12.	INCOME TAX

The Company is

not

subject to income or other taxes in the Cayman Islands. However, subsidiaries are subject to taxes of the jurisdiction where they are located.

Income (loss) before income taxes consisted of:

(In Thousands)

	Years Ended December 31
	2018		2017			2016

Cayman Islands	$	277	$	(7,371	)	$	(4,156	)
Foreign		2,952		2,236			2,228

Total	$	3,229	$	(5,135	)	$	(1,928	)

Income tax expense consisted of:

(In Thousands)

	Years Ended December 31
	2018			2017		2016

Current	$	1,296		$	970	$	2,289
Deferred		(155	)		40		(1,231	)

Total	$	1,141		$	1,010	$	1,058

The Company and its subsidiaries file separate income tax returns. The applicable statutory income tax rate in the Cayman Islands was

zero

for the Company for the years being reported. The reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate is as follows:

(In Thousands)

	Years Ended December 31
	2018			2017			2016

Tax expense at statutory rate	$	-		$	-		$	-
Increase (decrease) in tax resulting from:
Differences between Cayman and foreign tax rates		401			414			449
Changes in deferred income tax assets and liabilities		(247	)		(546	)		(1,249	)
Adjustments to prior years’ taxes		60			12			33
Changes in valuation allowances for deferred income tax assets		92			586			18
Withholding taxes on repatriation of subsidiary profits		521			298			1,669
Alternative Minimum Tax on EMC stock sales		105			-			-
Other		209			246			138

Total	$	1,141		$	1,010		$	1,058

The deferred income tax assets and liabilities as of

December 31, 2018

and

2017

consisted of the following:

(In Thousands)

	December 31
	2018			2017
Deferred income tax assets
Research and development credits	$	6,756		$	6,637
Net operating loss carryforwards		44			82
Depreciation and amortization		149			169
Accrued vacation and other expenses		29			68
		6,978			6,956
Valuation allowance		(6,928	)		(6,836	)

Total net deferred income tax assets	$	50		$	120

Deferred income tax liabilities
Withholding taxes on repatriation of subsidiary profits	$	681		$	906

The valuation allowance shown in the table above relates to net operating losses, credit carryforwards and temporary differences for which the Company believes that realization is

not

more than likely. The valuation allowance increased by

$92,000,

$586,000,

and

$18,000

for the years ended

December 31, 2018,

2017,

and

2016,

respectively. The changes in the valuation allowance in

2018,

2017,

and

2016,

were primary due to the fluctuations in R&D credits from O

Micro Inc. that could

not

be utilized.

As of

December 31, 2018,

Micro, Inc. had U.S. federal and state research and development credit carryforwards of approximately

$5,355,000

and

$7,123,000,

respectively. The U.S. federal research and development credit will expire from

2022

through

2038

not

utilized, while the state research and development credit will never expire. Utilization of the research and development credits

may

be subject to significant annual limitation due to the ownership change limitations provided by the U.S. Internal Revenue Code of

1986

and similar provisions in the State of California’s tax regulations. The annual limitation

may

result in the expiration of federal research and development credits before utilization.

As of

December 31, 2018,

the Company’s subsidiary had U.S. net operating loss carryforwards for federal and state tax purpose of

$50,000

and

$449,000,

respectively, which will expire, if

not

utilized beginning in

2035

and

2028.

December 22, 2017,

the Tax Cuts and Jobs Act of

2017

(the "Tax Act") was enacted into law and the new legislation contains certain key tax provisions that affected the Company. The Tax Act affects the Company by (i) reducing the U.S. tax rate from

35%

21%

effective

January 1, 2018,

and (ii) impacting the values of the deferred assets and liabilities.

Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are included as components of the income tax provision related to continuing operations within the same period. Therefore, the following changes in the tax laws have been accounted for in

2017.

The Company’s deferred tax assets and liabilities and offsetting valuation allowance have been remeasured at the new enacted tax rate as of

December 31, 2017.

The amount of U.S. net operating losses that the Company has is available and the Company’s ability to utilize them to reduce future taxable income is

not

impacted by the Tax Act.

December 2017,

the SEC staff issued Staff Accounting Bulletin

No.

118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB

118”

) which allows companies to record provisional amounts during a measurement period

not

to extend beyond

one

year of the enactment date. Since the Act was passed late in the

fourth

quarter of

2017,

and ongoing guidance and accounting interpretation was yet to be issued, the Company’s accounting of the transition tax and deferred tax re-measurements were incomplete as of

December 31, 2017.

The Company filed its

2017

Federal corporate income tax return in the

first

quarter of

2018.

The final analysis and impact of the Act is reflected in the tax provision and related tax disclosures for the year ended

December 31, 2018.

There was a

material change in estimate which would have been reflected within the measurement period in accordance with SAB

118.

To better position itself for the future growth phase, the Company considered the repatriation of the earnings from subsidiaries in Taiwan and China beginning in the

second

quarter of

2015.

As a result, deferred tax liabilities from withholding tax for the unremitted earnings in Taiwanese and Chinese subsidiaries have been recorded for

$681,000

and

$906,000

as of

December 31, 2018

and

2017,

respectively.

The Company files income tax returns in various foreign jurisdictions. The Company is generally

longer subject to income tax examinations by tax authorities for years prior to

2013

because of the statute of limitations.