Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Taxes

16. Income Taxes

The Company’s income tax expenses are composed of domestic and foreign income taxes depending on the relevant tax jurisdiction. “Domestic” refers to the income before taxes and current income taxes generated or incurred in the United States, where the parent company resides.

The components of income tax expense are as follows:

	Year Ended December 31,
	2014			2013			2012
Income (loss) before income taxes
Domestic	$	(22,146	)	$	(6,127	)	$	(2,634	)
Foreign		(93,563	)		(54,106	)		125,519
	$	(115,709	)	$	(60,233	)	$	122,885
Current income taxes expense (benefit)
Domestic	$	(3,300	)	$	(2,258	)	$	6,170
Foreign		3,312			4,875			4,533
Uncertain tax position liability (domestic)		10			(87	)		14
Uncertain tax position liability (foreign)		(66	)		7			175
		(44	)		2,537			10,892
Deferred income taxes expense
Foreign		1,567			1,433			1,955
Total income tax expenses	$	1,523		$	3,970		$	12,847
Effective tax rate		—			—			10.5	%

The Company’s annual effective tax rate was 10.5% for the year ended December 31, 2012.

The differences between the annual effective tax rates and the U.S. federal statutory rate of 35.0% primarily result from the non-income based withholding tax levied on intercompany interest income in the Company’s Dutch subsidiary, application of lower tax rates associated with certain earnings from the Company’s operations outside the U.S., the parent Company’s interest income, which is non-taxable for US tax purposes and the change of valuation allowance of deferred tax assets.

The statutory income tax rate of the Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., applicable to the Company was approximately 24.2% in 2014, 2013 and 2012.

The provision for domestic and foreign income taxes incurred is different from the amount calculated by applying the statutory tax rate to the net income before income taxes. The significant items causing this difference are as follows:

	Year Ended December 31,
	2014			2013			2012
Provision computed at statutory rate	$	(40,498	)	$	(21,082	)	$	43,010
Change in statutory tax rate		—			—			—
Difference in foreign tax rates		10,130			5,375			(12,544	)
Permanent differences
Derivative assets adjustment		(1,526	)		1,469			3,364
TPECs, hybrid and other interest		(6,813	)		(3,151	)		(5,920	)
Permanent impairment		—			—			(935	)
Thin capitalization		—			—			97
Deemed dividend		—			—			7,609
Permanent foreign currency gain (loss)		(901	)		3,351			(465	)
Customs penalty		—			—			742
Non-deductible settlement		6,318			—			—
Other permanent differences		(1,097	)		(881	)		1,556
Withholding tax		3,506			3,918			4,242
Foreign exchange rate adjustment		4,687			(7,455	)		(4,127	)
Change in valuation allowance		29,484			24,062			(21,184	)
Tax credit		(1,811	)		(1,818	)		(2,796	)
Uncertain tax positions liability		(56	)		(80	)		189
Others		100			262			9
Income tax expenses	$	1,523		$	3,970		$	12,847

A summary of the composition of net deferred income tax assets (liabilities) as of December 31, 2014, 2013 and 2012 are as follows:

	December 31,
	2014			2013			2012
Deferred tax assets
Accounts Receivables	$	1,076		$	28,628		$	8,799
Inventories		11,015			5,866			3,501
Accrued expenses		9,030			8,758			2,812
Product warranties		719			292			306
Other reserves		457			684			1,072
Royalty income		147			1,364			3,118
Property, plant and equipment		15,914			13,667			12,945
Intangible assets		780			922			—
Accumulated severance benefits		30,413			27,769			23,465
Foreign currency translation loss		17,496			12,220			13,533
NOL carry-forwards		80,979			53,714			72,533
Tax credit		25,161			26,041			26,786
Other long-term payable		1,034			608			168
Others		1,990			2,887			1,438
Total deferred tax assets		196,211			183,420			170,476
Less: valuation allowance		(194,739	)		(178,729	)		(162,968	)
		1,472			4,691			7,508
Deferred tax liabilities
Derivative assets		—			1,189			124
Intangible assets		—			—			1,712
Foreign currency translation gain		748			19			1,003
Others		147			1,239			295
Total deferred tax liabilities		895			2,447			3,134
Net deferred tax assets	$	577		$	2,244		$	4,374
Reported as
Current deferred income tax assets	$	237		$	1,348		$	1,788
Non-current deferred income tax assets	$	415		$	896		$	2,586
Current deferred income tax liabilities	$	(72	)	$	—		$	—
Non-current deferred income tax liabilities	$	(3	)	$	—		$	—

The valuation allowances at December 31, 2014, 2013 and 2012 are primarily attributable to net deferred tax assets at the Company’s Korean subsidiary for which, due to expected losses related to the Company’s Korean subsidiary in future years, the Company has recorded a full valuation allowance against the deferred tax assets, net of its deferred tax liabilities, and against certain foreign subsidiary’s deferred tax assets pertaining to its related tax loss carry-forwards that are not anticipated to generate a tax benefit. Changes in valuation allowance for deferred tax assets for the years ended December 31, 2014, 2013 and 2012 are as follows:

	Year Ended December 31,
	2014			2013			2012
Beginning balance	$	178,729		$	162,968		$	200,056
Charged to expense (income)		29,484			24,062			(21,184	)
NOL and tax credit expiration		(7,605	)		(10,150	)		(25,305	)
Translation adjustment		(5,869	)		1,849			9,401
Ending balance	$	194,739		$	178,729		$	162,968

The amount presented as “Charged to expense (income)” primarily relates to the utilization of net operating loss and tax credit carry-forwards, or pre-tax losses for which there is no tax benefit.

The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate future taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in which the Company operates and the overall future industry outlook.

As of December 31, 2014, 2013 and 2012, the Company had net deferred tax assets of $577 thousand, $2,244 thousand and $4,374 thousand, respectively, related to the Company’s Japanese subsidiary. As of December 31, 2014, 2013 and 2012, the Company recorded a valuation allowance of $194,739 thousand, $178,729 thousand and $162,968 thousand on its deferred tax assets related to temporary differences, net operating loss carry-forwards and tax credit in domestic and foreign subsidiaries. The Company maintained to record these valuation allowances on deferred tax assets based on its assessment that the negative evidence of expected losses in early future years outweighed the positive evidence of historical income.

As of December 31, 2014, the Company had approximately $315,344 thousand of net operating loss carry-forwards available to offset future taxable income. The majority of net operating loss is associated with the Company’s Korean subsidiary, which expires in part at various dates through 2024, and with the Company’s Luxembourg subsidiary with indefinite expiration. The Company utilized net operating loss of $1,219 thousand, $69,159 thousand and $86,938 thousand, for the years ended December 31, 2014, 2013 and 2012, respectively. The Company also has Korean, Dutch and U.S. tax credit carry-forwards of approximately $9,561 thousand, $15,210 thousand and $390 thousand, respectively, as of December 31, 2014. The Korean tax credits expire at various dates starting from 2015 to 2019, and the Dutch tax credits are carried forward to be used for an indefinite period of time.

Uncertainty in Income Taxes

The Company and the Company’s subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for all open tax years.

As of December 31, 2014, 2013 and 2012, the Company recorded $3,491 thousand, $3,706 thousand and $3,820 thousand of liabilities for unrecognized tax benefits, respectively. For the years ended December 31, 2014, 2013 and 2012, the Company recorded $110 thousand, $106 thousand and $5 thousand of income tax benefits by reversing liabilities due to the lapse of the applicable statute of limitations and incurred $44 thousand, $7 thousand and $55 thousand of income tax expenses for uncertain tax positions mainly resulting from withholding taxes related to intercompany balances.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $10 thousand, $20 thousand, $139 thousand of interest and penalties as income tax expense for the years ended December 31, 2014, 2013 and 2012, respectively. Total interest and penalties accrued as of December 31, 2014, 2013 and 2012 were $480 thousand, $530 thousand and $544 thousand, respectively.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of each period is as follows:

	Year Ended December 31,
	2014			2013			2012
Unrecognized tax benefits, balance at the beginning	$	11,865		$	11,196		$	10,297
Additions based on tax positions related to the current year		4,472			1,690			1,342
Additions for tax positions of prior years		47			—			41
Lapse of statute of limitations		(1,040	)		(1,067	)		(942	)
Translation adjustment		(375	)		46			458
Unrecognized tax benefits, balance at the ending	$	14,969		$	11,865		$	11,196