INCOME TAXES

On December 22, 2017, the act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly known as the Tax Cuts and Jobs Act, or TCJA, was signed into law. The TCJA changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, which provides guidance for companies that have not completed their accounting for the income tax effects of the TCJA, in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts.

At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. As a result of the rate reductions from 35% to 21%, the Company recorded a reduction of $129.4 million to its U.S. net deferred tax assets. The Company’s deferred tax attributes are generally subject to a full valuation allowance in the U.S. and thus, this adjustment to the attributes did not impact the tax provision.

As part of U.S. international tax reform, the TCJA imposes a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries, net of foreign deficits. The Company has not completed its final calculation for the transition tax but expect that the Company will be in an aggregate net foreign deficit position for U.S. tax purposes, and therefore not liable for the transition tax. Additionally, TCJA has repealed the alternative minimum tax (AMT) and made existing AMT credit carryovers refundable. Accordingly, the Company has recorded a deferred tax benefit and income tax receivable for its existing AMT credit in the amount of $0.8 million.

The FASB also provided additional guidance to address the accounting for the effects of the provisions related to the taxation of Global Intangible Low-Taxed Income, or GILTI, noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year it is incurred. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided for under SAB 118.

As noted above, the Company has not completed its accounting for the tax effects of the enactment of the TCJA but made a reasonable estimate of the effects in the areas discussed above. In other cases, such as GILTI discussed above, the Company has not been able to make a reasonable estimate at this time. However, in both cases, the Company will continue to assess its provision for income taxes as future guidance is issued, but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of TCJA. The accounting is expected to be complete within the one year measurement period particularly after the 2017 U.S. corporate income tax return is filed in 2018.

Income from before income taxes and the components of the income tax provision consisted of the following for the years ended December 31, 2017, 2016 and 2015 (in thousands):



	Year Ended December 31,
	2017			2016			2015
(Loss) income from operations before income taxes:
United States	$	(4,811	)	$	12,402		$	(23,977	)
Foreign	(8,611		)	32,942			24,542
Total (loss) income from operations before income taxes	$	(13,422	)	$	45,344		$	565
Provision for (Benefit from) income taxes:
Current tax expense (benefit):
Federal	$	(4	)	$	102		$	115
State	59			32			3
Foreign benefit of net operating losses	(66		)	(1,247		)	(180		)
Other foreign	1,774			(48		)	3,734
Total current tax expense (benefit)	1,763			(1,161		)	3,672
Deferred tax (benefit) expense:
Federal benefit related to Note issuance	—			—			(6,493		)
Federal	(821		)	96			—
Other foreign	(809		)	(1,810		)	906
Total deferred tax (benefit) expense	(1,630		)	(1,714		)	(5,587		)
Total provision for (benefit from) income taxes	$	133		$	(2,875	)	$	(1,915	)

Net deferred tax assets (liabilities) consisted of the following at December 31, 2017 and 2016 (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Tax credit and net operating loss carryforwards	$	267,706		$	369,847
Allowances for bad debts	34			431
Difference in accounting for:
Revenues	18,057			35,856
Costs and expenses	16,149			26,537
Inventories	4,501			9,118
Acquired intangible assets	1,830			6,112
Gross deferred tax assets	308,277			447,901
Valuation allowance	(298,955		)	(432,631		)
Deferred tax assets after valuation allowance	9,322			15,270
Deferred tax liabilities:
Difference in accounting for:
Costs and expenses	(3,608		)	(6,457		)
Acquired intangible assets	(2,189		)	(3,669		)
Basis difference convertible notes	(2,207		)	(4,812		)
Gross deferred tax liabilities	(8,004		)	(14,938		)
Net deferred tax assets	$	1,318		$	332
Recorded as:
Long-term deferred tax assets, net	1,318			1,245
Long-term deferred tax liabilities, net	—			(913		)
Net deferred tax assets	$	1,318		$	332

As noted above, the Company had not completed its accounting for the tax effects of enactment of the TCJA; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances. As a result of the rate reductions from 35% to 21%, the Company recorded a reduction of $129.4 million to its U.S. net deferred tax assets. The Company’s deferred tax attributes are generally subject to a full valuation allowance in the U.S. and thus, the valuation allowance is also reduced by $129.4 million - resulting in no impact to the net deferred asset after valuation allowance attributable to the rate reduction on January 1, 2015 the Company early adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The standard requires entities to present Deferred Tax Assets, or DTAs, and Deferred Tax liabilities, or DTLs, as non-current in the classified balance sheet. The standard simplified the previous guidance, which required entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet.

Deferred tax assets and liabilities reflect the net tax effects of the tax credits and net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The ultimate realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. Based on the magnitude of the deferred tax assets at December 31, 2017 and 2016 and the level of historical U.S. tax losses, management has determined that the uncertainty regarding the realization of these assets warranted a significant valuation allowance at December 31, 2017 and 2016.

For U.S. federal and state income tax purposes at December 31, 2017, the Company had tax credit carryforwards of $52.3 million, which will expire between 2018 and 2037, and net operating loss carryforwards of $786.8 million, which will expire between 2019 and 2037. In 2016, the Company early adopted ASU No. 2019-09, Improvements to Employee Share-base Payment Accounting. The deferred tax assets in the schedule above at December 31, 2016, include $33.7 million related to prior year tax assets resulting from the exercise of employee stock options, which previously were recognized in additional paid- in capital only when utilized as a reduction in taxes payable. Prior to adoption of ASU No. 2016-09, this amount was excluded from the above deferred tax asset schedule at December 31, 2015. The increase in the deferred tax asset of $33.7 million was offset by a corresponding increase in the valuation allowance.

The federal net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the Internal Revenue Code. The Company completed an assessment at March 31, 2015 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of the Company’s net operating loss and tax credit amounts are subject to any Section 382 limitation.

Additionally, the Company has foreign net operating loss carryforwards of $113.9 million and capital loss carryforwards of $1.7 million, each with an indefinite carryforward period and tax credit carryforwards of $5.3 million that begin to expire in 2030. The Company has determined there is uncertainty regarding the realization of a portion of these assets and has recorded a valuation allowance against $111.6 million of net operating losses, $1.7 million of capital losses and $5.3 million of tax credits at December 31, 2017.

The Company’s assessment of the valuation allowance on the U.S. and foreign deferred tax assets could change in the future based on its levels of pre-tax income and other tax related adjustments. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal.

The following table sets forth a reconciliation of the Company’s income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended December 31, 2017, 2016 and 2015:



	Year Ended December 31,
	2017			2016			2015
Statutory tax	$	(4,698	)	$	15,870		$	198
Tax credits	(1,646		)	(2,468		)	(2,972		)
Foreign operations	3,113			(12,662		)	(4,055		)
Change in uncertain tax positions	800			(6,710		)	—
Non-deductible expenses and other	1,109			670			2,303
Federal benefit related to Note issuance	—			—			(6,493		)
Tax deficiency on stock-based compensation	—			2,509			—
Change in valuation allowance	1,455			(84		)	9,104
Provision for (benefit from) income taxes	$	133		$	(2,875	)	$	(1,915	)

As a result of TCJA and the current U.S. taxation of deemed repatriated earnings, the additional taxes that might be payable upon repatriation of foreign earnings are not significant. However, the Company does not have any current plans to repatriate these earnings because the underlying cash will be used to fund the ongoing operations of the foreign subsidiaries.

A tax position must be more likely than not to be sustained before being recognized in the financial statements. It also requires the accrual of interest and penalties as applicable on unrecognized tax positions. The Company disclosed unrecognized tax benefits primarily related to the foreign tax implications arising from the changes in revenue recognition that arose in periods prior to 2012. The unrecognized tax benefits did not have an impact on the effective tax rate because the Company maintains a full valuation allowance on the related loss carryforwards. At December 31, 2015, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled $26.0 million, of which $3.2 million would affect the Company’s income tax provision and effective tax rate if recognized. At December 31, 2016, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled $1.0 million, of which $1.0 million would affect the Company’s effective tax rate if recognized. During 2016, the Company had a change in its uncertain tax position related to a method change in a foreign jurisdiction and reversed the associated accrual in its entirety. At December 31, 2017, the Company’s accrual for unrecognized tax benefits and related accrued interest and penalties related to an Israel audit issue totaled $1.8 million, of which $1.8 million would affect the Company’s income tax provision and effective tax rate if recognized.

The following table sets forth a reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding the impact of interest and penalties, for the years ended December 31, 2017, 2016 and 2015 (in thousands):



Unrecognized tax benefits at January 1, 2015	$	25,847
Increases for tax positions taken during a prior period	148
Unrecognized tax benefits at December 31, 2015	25,995
Increases for tax positions taken during a prior period	1,041
Decreases for tax positions taken during a prior period	(25,995		)
Unrecognized tax benefits at December 31, 2016	1,041
Increases for tax positions taken during a prior period	800
Unrecognized tax benefits at December 31, 2017	$	1,841

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties related to uncertain tax positions at December 31, 2017 and 2016 were not material.

The tax years 2008 and forward remain open to examination by taxing authorities in the jurisdictions in which the Company operates. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom.