Note 11: Income Taxes

The components of income (loss) before income taxes for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands):


	2017			2016		2015
U.S.	$	(27,926	)	$	8,254	$	9,311
Foreign		40,056			30,394		26,257

Total	$	12,130		$	38,648	$	35,568

The provision for (benefit from) income taxes for the years ended December 31, 2017, 2016, and 2015 is summarized as follows (in thousands):


	2017			2016			2015
Current:
U.S. Federal	$	6,897		$	(7,593	)	$	3,755
State		(2,926	)		662			1,813
Foreign		14,751			11,721			5,798

Total current		18,722			4,790			11,366

Deferred:
U.S. Federal		15,304			(4,276	)		(3,119	)
State		732			(567	)		(583	)
Foreign		(7,283	)		(6,248	)		(4,295	)

Total deferred		8,753			(11,091	)		(7,997	)

Provision for (benefit from) income taxes	$	27,475		$	(6,301	)	$	3,369

The reconciliation of the income tax provision (benefit) computed at the federal statutory rate to the actual tax provision (benefit) for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):


	2017					2016					2015
Tax provision at federal statutory rate	$	4,246		35.0	%	$	13,527		35.0	%	$	12,449		35.0	%
State income taxes, net of federal benefit		(1,426	)	(11.8	)		62		0.2			800		2.2
Research and development credits		(1,508	)	(12.4	)		(2,627	)	(6.8	)		(4,217	)	(11.9	)
Effect of foreign operations		(1,344	)	(11.1	)		(3,320	)	(8.5	)		(3,412	)	(9.5	)
Deemed repatriation transition tax		16,976		139.8			—		—			—		—
Provision for remeasuring deferred tax balances		10,450		86.1			—		—			—		—
Reduction in accrual for estimated potential tax assessments		(1,676	)	(13.7	)		(15,404	)	(39.9	)		(4,808	)	(13.4	)
Non-deductible stock-based compensation pursuant to ASC 718-740		1,249		10.3			1,288		3.3			3,244		9.1
Domestic manufacturing deduction		—		—			(831	)	(2.2	)		(878	)	(2.5	)
Meals and entertainment		500		4.1			475		1.2			474		1.3	%
Other		8		0.1			529		1.4			(283	)	(0.8	)

Provision for (benefit from) income taxes	$	27,475		226.4	%	$	(6,301	)	(16.3	)%	$	3,369		9.5	%

On December 22, 2017, the 2017 Tax Act was enacted by the U.S. government. The 2017 Tax Act made broad and complex changes to the U.S. tax code that impact the year ended December 31, 2017, including, but not limited to the deemed repatriation transition tax and the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate rate from 35% to 21%. The enactment of the 2017 Tax Act requires companies, under ASC 740, to recognize the effects of changes in tax law and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The effects of these changes in tax law are recorded as a component of our tax provision, regardless of the category of pre-tax income or loss to which the deferred taxes relate.

The SEC issued SAB 118, which allows us to record a provisional estimate of the income tax effects of the 2017 Tax Act in the period in which we can make a reasonable estimate of its effects. We have recorded a $27.5 million tax charge in the year ended December 31, 2017 as a provisional estimate. This includes an estimated charge of $17.0 million related to the deemed repatriation transition tax, which is comprised of a gross transition tax of $27.0 million offset by foreign tax credits of $10.0 million. In addition, we have recorded a $10.5 million charge related to the remeasurement of U.S. deferred tax assets and liabilities. While we have calculated a reasonable estimate of the impact of the U.S. tax rate reduction and the amount of the deemed repatriation transition tax, we are gathering additional information to refine and finalize our calculation of the impacts of the 2017 Tax Act on our U.S. deferred tax assets and liabilities, the deemed repatriation transition tax, and other provisions associated with the 2017 Tax Act. As we obtain additional information, we will record adjustments in subsequent periods, and will finalize the calculation of the income tax effects of the 2017 Tax Act in the fourth quarter of 2018, or in an earlier quarter if our analysis is complete.

The 2017 Tax Act also created a minimum tax on certain foreign earnings, also known as the GILTI provision, commencing in the year ending December 31, 2018. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations, but also our intent and ability to modify our structure and/or our business, we are not yet able to provide a reasonable estimate of the effect of this provision of the 2017 Tax Act. Any subsequent adjustment to the deferred tax amounts related to GILTI (or other computations) will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

During the year ended December 31, 2017, we recognized a $3.5 million tax benefit (including state tax benefit) from the release of previously unrecognized tax benefits due to the expiration of U.S. federal, state, and foreign statutes of limitations.

We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Of the income generated in foreign jurisdictions with tax rates materially lower than the statutory U.S. tax rate of 35%, most is earned in the Netherlands, Spain, U.K., Italy, Israel, and the Cayman Islands. Our effective tax rate could fluctuate significantly and be adversely impacted if anticipated earnings in the Netherlands, Spain, U.K., Italy, Israel, and the Cayman Islands are proportionally lower than current projections and earnings in all other jurisdictions are proportionally higher than current projections.

While we currently do not foresee a need to repatriate the earnings of foreign operations, should we require more capital in the U.S. than is generated by our U.S. operations, we may elect to repatriate funds held in our foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates, the cash payments of taxes and/or increased interest expense. As of December 31, 2017, we have permanently reinvested $214.9 million of unremitted foreign earnings. Due to the changes resulting from the enactment of the 2017 Tax Act, we will not be subject to U.S. federal income tax on dividends received from our foreign subsidiaries commencing January 1, 2018. We are evaluating the potential foreign and U.S. state income tax liabilities that would result from future repatriations, if any, and how the 2017 Tax Act will impact our current permanent reinvestment assertion. We expect to complete this analysis and the impact, if any, which the 2017 Tax Act may have on our indefinite reinvestment assertion in the fourth quarter of 2018, or in an earlier quarter if our analysis is complete.

In Altera Corp.v. Commissioner, the U.S Tax Court issued an opinion on July 27, 2015, related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. To date, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation in intercompany cost-sharing arrangements from its regulations. Due to the uncertainty related to the status of the current regulations and the ultimate outcome of the appeal, we have not recorded any benefit as of December 31, 2017 in our Consolidated Statement of Operations. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

The tax effects of temporary differences that give rise to deferred tax assets (liabilities) as of December 31, 2017 and 2016 are as follows (in thousands):


	2017			2016
Tax credit carryforwards	$	62,096		$	63,985
Net operating loss carryforwards		9,066			10,055
Reserves and accruals not currently deductible for tax purposes		8,785			14,079
Stock-based compensation		3,432			8,487
Deferred revenue		1,332			1,642
Other		6,374			6,971

Gross deferred tax assets		91,085			105,219

Depreciation and amortization		(11,075	)		(17,845	)
State Taxes		(1,073	)		(2,092	)

Gross deferred tax liabilities		(12,148	)		(19,937	)

Deferred tax valuation allowance		(45,506	)		(42,406	)

Net deferred tax assets	$	33,431		$	42,876

We have $13.7 million ($49.5 million for state tax purposes) and $36.3 million ($38.0 million for state tax purposes) of loss and credit carryforwards at December 31, 2017 for U.S. federal tax purposes. A majority of these federal and state losses and credits will expire between 2022 and 2027. A significant portion of these net operating loss and credit carryforwards relate to recent acquisitions. Utilization of these loss and credit carryforwards will be subject to an annual limitation under the Internal Revenue Code (“IRC”). We also have a valuation allowance related to California and Luxembourg deferred tax assets.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. Other than valuation allowances on deferred tax assets related to California, Luxembourg, Israel, Netherlands, and Turkey deferred tax assets that are not likely to be realized based on the size of the net operating loss and research and development credits being generated, we have determined that it is more likely than not that we will realize the benefit related to all other deferred tax assets. To the extent we increase a valuation allowance, we will include an expense within the tax benefit in the Consolidated Statement of Operations in the period in which such determination is made.

A reconciliation of the change in the gross unrecognized tax benefits from January 1, 2015 to December 31, 2017 is as follows (in millions):


	Federal, State, and Foreign Tax			Accrued Interest and Penalties			Gross Unrecognized Income Tax Benefits
Balance at January 1, 2015	$	34.2		$	0.8		$	35.0
Additions for tax positions of prior years		14.1			0.2			14.3
Additions for tax positions related to 2015		4.7			—			4.7
Reductions due to lapse of applicable statute of limitations		(6.9	)		(0.5	)		(7.4	)

Balance at December 31, 2015	$	46.1		$	0.5		$	46.6

Additions for tax positions of prior years		1.8			0.2			2.0
Additions for tax positions related to 2016		3.9			—			3.9
Reductions due to lapse of applicable statute of limitations		(16.4	)		(0.2	)		(16.6	)

Balance at December 31, 2016	$	35.4		$	0.5		$	35.9

Additions for tax positions of prior years		1.7			0.3			2.0
Additions for tax positions related to 2017		4.5			—			4.5
Reductions due to lapse of applicable statute of limitations		(4.1	)		(0.1	)		(4.2	)

Balance at December 31, 2017	$	37.5		$	0.7		$	38.2

As of December 31, 2017, 2016, and 2015, gross unrecognized benefits that would affect the effective tax rate if recognized were $33.9, $32.0, and $43.5 million, respectively, offset by deferred tax benefits of $0.4, $1.1, and $1.0 million related to the federal tax effect of state income taxes for the same periods. Over the next twelve months, our existing tax positions will continue to generate increased liabilities for unrecognized tax benefits. It is reasonably possible that our gross unrecognized tax benefits will decrease up to $5.5 million in the next twelve months. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits in our Consolidated Statements of Operations.

In accordance with ASU 2013-11, we recorded $16.9 million of gross unrecognized tax benefits as an offset to deferred tax assets as of December 31, 2017, and the remaining $17.0 million has been recorded as noncurrent income taxes payable.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2017, 2016, and 2015, we have accrued $0.7, $0.5, and $0.5 million, respectively, for potential payments of interest and penalties.

In accordance with ASU 2016-09, which was adopted in the second quarter of 2016, we recorded $2.2 million of deferred tax assets related to excess tax benefits for federal research and development income tax credits not previously benefitted and $0.6 million of deferred tax assets for the tax benefit on the cumulative effect adjustment associated with the change in accounting for RSU forfeitures.

We are subject to examination by the Internal Revenue Service (“IRS”) for the 2014-2016 tax years, state tax jurisdictions for the 2013-2016 tax years, the Netherlands tax authority for the 2014-2016 tax years, the Spanish tax authority for the 2013-2016 tax years, the Israel tax authority for the 2014-2016 tax years, and the Italian tax authority for the 2013-2016 tax years