(11) Income Taxes

Income tax expense (benefit) consisted of the following components (dollars in thousands):


	2018		2017		2016
Current:
Federal	$	(1,711)	$	(423)	$	(9,918)
State		249		1,072		(624)
Foreign		10,300		11,490		8,975
		8,838		12,139		(1,567)
Deferred:
Federal		736		25,797		(12,687)
State		57		7,694		(2,217)
Foreign		(223)		335		(851)
		570		33,826		(15,755)
Total	$	9,408	$	45,965	$	(17,322)

Income (loss) before income taxes consisted of the following (dollars in thousands):


	2018		2017 (1)		2016 (1)
U.S.	$	(57,502)	$	(56,465)	$	(81,579)
Foreign		67,601		62,990		38,339
Total	$	10,099	$	6,525	$	(43,240)

(1)

Pre-tax amounts for 2017 and 2016 noted above do not include the restatement recorded for segment reporting for U.S. expenses now being allocated to the international segments as such amounts were not adjusted for income tax purposes (see Note 24, Segment Reporting).

The components of the Company’s net deferred tax asset are as follows (dollars in thousands):


	2018		2017
Deferred tax assets:
Compensation and benefits	$	6,427	$	5,912
Net operating loss and capital loss carryover		17,555		18,974
Share-based compensation		5,548		5,092
Research and development credits		8,215		7,438
Foreign tax credits		10,240		11,117
Tax benefits on uncertain tax positions		697		831
Goodwill and other intangibles		4,007		6,363
Depreciation		3,969		3,527
Capitalized software		3,132		383
Rent		2,844		3,013
Other		1,297		700
Total deferred tax assets		63,931		63,350
Less: valuation allowance		(58,879)		(58,448)
Total deferred tax assets, net of valuation allowance		5,052		4,902
Deferred tax liabilities:
Indefinite life intangible		(1,859)		(1,695)
Other		(328)		(55)
Total deferred tax liabilities		(2,187)		(1,750)
Net deferred tax assets	$	2,865	$	3,152

Under ASC 740, Income Taxes, the Company regularly assesses the need for a valuation allowance against its deferred taxes. In making that assessment, both positive and negative evidence is considered related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely than not that some or all of its deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company considered its cumulative pre-tax loss in the U.S. jurisdiction over the previous three years as a significant piece of negative evidence. Prevailing accounting guidance limits the ability to consider other subjective evidence to support deferred tax assets, such as projections of future profits, when objective verifiable evidence such as a cumulative loss exists. As a result, the Company recorded a full valuation allowance against its U.S. deferred tax assets in the third quarter 2017, resulting in a non-cash charge of $48.1 million, which included $42.3 million related to deferred tax assets that existed at June 30, 2017.

At December 31, 2018, the Company believes that it is more-likely-than-not that future reversals of its existing taxable temporary differences and future generation of sufficient taxable income in the appropriate jurisdiction will enable the Company to realize the carrying value of its net deferred tax assets. The Company’s valuation allowance increased $0.4 million to $58.9 million at December 31, 2018 and is primarily the result of the usage of historical net operating losses in the Asia Pacific entities, where a full valuation allowance is maintained for all deferred assets and net operating losses, as well as certain state tax credits and net operating losses. The Company has foreign tax credit carryforwards of $10.2 million that begin to expire in 2024 and research and development tax credits of $8.2 million that begin to expire in 2034.

The Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) was enacted on December 22, 2017, and introduced significant changes to U.S, income tax law. Effective in 2018, the Tax Cuts and Jobs Act reduces the U.S. statutory corporate tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related party payments, which are referred to as the global intangible low-taxed income tax (“GILTI”) and the base erosion tax, respectively. In addition, under the Tax Cuts and Jobs Act, in 2017 the Company was subject to the mandatory inclusion in U.S. taxable income of all accumulated foreign subsidiary earnings not previously subject to U.S. tax. The mandatory inclusion did not result in any incremental U.S. tax expense in 2017 due to the impact of a U.S. tax loss and the utilization of foreign tax credits. In 2018, the GILTI inclusion did not result in any incremental U.S. tax expense due to the impact of a current year U.S. tax loss and the utilization of foreign tax credits. The Company is not subject to the base erosion tax. The Company completed the final accounting for the tax effects of the Tax Cuts and Jobs Act on the 2017 consolidated financial statements with no changes to the provisional amounts recorded in 2017.

Net operating loss carryforwards expire as follows (dollars in thousands):


	Amount		Years remaining
Hong Kong and Australia	$	68,878	Indefinite
State and local (United States)		41,037	12 - 20 years

The effective tax rate varied from the U.S. federal statutory income tax rate due to the following:


	2018		2017		2016
U.S. federal statutory income tax rate	21.0	%	35.0	%	35.0	%
State and local income taxes, net of U.S. federal income tax effect	(0.64)		0.6		5.2
Foreign tax impact, net	(32.4)		(81.8)		6.2
Valuation allowance	86.1		585.8		—
Tax impact of Tax Cuts and Jobs Act	—		149.2		—
Stock windfall/shortfall	(3.8)		(13.5)		—
Reserves released upon tax settlement	(16.8)		—		18.6
Non-deductible costs (1)	43.0		21.3		(22.8)
Other, net	(3.3)		7.9		(2.1)
Effective income tax rate	93.2	%	704.5	%	40.1	%

(1)

Includes the impact of the non-deductible payments in 2018 and 2016 to the Securities and Exchange Commission (the “SEC”). Additionally, 2018, 2017 and 2016 includes non-deductible officer’s compensation.

The Company has selected the period cost method as its accounting policy for GILTI and will treat any taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred.

Tax Uncertainties

Under ASC 740, Income Taxes, a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollars in thousands):


Uncertain Tax Benefits	2018		2017		2016
Balance, January 1	$	7,693	$	7,356	$	15,553
Additions based on tax positions related to the current year		322		591		66
Additions based on tax positions of prior years		38		4		406
Reductions for tax positions of prior years		—		(13)		—
Reductions due to settlements with taxing authorities		(987)		(64)		(2,153)
Reductions due to expiration of statute of limitations		(1,209)		(181)		(6,516)
Balance, December 31	$	5,857	$	7,693	$	7,356

The unrecognized tax benefits were $5.9 million and $7.7 million, respectively, at December 31, 2018 and 2017. At December 31, 2018 and 2017, $4.6 million and $4.5 million, respectively, of the unrecognized tax benefits was netted against fully reserved U.S. deferred tax assets.

With limited exception, the Company is no longer subject to U.S. federal, state, local or foreign income tax audits by taxing authorities for years preceding 2015. Certain foreign, state and local returns are also currently under various stages of audit for the tax years 2013 through 2014. The Company does not anticipate a significant change to the total of unrecognized tax benefits within the next twelve months.

At December 31, 2018, interest expense of $1.7 million was accrued related to unrecognized tax benefits. As a continuing policy, interest accrued related to unrecognized tax benefits is recorded as income tax expense. During 2018, the Company recognized net reductions of $0.4 million of tax-related interest expense. During 2017 and 2016, the Company recognized a net reduction of $0.1 million and a net addition of $2.5 million, respectively, of tax-related interest expense. Tax penalties of $0.1 million were recorded during 2017. No penalties were recorded in 2018 or 2016.