INCOME TAXES

The components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (in thousands):



	2017			2016
United States	$	(6,911	)	$	(2,368	)
Foreign	9,371			1,413
	$	2,460		$	(955	)

The components of the Company’s income tax expense for the years ended December 31 (in thousands):



Current provision (benefit):	2017			2016
Federal	$	(1,157	)	$	(396	)
State	75			59
Foreign	3,186			1,438
	2,104			1,101
Deferred provision (benefit):
Federal	1,185			(95		)
State	(425		)	(25		)
Foreign	1,383			(1,350		)
	2,143			(1,470		)
	$	4,247		$	(369	)

A reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for the years ended December 31:



	2017		2016
Federal statutory income taxes	35.0	%	35.0	%
State income taxes, net of federal benefit	(8.0	)	(4.1	)
Difference in foreign and United States tax on foreign operations	(68.6	)	9.5
Effect of changes in valuation allowance	121.1		59.0
Effect of change in uncertain tax positions (net)	(22.6	)	12.8
Federal Sub-Part F Income from foreign operations	6.6		(27.4	)
Federal Transition Tax (net of deduction)	191.4		—
Effect of changes in tax rates	32.5		—
Foreign Exchange	9.4		(45.7	)
Prior year adjustments	17.4		—
Other deferred - NOL expiration	26.0		—
Foreign tax credits and withholding tax	(180.8	)	—
Meals and entertainment	5.5		—
Other permanent items	4.4		—
Other	3.4		(0.4	)
	172.7	%	38.7	%

For the years ended December 31, 2017 and 2016, the Company’s effective tax rate was 172.7% and 38.7%, respectively. For 2017, the Company had a significant increase in its rate due to the impact of the Act. Items decreasing the effective income tax rate included the favorable rate difference from foreign jurisdictions, utilization of foreign tax credits against the transition tax, and certain tax reserve items removed due to expiration of applicable statute of limitations. Items increasing the effective income tax rate included transition tax, return to provision and prior year adjustments, and change in valuation allowance. For 2016, the Company had a tax benefit due to loss before income tax. Items decreasing the effective income tax rate included the favorable rate difference from foreign jurisdictions, return to provision adjustment, release of value allowances with respect to Switzerland and certain tax reserve items removed due to expiration of applicable statute of limitations. Items increasing the effective income tax rate included foreign exchange losses and “Subpart F income” resulting from controlled foreign corporation operations.

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 used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities consisted of the following at December 31 (in thousands):



Deferred tax assets:	2017			2016
Deferred revenue	$	353		$	492
Inventory capitalization	147			258
Inventory reserves	112			82
Accrued expenses	917			799
Depreciation and amortization	1,506			2,181
Net operating loss⁽¹⁾	6,549			6,021
Deferred royalty	5			18
Non-cash accounting charges related to stock options and warrants	464			715
Foreign tax credit carryover	5,544			3,797
Other	360			932
Total deferred tax assets	$	15,957		$	15,295
Valuation allowance	(11,436		)	(8,458		)
Total deferred tax assets, net of valuation allowance	$	4,521		$	6,837
Deferred tax liabilities:
Prepaid expenses	$	239		$	380
Deferred commissions	543			742
Internally-developed software	381			205
Fixed assets	266			178
Total deferred tax liabilities	$	1,429		$	1,505

Total net deferred tax asset	$	3,092		$	5,332

⁽¹⁾ The Company’s net operating loss will expire as follows (dollar amounts in thousands):



Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Canada	$	9	$	2	2026
Colombia	$	1,641	$	558	Indefinite
Cyprus	$	8	$	1	2021
Denmark	$	9	$	2	Indefinite
Hong Kong	$	110	$	18	Indefinite
Japan	$	400	$	139	Indefinite
Mexico	$	9,395	$	2,819	2020-2027
Norway	$	263	$	61	Indefinite
Russia⁽¹⁾	$	49	$	10	Indefinite
Singapore	$	131	$	22	Indefinite
South Africa	$	239	$	67	Indefinite
Sweden	$	549	$	121	Indefinite
Switzerland	$	10,893	$	1,001	2018-2023
Taiwan	$	4,707	$	800	2018-2026
Ukraine⁽²⁾	$	604	$	109	Indefinite
United Kingdom	$	454	$	86	Indefinite


⁽¹⁾	On August 1, 2016, the Company established a legal entity in Russia.


⁽²⁾	On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity.

In addition to net operating loss attributes, the Company has recorded a foreign tax credit carryforward of $5.5 million, which will begin to expire in 2024 and a charitable contribution carryforward of $0.2 million, which will expire in 2021. The Company maintains a full valuation against both the foreign tax credits and the charitable contribution carryforward.

At December 31, 2017 and 2016, the Company’s valuation allowance was $11.4 million and $8.5 million, respectively. The provisions of ASC Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowances presented below (in millions) at December 31, 2017 and 2016, represented a reserve against the Company’s net deferred tax asset the Company believed the “more likely than not” criterion for recognition purposes could not be met. The U.S. valuation allowance increased due to the carryover of foreign tax credits that we do not anticipate to utilize in future years.



Country	2017		2016
Colombia	$	0.6	$	0.3
Mexico	2.8		2.4
South Africa	0.1		—
Sweden	0.1		0.1
Switzerland	—		0.1
Taiwan	0.8		1.3
Ukraine	0.1		0.1
United Kingdom	0.1		—
United States	6.8		4.1
Other Jurisdictions	—		0.1
Total	$	11.4	$	8.5

U.S. Tax

On December 22, 2017, President Trump signed into law H.R. 1/Public Law No. 115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Pursuant to ASC 740-10-25-47, the effects of the new federal legislation are recognized upon enactment, which is the date the president signs a bill into law.

The Securities and Exchange Commission staff (“SEC Staff”) recognized that entities may not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the Act in the reporting period that includes the date of enactment. SEC Staff issued guidance in SAB 118 to address this situation. SAB 118 provides that to the extent an entity can complete the income tax accounting effects of the Act, the completed amount is reported. To the extent the entity cannot complete the calculation for certain income tax effects of the Act, the entity may provide a reasonable estimate and report this provisional amount in the first reporting period in which the entity is able to make a reasonable estimate. If the entity is unable to make a reasonable estimate, then the entity will not report any provisional amounts and will continue to report the effects of the tax law in effect immediately prior to the Act. The measurement period begins in the period of enactment and ends when the entity has obtained, prepared, and analyzed the information needed to complete the accounting requirements under ASC 740; however, the measurement period should not extend beyond one year from the enactment date.

The following is a summary of the tax effects of the Act:

Corporate Tax Rate Change: The Act includes a decrease to the U.S. corporate income tax rate effective January 1, 2018, from 35 percent to 21 percent, which requires a re-measurement of deferred tax assets and liabilities pursuant to ASC 740-10-25-47. For the year ended December 31, 2017, Mannatech recorded deferred tax expense of $0.8 million as a provisional estimate related to revaluing its deferred tax assets and liabilities to the newly enacted tax rate.

Deemed Repatriation of Foreign Earnings (“Transition Tax”): The Act provides that a U.S. shareholder of a specified foreign corporation (“SFC”) must include in gross income, at the end of the SFC’s last tax year beginning before January 1, 2018, the U.S. shareholder’s pro rata share of certain of the SFC’s undistributed and previously untaxed post-1986 foreign earnings and profits and base the calculation on the greater of the E&P as of November 2, 2017, or December 31, 2017. Mannatech has recorded a current tax expense of $1.7 million after foreign tax credits as a provisional estimate.

The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based, in part, on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

Global Intangible Low Taxed Income: The Act creates a requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC’s U.S. shareholder. Global Intangible Low Tax Income (“GILTI”) is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return (“the routine return”), which is defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of the net CFC-tested income.

A deduction is permitted to a domestic corporation in an amount equal to 50 percent of the sum of the GILTI inclusion and the amount treated as a dividend, subject to certain limitations. The GILTI provisions are effective for tax years beginning on or after January 1, 2018.

In FASB staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, the FASB staff noted that ASC 740 was not clear with respect to the appropriate accounting for GILTI, and accordingly, an entity may either: (1) elect to treat taxes on GILTI as period costs similar to special deductions, or (2) recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal (the deferred method). Mannatech has not yet adopted an accounting policy related to GILTI.

Unremitted Foreign Earnings: For each of its foreign subsidiaries, the company makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States. ∙ The Act requires companies to pay a one-time transition tax on earnings of foreign subsidiaries, a majority of which were previously considered permanently reinvested by the company. It is the Company’s intention to repatriate its previously taxed income (“PTI”) of approximately $25 million, which is a provisional estimate as it includes the PTI generated from the Company’s provisional estimate of the transition tax. In addition to the one-time transition tax, a deferred tax liability for withholding taxes of $1.3 million has been accrued on the estimated PTI at December 31, 2017, along with an offsetting deferred tax asset for the U.S. foreign tax credit that would be generated. The Company is currently evaluating the impact of The Act on its permanent reinvestment assertion for any remaining outside basis difference after considering the transition tax. The repatriation of incremental outside basis difference could result in an adjustment to the tax liability due to contributing factors such as withholding taxes, income taxes and the impact of foreign currency movements. As such, the company is still evaluating any remaining outside basis difference.

Deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31 as follows (in thousands):



	2017			2016
Noncurrent deferred tax assets	$	4,239		$	5,368
Long-term deferred tax liabilities	(1,147		)	(29		)
Net deferred tax assets	$	3,092		$	5,339

On January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. Topic 740 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2017, the Company recorded $0.2 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2017, the Company had unrecognized tax benefits of $0.2 million that, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2017 and 2016 (in thousands):



	2017			2016
Balance as of January 1	$	733		$	715
Additions for tax positions related to the current year	—			90
Additions for tax positions of prior years	—			54
Reductions of tax positions of prior years	(576		)	(126		)
Balance as of December 31	$	157		$	733

The Company recognizes interest and/or penalties related to uncertain tax positions in current income tax expense. As of December 31, 2017 and December 31, 2016, the Company had accrued interest and penalties of $0.1 million and $0.3 million in the consolidated balance sheet, of which $9 thousand and $42 thousand were accrued in the consolidated statement of operations. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase or decrease within the next twelve months due to uncertainties regarding the timing of any examinations, the Company does not expect its unrecognized tax benefits to decrease during the next twelve months.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2017, the tax years that remained subject to examination by a major tax jurisdiction for the Company’s most significant subsidiaries were as follows:



Jurisdiction	Open Years
Australia	2013-2017
Canada	2013-2017
China	2016-2017
Denmark	2014-2017
Japan	2014-2017
Mexico	2013-2017
Norway	2010-2017
Republic of Korea	2011-2017
Singapore	2013-2017
South Africa	2014-2017
Sweden	2012-2017
Switzerland	2013-2017
Taiwan	2012-2017
United Kingdom	2014-2017
United States	2014-2017