INCOME TAXES

Income (loss) before income tax expense (benefit) consisted of the following (in thousands):



	Year Ended March 31,
	2018			2017		2016
Domestic	$	(35,032	)	$	32,475	$	(6,979	)
Foreign	16,373			19,710		(25,460		)
	$	(18,659	)	$	52,185	$	(32,439	)

The components of the income tax expense (benefit) are as follows (in thousands):



	Year Ended March 31,
	2018			2017			2016
Current income tax expense:
Federal	$	14,191		$	15,912		$	29,238
State	1,925			3,152			2,223
Foreign	12,249			11,175			6,628
	28,365			30,239			38,089
Deferred income tax expense (benefit):
Federal	(113,122		)	(8,278		)	(30,216		)
State	(10,037		)	3,578			(4,461		)
Foreign	(3,677		)	(6,645		)	(7,482		)
	(126,836		)	(11,345		)	(42,159		)
	$	(98,471	)	$	18,894		$	(4,070	)

The income tax expense (benefit) computed using the federal statutory income tax rate differs from NetScout’s effective tax rate primarily due to the following:



	Year Ended March 31,
	2018		2017		2016
Statutory U.S. federal tax rate	31.6	%	35.0	%	35.0	%
State taxes, net of federal tax effect	6.9		9.7		3.1
Research and development tax credits	39.5		(8.2	)	13.0
Effect of foreign operations	15.5		(6.7	)	(18.2	)
Meals and entertainment	(6.7	)	2.5		(3.5	)
Domestic production activities deduction	13.8		(4.0	)	9.2
Change in valuation allowance	(0.2	)	(0.1	)	0.7
Transaction costs	—		—		(19.1	)
2017 tax act	454.1		—		—
Foreign withholding	(21.0	)	3.8		(6.1	)
Other permanent differences	(5.8	)	4.2		(1.6	)
	527.7	%	36.2	%	12.5	%

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Legislation) was signed into law. The Tax Legislation significantly revises the U.S. tax code by, among other things, lowering the corporate tax rate from 35% to 21%; imposing a minimum tax on certain foreign earnings; limiting the deductibility of interest expense; implementing a territorial tax system and imposing a one-time transition tax on deemed repatriating earnings of foreign subsidiaries. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses situations where the accounting is incomplete for the income tax effects of the Tax Legislation. SAB 118 directs taxpayers to consider the impact of the Tax Legislation as “provisional” when the Company does not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that could not be estimated as of December 31, 2017.

Due to the effective date of the rate reduction on our fiscal year, the Company recorded a blended statutory rate for the year ended March 31, 2018. While the Company continues to assess the impact of the Tax Legislation on its consolidated financial statements, the Company has recorded a provisional amount increasing current tax expense by approximately $2 million related to the transition tax associated with the deemed repatriation of foreign earnings. The Company has not provided additional income taxes for any additional outside basis differences inherent in our investments in foreign subsidiaries because the investments are essentially permanent in duration or it has been concluded that no additional tax liability will arise upon disposal. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable. The Company is still in the process of analyzing the impact of the Tax Legislation on its indefinite reinvestment assertion. Additionally, the Company has recorded a provisional deferred tax benefit of approximately $87 million related to the re-measurement of deferred tax assets and liabilities. In the three months ending March 31, 2018, the Company recorded an overall adjustment to our provisional income tax benefit of $4 million of additional income tax benefit principally due to changes in our estimate of the re-measurement of deferred tax assets and liabilities.

The aforementioned provisional amounts may differ from actual results due to a variety of factors, including, among others, (i) management’s further assessment of the Tax Legislation and related regulatory guidance; (ii) guidance that may be issued; (iv) finalization of earnings and profits amounts and cash balances held by foreign subsidiaries impacting the transitions tax and (iv) actions the Company may take as a result of the Tax Legislation. Any adjustments to these provisional amounts made during the measurement period will be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.

The Company may be subject to the tax on the Global Intangible Low-Taxed Income (GILTI) in future years but has not completed its analysis of the applicability of the tax. The Company will continue to gather and evaluate information as to the impact of this tax, and therefore will not make a policy election on how to account for GILTI (as part of deferred taxes or as a period expense) until management has received and evaluated the necessary information. Accordingly, no amounts related to GILTI are included within deferred taxes.

The components of net deferred tax assets and liabilities are as follows (in thousands):



	Year Ended March 31,
	2018			2017
Deferred tax assets:
Accrued expenses	$	4,068		$	4,883
Deferred revenue	12,168			8,427
Reserves	3,375			6,240
Pension and other retiree benefits	5,307			4,978
Net operating loss carryforwards	21,251			27,322
Tax credit carryforwards	6,625			5,502
Share-based compensation	5,164			6,418
Other	418			288
Total gross deferred tax assets	58,376			64,058
Valuation allowance	(3,108		)	(3,374		)
Net deferred tax assets	55,268			60,684
Deferred tax liabilities:
Intangible assets	(195,959		)	(323,008		)
Depreciation	(4,187		)	(8,695		)
Total deferred tax asset (liability)	$	(144,878	)	$	(271,019	)

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. We evaluate the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. We weigh objective and verifiable evidence more heavily in this analysis. In situations where we conclude that we do not have sufficient objective and verifiable evidence to support the realizability of the asset we create a valuation allowance against it. A valuation allowance has been established for the deferred tax assets related to Psytechnics Ltd., and for certain deferred tax assets related to the acquisition of ONPATH. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.

At March 31, 2018, the Company had U.S. federal net operating loss carry forwards of approximately $33 million, state net operating loss carryforwards of approximately $66 million and tax credit carryforwards of approximately $8 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2019. The Company also had foreign net operating loss carryforwards of approximately $67 million at March 31, 2018. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2014, although carryforward attributes that were generated prior to 2014 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2018, 2017 and 2016 is as follows (in thousands):



	Year Ended March 31,
	2018			2017			2016
Balance at April 1,	$	2,926		$	1,588		$	1,038
Additions based on tax positions related to the current year	126			46			48
Release of tax positions of prior years	(481		)	(154		)	—
Increase in unrecognized tax benefits as a result of a tax position taken during a prior period	—			1,446			502
Decrease relating to settlements with taxing authorities	(356		)	—			—
Balance at March 31,	$	2,215		$	2,926		$	1,588

We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.