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):



	2018			2017
United States	$	(11,762	)	$	(6,911	)
Foreign	12,251			9,371
Income before income taxes	$	489		$	2,460

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



Current provision (benefit):	2018			2017
Federal	$	13		$	(1,157	)
State	(25		)	75
Foreign	3,220			3,186
	3,208			2,104
Deferred provision (benefit):
Federal	1,074			1,185
State	1,027			(425		)
Foreign	(934		)	1,383
	1,167			2,143
	$	4,375		$	4,247

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:



	2018		2017
Federal statutory income taxes	21.0	%	35.0	%
State income taxes, net of federal benefit	(40.3	)	(8.0	)
Difference in foreign and United States tax on foreign operations	(75.6	)	(68.6	)
Effect of changes in valuation allowance	920.1		121.1
Effect of change in uncertain tax positions (net)	(0.5	)	(22.6	)
Federal Sub-Part F Income from foreign operations	0.4		6.6
Global Intangible Low Taxed Income (GILTI)	43.2		—
Federal Transition Tax (net of deduction)	—		191.4
Effect of changes in tax rates	(23.6	)	32.5
Foreign Exchange	(8.4	)	9.4
Prior year adjustments	(4.1	)	17.4
Other deferred - NOL expiration	—		26.0
Foreign tax credits and withholding tax	6.3		(180.8	)
Meals and entertainment	11.9		5.5
Stock Option Expense	25.8		—
Other permanent items	14.4		4.4
Other	4.1		3.4
	894.7	%	172.7	%

For the years ended December 31, 2018 and 2017, the Company’s effective tax rate was 894.7% and 172.7%, respectively. In 2018, the Company had a significant increase in its rate due to the mix of earnings across jurisdictions, valuation allowance recorded losses in certain jurisdictions, and the impact of Global Intangible Low-Tax Income ("GILTI") as a result of the Tax Cuts and Jobs Act (the "Act") passed last year. 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.

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:	2018			2017
Deferred Revenue	$	277		$	353
Inventory capitalization	109			147
Inventory reserves	141			112
Accrued expenses	804			917
Disallowed Interest Expense	123			—
Depreciation and amortization	—			1,506
Net operating loss⁽¹⁾	9,293			6,549
Non-cash accounting charges related to stock options and warrants	584			464
Foreign tax credit carryover	3,621			5,544
Other	876			365
Total deferred tax assets	$	15,828		$	15,957
Valuation allowance	(12,793		)	(11,436		)
Total deferred tax assets, net of valuation allowance	$	3,035		$	4,521
Deferred tax liabilities:
Prepaid expenses	$	262		$	239
Deferred commissions	255			543
Internally-developed software	326			381
Fixed assets	267			266
Total deferred tax liabilities	$	1,110		$	1,429

Total net deferred tax asset	$	1,925		$	3,092

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



Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Australia	$	597	$	179	Indefinite
Bermuda	$	32	$	—	N/A
Canada	$	40	$	10	2026
China	$	278	$	70	2024
Colombia	$	1,857	$	613	Indefinite
Gibraltar	$	116	$	—	Indefinite
Hong Kong	$	323	$	53	Indefinite
Japan	$	203	$	70	Indefinite
Mexico	$	10,195	$	3,059	2020-2028
Norway	$	287	$	66	Indefinite
Russia⁽¹⁾	$	43	$	9	Indefinite
Singapore	$	127	$	22	Indefinite
South Africa	$	687	$	192	Indefinite
Sweden	$	490	$	108	Indefinite
Switzerland	$	9,249	$	850	2019-2025
Taiwan	$	4,901	$	980	2019-2028
Ukraine⁽²⁾	$	568	$	102	Indefinite
United States - Federal	$	9,091	$	1,878	Indefinite
United Kingdom	$	415	$	79	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 $3.6 million, which will begin to expire in 2025 and a charitable contribution carryforward of $0.2 million, which will expire between 2019 and 2022. The Company maintains a full valuation against both the foreign tax credits and the charitable contribution carryforward.

At December 31, 2018 and 2017, the Company’s valuation allowance was $12.8 million and $11.4 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, 2018 and 2017, 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	2018		2017
Australia	$	0.3	$	—
China	0.3		—
Colombia	0.6		0.6
Hong Kong	0.1		—
Mexico	3.1		2.8
Norway	0.1		—
South Africa	0.2		0.1
Sweden	0.1		0.1
Taiwan	0.9		0.8
Ukraine	0.1		0.1
United Kingdom	0.1		0.1
United States	6.9		6.8
Other Jurisdictions	—		—
Total	$	12.8	$	11.4

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. As of the year ended December 31, 2018, the Company has completed its analysis and no material adjustments resulted from the analysis.

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



	2018			2017
Deferred tax assets	$	1,928		$	4,239
Deferred tax liabilities	(3		)	(1,147		)
Net deferred tax assets	$	1,925		$	3,092

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, 2018, 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, 2018, the Company had unrecognized tax benefits of $0.1 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, 2018 and 2017 (in thousands):



	2018		2017
Balance as of January 1	$	79	$	515
Additions for tax positions related to the current year	—		—
Additions for tax positions of prior years	—		—
Reductions of tax positions of prior years	—		(436		)
Balance as of December 31	$	79	$	79

The Company recognizes interest and/or penalties related to uncertain tax positions in current income tax expense. As of December 31, 2018 and December 31, 2017, the Company had accrued interest and penalties of $0.1 million in the consolidated balance sheet, of which $11 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, 2018, 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	2014-2018
Canada	2014-2018
China	2016-2018
Denmark	2015-2018
Japan	2015-2018
Mexico	2014-2018
Norway	2011-2018
Republic of Korea	2012-2018
Singapore	2014-2018
South Africa	2015-2018
Sweden	2013-2018
Switzerland	2014-2018
Taiwan	2013-2018
United Kingdom	2015-2018
United States	2015-2018