Income Taxes

Income before income taxes and the provision for income taxes consisted of the following:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
United States	$	57,989	$	88,748	$	88,681
International	32,725		26,321		(3,117		)
Total	$	90,714	$	115,069	$	85,564



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Current:
U.S. Federal	$	40,532		$	33,267		$	30,970
State	4,463			2,693			3,139
Foreign	4,305			6,278			6,105
	49,300			42,238			40,214
Deferred:
U.S. Federal	23,005			(2,052		)	(2,645		)
State	(288		)	441			134
Foreign	(739		)	(1,409		)	(723		)
	21,978			(3,020		)	(3,234		)
Total	$	71,278		$	39,218		$	36,980

Net deferred tax assets consisted of the following:



	Year Ended December 31,
	2017			2016
	(In thousands)
Deferred Tax Assets:
Accruals and allowances	$	23,661		$	32,303
Net operating loss carryforwards	3,317			6,358
Stock-based compensation	6,015			8,250
Deferred rent	1,977			3,002
Deferred revenue	2,740			1,957
Tax credit carryforwards	974			1,543
Acquired intangibles	14,907			21,871
Depreciation and amortization	1,185			1,160
Total deferred tax assets	54,776			76,444
Deferred Tax Liabilities:
Depreciation and amortization	—			—
Other	(126		)	(991		)
Total deferred tax liabilities	(126		)	(991		)

Valuation Allowance ⁽¹⁾	(5,182		)	(4,594		)
Net deferred tax assets	$	49,468		$	70,859

_________________________


⁽¹⁾	Valuation allowance is presented gross. The valuation allowance net of the federal tax effect is $4.1 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively.

Management's judgment is required in determining the Company's provision for income taxes, its deferred tax assets and any valuation allowance recorded against its deferred tax assets. As of December 31, 2017, a valuation allowance of $5.2 million was placed against California deferred tax assets since the recovery of the assets is uncertain. There was a valuation allowance of $4.6 million placed against deferred tax assets as of December 31, 2016. Accordingly, the valuation allowance increased $0.6 million during 2017. In management's judgment it is more likely than not that the remaining deferred tax assets will be realized in the future as of December 31, 2017, and as such no valuation allowance has been recorded against the remaining deferred tax assets.

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:



	Year Ended December 31,
	2017		2016		2015
Tax at federal statutory rate	35.0	%	35.0	%	35.0	%
State, net of federal benefit	1.1	%	1.8	%	2.6	%
Impact of international operations	(6.4	)%	(2.7	)%	7.1	%
Stock-based compensation	(0.9	)%	1.2	%	(0.4	)%
Tax credits	(1.6	)%	(0.9	)%	(1.2	)%
Impact of the Tax Act	53.3	%	—	%	—	%
Others	(1.9	)%	(0.3	)%	0.1	%
Provision for income taxes	78.6	%	34.1	%	43.2	%

Income tax benefits (provision) in the amount of $2.5 million and $(2.2) million related to stock options were credited to additional paid-in capital during the years ended December 31, 2016, and 2015, respectively. On January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (Topic 718) upon which all income tax benefits are recorded in income tax expense. As a result of changes in fair value of available-for-sale securities and foreign currency hedging, income tax (provision) benefits of $0.4 million, $(0.3) million and $21,000 were recorded in comprehensive income related to the years ended December 31, 2017, 2016, and 2015, respectively.

As of December 31, 2017, the Company has approximately $15.8 million of acquired federal net operating loss carry forwards as well as $3.1 million of California tax credits carryforwards. All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382. The federal losses expire in different years beginning in fiscal 2021. The California tax credit carryforwards have no expiration.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated an estimate of the impact of the Tax Act in is year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing and as a result has recorded $48.3 million as additional income tax expense in the fourth fiscal quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $26.6 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $21.7 million.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that the $21.7 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. As further guidance is issued by Treasury, additional work may be necessary to ensure earnings as required by the calculations are properly determined. Additionally, as a result of the Tax Act, the Company has not completed its evaluation of its indefinite reinvestment assertion with regard to foreign earnings under ASC 740-30. As a result, deferred tax liabilities may be increased or decreased during the period allowed under SAB 118. Further, no estimate can currently be made and no provisional amounts were recorded in the financial statements for the impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. This tax is effective for the Company after the end of the current fiscal year. However, the company is evaluating whether deferred taxes should be recorded in relation to the GILTI provisions or if the tax should be recorded in the period in which it occurs. Based on the current interpretation, the company may choose either method as an accounting policy election. The Company has not yet decided on the accounting policy related to GILTI and will only do so after completion of an analysis. Any subsequent adjustment to any of these amounts will be recorded to current tax expense during the measurement period provided under SAB 118.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years before 2013. During August 2017, the U.S. federal Internal Revenue Service (IRS) completed its audit of the tax year ended December 31, 2014 without change. The Company is no longer subject to foreign income tax examinations before 2004. The Italian Tax Authority (ITA) has audited the Company’s 2004 through 2012 tax years. The Company is currently in litigation with the ITA with respect to all of these years. In August 2017, the German Tax Authority (GTA) completed its examination of the Company’s 2008 and 2013 tax years without change. During 2016, the United Kingdom HMRC (Her Majesty’s Revenue and Customs) initiated an audit of the Company’s 2014 and 2015 tax years. They have since added the 2016 year to their query. Additionally, in December, 2017 the French Tax Authority commenced an audit of the Company’s 2015 and 2016 tax years. The Company has limited audit activity in various states and other foreign jurisdictions. Due to the uncertain nature of ongoing tax audits, the Company has recorded its liability for uncertain tax positions as part of its long-term liability as payments cannot be anticipated over the next 12 months. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain tax positions resulting from the expiration of statutes of limitation in multiple jurisdictions in the next 12 months is approximately $0.9 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:



	Federal, State, and Foreign Tax
	(In thousands)
Balance as of December 31, 2014	$	13,364
Additions based on tax positions related to the current year	1,608
Additions for tax positions of prior years	228
Settlements	(199		)
Reductions for tax positions of prior years	(302		)
Reductions due to lapse of applicable statutes	(1,053		)
Adjustments due to foreign exchange rate movement	(816		)
Balance as of December 31, 2015	12,830
Additions based on tax positions related to the current year	1,523
Additions for tax positions of prior years	45
Reductions for tax positions of prior years	(237		)
Reductions due to lapse of applicable statutes	(627		)
Adjustments due to foreign exchange rate movement	(569		)
Balance as of December 31, 2016	$	12,965
Additions based on tax positions related to the current year	938
Additions for tax positions of prior years	32
Reductions for tax positions of prior years	(1,477		)
Reductions due to lapse of applicable statutes	(899		)
Adjustments due to foreign exchange rate movement	1,008
Balance as of December 31, 2017	$	12,567

The total amount of net UTB that, if recognized would affect the effective tax rate as of December 31, 2017 is $10.4 million. The ending net UTB results from adjusting the gross balance at December 31, 2017 for items such as U.S. federal and state deferred tax, interest, and deductible taxes. The net UTB is included as a component of non-current income taxes payable within the consolidated balance sheets.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2017, 2016, and 2015, total interest and penalties expensed were $(0.4) million, $0.6 million and $0.1 million, respectively. As of December 31, 2017 and 2016, accrued interest and penalties on a gross basis was $3.3 million and $3.6 million, respectively. Included in accrued interest are amounts related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

The Company continues to permanently reinvest its earnings overseas but is in the process of evaluating this position in light of the Tax Act. The earnings were approximately $175.0 million and $154.2 million as of December 31, 2017 and 2016, respectively. Due to the impact of the Tax Act, no additional U.S. taxes are anticipated on these earnings.