INCOME TAXES

Loss from operations before income taxes consists of the following (in thousands):



	Year ended December 31,
	2018			2017			2016
United States	$	(19,780	)	$	(50,041	)	$	(53,833	)
International	2,832			(34,666		)	(26,597		)
Loss before income taxes	$	(16,948	)	$	(84,707	)	$	(80,430	)

The components of the benefit from income taxes consist of the following (in thousands):



	Year ended December 31,
	2018			2017			2016
Current:
Federal	$	(305	)	$	(4,530	)	$	(950	)
State	116			129			181
International	2,958			273			2,738
Deferred:
Federal	—			—			(713		)
International	1,318			2,376			(9,372		)
Total provision for (benefit from) income taxes	$	4,087		$	(1,752	)	$	(8,116	)

The differences between the provision for (benefit from) income taxes computed at the U.S. federal statutory rate at 21% and the Company’s actual provision for (benefit from) income taxes are as follows (in thousands):



	Year ended December 31,
	2018			2017			2016
Benefit from for income taxes at U.S. Federal statutory rate	$	(3,559	)	$	(29,648	)	$	(28,150	)
Differential in rates on foreign earnings	4,299			15,920			11,741
Non-deductible amortization expense	—			—			617
Tax Reform tax rate reduction	—			14,527			—
Change in valuation allowance	1,449			(2,834		)	4,465
Change in liabilities for uncertain tax positions	(250		)	(2,009		)	(960		)
Non-deductible stock-based compensation	1,363			1,934			1,480
Permanent Differences	1,096			380			441
Adjustments related to tax positions taken during prior years	184			(473		)	(163		)
Adjustments made under intercompany transactions	—			—			1,779
Tax refund	(305		)	(834		)	—
Other	(190		)	1,285			634
Total provision for (benefit from) income taxes	$	4,087		$	(1,752	)	$	(8,116	)

The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in its interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management's assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.

In 2018, the Company had a worldwide consolidated loss before tax of $16.9 million and tax expense of $4.1 million, with an annual effective income tax rate of (24)%. The Company’s 2018 effective income tax rate differed from the U.S. federal statutory rate of 21% primarily due to geographical mix of income and losses, full valuation allowance against U.S. federal, California and other states deferred tax assets, foreign withholding taxes and income taxes on earnings from operations in foreign tax jurisdictions.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2018, the Company completed the accounting for transition tax and concluded that it had no tax impact because the Company's cumulative unremitted earnings and profits are negative.

The TCJA also includes a requirement to pay a minimum tax on foreign earnings for tax years beginning after December 31, 2017. An accounting policy election is allowed to either treat taxes due on future U.S. inclusions as a current period expense or account for the minimum tax in the measurement of deferred tax assets. The Company has elected to treat the minimum tax as a period cost. As such, the Company has not recognized any deferred taxes related to the minimum tax.

In 2017, the Company had a worldwide consolidated loss before tax of $84.7 million and tax benefit of $1.8 million, with an annual effective tax rate of 2%. The Company’s 2017 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to geographical income mix, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate change in foreign jurisdictions, tax benefits associated with the release of tax reserves for uncertain tax positions resulting from the expiration of the statutes of limitations, a one-time benefit of $2.6 million from the reduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, and the net of various other discrete tax adjustments.

In 2016, the Company had a worldwide consolidated loss before tax of $80.4 million and tax benefit of $8.1 million, with an annual effective income tax rate of 10%. The Company’s 2016 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to geographical income mix and its tax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorable resolutions of uncertain tax positions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.

The components of net deferred tax assets included in the Consolidated Balance Sheets are as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Reserves and accruals	$	17,090		$	17,247
Net operating loss carryforwards	29,900			34,915
Research and development credit carryforwards	36,446			34,419
Deferred stock-based compensation	2,201			2,677
Intangibles	2,585			2,062
Other	939			1,441
Gross deferred tax assets	89,161			92,761
Valuation allowance	(77,144		)	(77,756		)
Gross deferred tax assets after valuation allowance	12,017			15,005
Deferred tax liabilities:
Depreciation and amortization	(391		)	(259		)
Convertible notes	(2,931		)	(4,284		)
Gross deferred tax liabilities	(3,322		)	(4,543		)
Net deferred tax assets	$	8,695		$	10,462

The following table summarizes the activities related to the Company’s valuation allowance (in thousands):



	Year ended December 31,
	2018			2017			2016
Balance at beginning of period	$	77,756		$	74,480		$	64,545
Additions	928			9,028			18,291
Deductions	(1,540		)	(5,752		)	(8,356		)
Balance at end of period	$	77,144		$	77,756		$	74,480

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction by jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

In 2018, the Company continued to record a valuation allowance against all of its United States deferred tax assets due to significant cumulative losses in the United States, resulting in a net increase in valuation allowance of $0.9 million. This increase in valuation allowance is offset partially by the release of $1.5 million valuation allowance against one of its Israel subsidiaries due to cumulative income generated in the recent years as well as the analysis of all available positive and negative evidence. As of December 31, 2018, the Company had a valuation allowance of $77.1 million against all of its U.S. federal, California and other states net deferred tax assets.

The Company adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, using a modified-retrospective transition method, in the first quarter of fiscal 2017. As a result, the Company recorded a cumulative effect of $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuation allowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings or effective tax rate for 2017.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this ASU during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4 million to the retained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and write off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015 (the “2015 Decision”). On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeals. The Ninth Circuit was to decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner (the “Altera Opinion”) requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the 2015 Decision of the United States Tax Court. The Ninth Circuit subsequently withdrew the opinion on August 7, 2018. Due to uncertainties surrounding the ultimate resolution of the 2015 Decision, the Company continues to share expenses related to share-based compensation despite the 2015 Decision.

As of December 31, 2018, the Company had $95.9 million, $38.0 million, $21.6 million and $48.0 million of foreign, U.S. federal, U.S. California state, and U.S. other states net operating loss carryforwards (“NOL”), respectively. There is no expiration to the utilization of the foreign NOL, while the U.S. federal and California NOL begin to expire at various dates beginning in 2026 through 2039, if not utilized.

As of December 31, 2018, the Company had U.S. federal and California state tax credit carryforwards of approximately $13.2 million and $34.9 million, respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit forward will not expire.

The Company has not provided U.S. state income taxes and foreign withholding taxes, on approximately $15.3 million of cumulative earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which require application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions to be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2018, the Company had $16.6 million of unrecognized future tax benefits that would favorably impact the effective tax rate in future periods if recognized. The following table summarizes the activities related to the Company’s gross unrecognized tax benefits (in millions):



	Year ended December 31,
	2018			2017			2016
Balance at beginning of period	$	18.8		$	19.2		$	15.6
Increase in balance related to tax positions taken during current year	1.0			1.4			4.6
Decrease in balance as a result of a lapse of the applicable statues of limitations	(0.1		)	(2.2		)	(1.0		)
Decrease in balance due to settlement with tax authorities	(1.6		)	—			—
Increase in balance related to tax positions taken during prior years	0.2			1.8			—
Decrease in balance related to tax positions taken during prior years	(0.3		)	(1.4		)	—
Balance at end of period	$	18.0		$	18.8		$	19.2

The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements of Operations. The net interest and penalties charges recorded for the years ended December 31, 2016 through 2018, were not material. The Company had approximately $24.0 thousand and $0.5 million of accrued interest and penalties related to uncertain tax positions as of December 31, 2018 and December 31, 2017.

The 2015 through 2018 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In addition, a subsidiary of the Company is under audit from 2013 to 2017 tax years by the Swiss tax authority. If, upon the conclusion of this audit, the ultimate determination of taxes owed in Switzerland is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has substantially met these various thresholds and the Switzerland tax holiday is effective through the end of 2018. The income tax benefits attributable to the Switzerland holiday were estimated to be approximately $0.4 million, $0.6 million and $0.7 million for each of the fiscal years 2018, 2017 and 2016, increasing diluted earnings per share by approximately $0.005, $0.007 and $0.008 for each of the fiscal years 2018, 2017 and 2016, respectively.