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.

We completed our accounting for the tax effects of the TCJA at September 30, 2018 and there were no material changes to the estimated amounts that were recorded as of December 31, 2017. At December 31, 2017, we recorded a reduction of $129.4 million to our U.S. net deferred tax assets as a result of the rate reduction from 35% to 21%. Our 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. We were in an aggregate net foreign deficit position for U.S. tax purposes, and therefore not liable for the transition tax. Additionally, TCJA repealed the alternative minimum tax (AMT) and made existing AMT credit carryovers refundable. Accordingly, at December 31, 2017, we recorded a deferred tax benefit and income tax receivable for our existing AMT credit in the amount of $0.8 million.

The global intangible low-taxed income (“GILTI”) provisions of the TCJA impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Under U.S. GAAP, we can make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of our deferred taxes (the “deferred method”). During the year ended December 31, 2018 we made a policy election to record tax effects of GILTI as an expense in the period incurred.

Income from before income taxes and the components of the income tax provision consisted of the following for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	Year Ended December 31,
	2018			2017			2016
(Loss) income from operations before income taxes:
United States	$	(1,940	)	$	(4,811	)	$	12,402
Foreign	(7,463		)	(8,611		)	32,942
Total (loss) income from operations before income taxes	$	(9,403	)	$	(13,422	)	$	45,344
Provision for (Benefit from) income taxes:
Current tax expense (benefit):
Federal	$	(1	)	$	(4	)	$	102
State	59			59			32
Foreign benefit of net operating losses	(206		)	(66		)	(1,247		)
Other foreign	1,372			1,774			(48		)
Total current tax expense (benefit)	1,224			1,763			(1,161		)
Deferred tax (benefit) expense:
Federal	—			(821		)	96
Other foreign	47			(809		)	(1,810		)
Total deferred tax (benefit) expense	47			(1,630		)	(1,714		)
Total provision for (benefit from) income taxes	$	1,271		$	133		$	(2,875	)

Net deferred tax assets (liabilities) consisted of the following at December 31, 2018 and 2017 (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Tax credit and net operating loss carryforwards	$	283,473		$	267,706
Allowances for bad debts	32			34
Difference in accounting for:
Revenues	3,666			18,057
Costs and expenses	17,033			16,149
Inventories	3,744			4,501
Acquired intangible assets	555			1,830
Gross deferred tax assets	308,503			308,277
Valuation allowance	(304,070		)	(298,955		)
Deferred tax assets after valuation allowance	4,433			9,322
Deferred tax liabilities:
Difference in accounting for:
Costs and expenses	(1,454		)	(3,608		)
Acquired intangible assets	(709		)	(2,189		)
Basis difference convertible notes	(1,112		)	(2,207		)
Gross deferred tax liabilities	(3,275		)	(8,004		)
Net deferred tax assets	$	1,158		$	1,318
Recorded as:
Long-term deferred tax assets, net	1,158			1,318
Long-term deferred tax liabilities, net	—			—
Net deferred tax assets	$	1,158		$	1,318

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, 2018 and 2017 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, 2018 and 2017.

As noted above under Recently Adopted Accounting Pronouncements, there was no tax impact upon our adoption of ACS 606 Revenue from Contracts with Customers, because our deferred tax assets related to deferred revenue have a full valuation allowance. However, in connection with the reduction in our deferred revenue balances upon ASC 606 adoption, we reduced both the deferred tax asset related to deferred revenue and its corresponding valuation allowance by $12.2 million.

For U.S. federal and state income tax purposes at December 31, 2018, we had tax credit carryforwards of $50.9 million, which will expire between 2019 and 2038, and net operating loss carryforwards of $787.0 million, the majority of which will expire between 2019 and 2037.

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. We completed an assessment at June 30, 2018 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of our net operating loss and tax credit amounts are subject to any Section 382 limitation.

Additionally, we have foreign net operating loss carryforwards of $147.1 million and capital loss carryforwards of $0.8 million, each with an indefinite carryforward period and tax credit carryforwards of $5.5 million that begin to expire in 2030. We have determined there is uncertainty regarding the realization of a portion of these assets and have recorded a valuation allowance against $145.6 million of net operating losses, $0.8 million of capital losses and $5.4 million of tax credits at December 31, 2018.

Our assessment of the valuation allowance on the U.S. and foreign deferred tax assets could change in the future based on our 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 our income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
	2018			2017			2016
Statutory tax	$	(1,975	)	$	(4,698	)	$	15,870
Tax credits (generated) / expired	1,277			(1,646		)	(2,468		)
Foreign operations	1,854			3,113			(12,662		)
Change in uncertain tax positions	58			800			(6,710		)
Non-deductible expenses and other	301			1,109			670
Tax deficiency on stock-based compensation	—			—			2,509
Change in valuation allowance	(244		)	1,455			(84		)
Provision for (benefit from) income taxes	$	1,271		$	133		$	(2,875	)

As noted above, the TCJA included a reduction of the corporate income tax rate from 35% to 21% for years beginning after 2017. Accordingly, the amount reflected above for statutory tax is computed at a 21% rate for the year ended December 31, 2018 and a 35% rate for the previous two years ended December 31 2017 and 2016.

Our tax credits decreased significantly in 2018 driven by expiring U.S. research and development tax credits exceeding current year tax credits generated. Changes in the jurisdictional mix of our foreign profitability drives the change in the taxes on foreign operations. The 2016 benefit was primarily due to a change in our uncertain tax position related to the foreign tax implications arising from changes in revenue recognition.

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, we do 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. We 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 we maintain a full valuation allowance on the related loss carryforwards. At December 31, 2016, our unrecognized tax benefits and related accrued interest and penalties totaled $1.0 million, of which $1.0 million would affect our income tax provision and effective tax rate if recognized. At December 31, 2017 and 2018, our unrecognized tax benefits and related accrued interest and penalties totaled $1.8 million, of which $1.8 million would affect our effective tax rate if recognized. During 2016, we had a change in our uncertain tax position related to a method change in a foreign jurisdiction and reversed the associated accrual in its entirety. At December 31, 2018, our 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 our 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, 2018, 2017 and 2016 (in thousands):



Unrecognized tax benefits at January 1, 2016	$	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
Decreases for tax positions taken during a prior period	(78		)
Unrecognized tax benefits at December 31, 2018	$	1,763

We recognize interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties related to uncertain tax positions at December 31, 2018 were $0.3 million and were not material in 2017.

The tax years 2009 and forward remain open to examination by taxing authorities in the jurisdictions in which we operate. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom.