NOTE 6 − INCOME TAXES

We recorded net income tax benefit of $0.4 million for the year ended December 31, 2018 and net income tax expense of $1.4 million for the year ended December 31, 2017. The net benefit for the year ended December 31, 2018 consisted of current income tax expense of $0.5 million and a deferred tax benefit of $0.9 million. The current tax expense consists of income tax primarily from our U.S. and U.K. based operations. The deferred tax benefit primarily consists of benefits from establishing deferred tax assets of $0.5 million for our foreign tax credit (“FTC”) carryforwards, $0.2 million for net operating losses from certain U.K. subsidiaries that are expected to be used by another U.K. subsidiary and $0.2 million decrease in net deferred tax liabilities. The net expense during the year ended December 31, 2017 consisted of current income tax expense of $1.9 million and a deferred tax benefit of $0.5 million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations and unrecoverable foreign withholding taxes in the U.K. The deferred tax benefit was related primarily to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company including the reduction of the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017. The Tax Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including the elimination of certain domestic deductions and credits, capitalization of research and development expenditures, and additional limitations on the deductibility of executive compensation and interest. We adjusted our deferred tax assets and liabilities in the U.S. at December 31, 2017, using the new federal corporate tax rate of 21%.

Global Intangible Low-taxed Income

We recognize the tax on global intangible low-taxed income (“GILTI”) as a period cost in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. For the year ended December 31, 2018, there is no GILTI inclusion.

Transfer pricing adjustments, net

The Company's tax positions include the Company's intercompany transfer pricing policies and the associated taxable income and deductions arising from intercompany charges between subsidiaries within the consolidated group. During fiscal 2018, the Company finalized an Advance Pricing Arrangement ("APA") with the Evolving Systems, Inc. and its subsidiaries. This APA determined the amount of income which is taxable in each respective jurisdiction. In accordance with the APA, the adjustments necessary to reflect the reduction in 2018 U.S. pre-tax income in the resulted in an increase in domestic income before income tax expense of $5.5 million and a corresponding decrease in foreign income before income tax expense in the year ended 2018.

The pre-tax (loss) income on which the provision for income taxes was computed is as follows (in thousands):


		For the Years Ended December 31,
		2018		2017

Domestic	$	(17,820)	$	(4,168)
Foreign		2,607		8,105
Total	$	(15,213)	$	3,937

The expense (benefit) from continuing operations for income taxes consists of the following (in thousands):


		For the Years Ended December 31,
		2018		2017

Current:
Federal	$	340	$	(108)
Foreign		155		1,998
State		25		22
Total Current		520		1,912
Deferred:
Federal		41		(444)
Foreign		(987)		(47)
Total Deferred		(946)		(491)
Total	$	(426)	$	1,421

As of December 31, 2018, and 2017 we had no Federal NOL carryforwards remaining. As of December 31, 2018, and 2017, we had state NOL’s of approximately $27.5 million and $28.9 million, respectively. The state NOL carryforwards expire at various times beginning in 2019 and ending in 2037. As of December 31, 2018, and 2017, we had foreign NOLs of $5.5 million and $5,6 million, respectively. The foreign NOL carryforwards expire at various times beginning in 2019 and ending in 2037. In addition, we have research and experimentation credit carryforwards of approximately $0.3 million which may expire in 2019 and Alternative Minimum Tax (“AMT”) credits of $0.8 million. For tax years beginning after 2018 and before 2023, the AMT credit is refundable in an amount equal to 50% of excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability.

In our U.S. Federal income tax returns we historically deducted income taxes paid to various countries. Our income tax calculations have historically been under the regular and AMT regulations found in U.S. tax laws. The U.S. tax system contains rules to alleviate the burden of double taxation on income generated in foreign countries and subject to tax in such countries. The U.S. allows for either a deduction or credit of such foreign taxes against U.S. taxable income (“Foreign Tax Credit” or “FTC”). An election to either claim a deduction or FTC on such foreign income taxes can be made each tax year, independent from elections made in other years. An FTC reduces a company’s actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only the company’s income subject to tax. As the election to claim the FTC or deduction is made on an annual basis, we intend to compare benefits to either claim a deduction or FTC on an annual basis. We had approximately $4.8 million of FTC’s to carryforward into 2019 and subsequent years as a deferred tax asset. As of December 31, 2018, our FTC deferred tax asset balance was approximately $0.5 million, net of its valuation allowance. We utilized $0.5 million of Foreign Tax Credits for the year ended December 31, 2017 to offset the one-time transition tax on indefinitely reinvested and unrepatriated foreign earnings. The determination of the transition tax required analysis regarding the amount and composition of our historical earnings, the amount of available Foreign Tax Credits and our ability to utilize certain Foreign Tax Credits

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):


		December 31, 2018		December 31, 2017
Deferred tax assets:
Foreign tax credits carryforwards	$	4,788	$	4,731
Net operating loss carryforwards - Foreign		5,531		5,596
Net operating loss carryforwards - State		887		914
Research & development credits		303		303
AMT credit		770		770
Stock compensation		559		570
Depreciable assets		38		33
Accrued liabilities and reserves		67		66
Total deferred tax assets		12,943		12,983

Deferred tax liabilities:
Intangibles		(697)		(1,045)
Accrued liabilities and reserves		(174)		(120)
Total deferred tax liability		(871)		(1,165)

Net deferred tax assets, before valuation allowance		12,072		11,818
Valuation allowance		(10,932)		(11,544)
Net deferred tax asset	$	1,140	$	274

In conjunction with the acquisition of Evolving Systems Labs in October 2013, we recorded certain identifiable intangible assets. We established a deferred tax asset of $0.1 million at the acquisition date for the expected difference between what would be expensed for financial reporting purposes and what would be deductible for income tax purposes. In September 2015, we established a deferred tax liability of $1.8 million as a result of the acquisition of Evolving Systems NC. In September 2017, we established a deferred tax liability of $0.4 million as a result of the acquisition of the Lumata Entities. As of December 31, 2018, and 2017, there was a net deferred tax liability of $0.7 million and a net deferred tax liability of $0.8 million, respectively. This net deferred tax liability will be recognized as the identifiable intangibles are amortized.

We maintain a valuation allowance on the domestic net deferred tax assets other than $0.7 million in AMT credits and $0.5 million in FTC, and $0.3 million of foreign net deferred tax assets, as we have determined it is more likely than not that we will not realize our domestic deferred tax assets. Such assets primarily consist of certain net state operating loss carryforwards, research and development credits and, Foreign Tax Credits. We assessed the realizability of our domestic deferred tax assets using all available evidence. In particular, we considered both historical results and projections of profitability for the reasonably foreseeable future periods. We are required to reassess our conclusions regarding the realization of our deferred tax assets at each financial reporting date. A future evaluation could result in a conclusion that all or a portion of the valuation allowance is no longer necessary which could have a material impact on our results of operations and financial position.

The benefit for income taxes differs from the amount computed by applying the U.S. federal and state combined income tax rate of 25.6% for 2018 and 38.0% for 2017 to (loss) income to (loss) income before income tax (benefit) expense as follows (in thousands):


		For the Years Ended December 31,
		2018		2017

U.S. federal income tax expense at statutory rates	$	(3,920)	$	1,776
State income tax expense, net of federal impact		23		22
Foreign Tax Credit		-		(848)
Foreign rate differential		540		(1,312)
Foreign deemed dividends		-		1,311
Change in valuation allowance		(274)		844
Research and development expenses		(1,167)		(305)
Foreign taxes		-		18
Section 78 Gross-up		-		311
US Tax Reform		-		(108)
Goodwill impairment loss		4,188		-
Permanent differences and other, net		184		(288)
Total tax (benefit) expense	$	(426)	$	1,421

The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more likely than not that the position would be sustained upon examination by taxing authorities.

As of December 31, 2018, and 2017, we had no liability for unrecognized tax benefits. We do not believe there will be any material changes to our unrecognized tax positions over the next twelve months. Interest and penalties related to income tax liabilities are included as a component of income tax expense (benefit) in the accompanying statements of operations.

Our income taxes payable may be reduced by the AMT tax benefits from employee stock plan awards. We had no net excess tax benefits from employee stock plan awards for the years ended December 31, 2018 and 2017, which would be reflected as income tax expense or benefit in the statement of operations.

We conduct business globally and, as a result, Evolving Systems Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, namely the U.K., France, and India. Although carryovers can always be subject to review by taxing authorities, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2013.