It is reasonably possible that unrecognized tax benefits related to entity classification and withholding taxes will decrease by up to $2.9 million due to the lapse of statutes of limitations in foreign jurisdictions.

The liability related to our unrecognized tax benefits is $25.3 million as of December 31, 2018 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 $5.3 million as of December 31, 2018 and is included as a component of other non-current liabilities in connection with our unrecognized tax benefits.