Income Taxes

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



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
United States	$	32,237	$	36,461	$	89,877
International	10,967		9,763		16,618
Total	$	43,204	$	46,224	$	106,495



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Current:
U.S. Federal	$	(587	)	$	25,733		$	28,796
State	(2,338		)	2,435			2,412
Foreign	4,267			1,545			4,130
	1,342			29,713			35,338
Deferred:
U.S. Federal	20,930			27,936			1,139
State	2,514			190			762
Foreign	1,092			(482		)	(1,056		)
	24,536			27,644			845
Total	$	25,878		$	57,357		$	36,183

Net deferred tax assets consisted of the following:



	Year Ended December 31,
	2018			2017
	(In thousands)
Deferred Tax Assets:
Accruals and allowances	$	20,765		$	16,629
Net operating loss carryforwards	1,673			50
Stock-based compensation	5,734			5,634
Deferred rent	1,296			1,977
Deferred revenue	1,100			1,459
Tax credit carryforwards	1,661			974
Acquired intangibles	31,902			15,598
Depreciation and amortization	866			904
Total deferred tax assets	64,997			43,225
Deferred Tax Liabilities:
Other	(706		)	(362		)
Total deferred tax liabilities	(706		)	(362		)

Valuation Allowance ⁽¹⁾	(6,734		)	(4,570		)
Net deferred tax assets	$	57,557		$	38,293

_________________________


⁽¹⁾	Valuation allowance is presented gross. The valuation allowance net of the federal tax effect is $5.4 million and $3.6 million for the years ended December 31, 2018 and 2017, 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, 2018, a valuation allowance of $6.7 million was placed against California deferred tax assets and certain federal tax attributes 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, 2017. Accordingly, the valuation allowance increased $2.2 million during 2018. 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, 2018, 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,
	2018		2017		2016
Tax at federal statutory rate	21.0	%	35.0	%	35.0	%
State, net of federal benefit	1.5	%	1.0	%	1.8	%
Impact of international operations	1.9	%	(8.8	)%	(2.8	)%
Stock-based compensation	(0.3	)%	(3.9	)%	1.2	%
Tax credits	(2.6	)%	(2.0	)%	(0.9	)%
Valuation allowance	1.4	%	—	%	—	%
Impact of the Tax Act	(15.4	)%	104.6	%	—	%
Write-off of future tax benefits related to Arlo	52.2	%	—	%	—	%
Others	0.2	%	(1.8	)%	(0.3	)%
Provision for income taxes	59.9	%	124.1	%	34.0	%

Income tax benefits (provision) in the amount of $2.2 million related to stock options was credited to additional paid-in capital during the years ended December 31, 2016. 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 $(0.1) million, $0.4 million, and $(0.3) million were recorded in comprehensive income related to the years ended December 31, 2018, 2017, and 2016, respectively.

As of December 31, 2018, the Company has approximately $8.0 million of acquired federal net operating loss carry forwards as well as $1.7 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.

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 recorded a provisional income tax expense of $48.3 million in the fourth fiscal quarter of 2017, the period in which the legislation was enacted. The provisional estimate included $26.6 million related to the re-measurement of its net deferred tax assets at a U.S. federal statutory rate that was reduced from 35% to 21%, and $21.7 million related to the transition tax on the mandatory deemed repatriation of foreign earnings.

The Company completed its analysis of the impact of U.S. Tax reform in the fourth quarter of 2018. The Company completed the computation of the transition tax as part of the 2017 income tax returns filing and reduced the provisional amount by $6.7 million. The Company elected to pay the liability for the transition tax on the mandatory deemed repatriation of foreign earnings in installments. As of December 31, 2018 and December 31, 2017, $6.5 million and $17.5 million of the transition tax related liability was included in non-current income taxes payable on our consolidated balance sheet.

In addition, certain new complex tax rules related to the taxation of foreign earnings (Global Intangible Low-Taxed Income “GILTI”, Foreign Derived Intangible Income “FDII” and Base Erosion and Anti-abuse Tax “BEAT”) became effective as of January 1, 2018. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. The Company made the accounting policy election to record the GILTI tax in the period it occurs. The Company has evaluated these provisions and recorded a detriment of $0.4 million and a benefit of $(0.7) million in relation to GILTI and FDII respectively, resulting on a net benefit of $(0.3) million. The Company is not subject to BEAT for the year ended in December 31st, 2018.

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 2014. 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. The German Tax Authority (GTA) is currently conducting a broad based audit of fiscal years 2014 through 2016, which will cover income tax, trade tax, payroll tax, and VAT tax. 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 $1.1 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, 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
Additions based on tax positions related to the current year	637
Additions for tax positions of prior years	280
Reductions for tax positions of prior years	(116		)
Reductions due to lapse of applicable statutes	(999		)
Adjustments due to foreign exchange rate movement	(386		)
Balance as of December 31, 2018	$	11,983

The total amount of net UTB that, if recognized would affect the effective tax rate as of December 31, 2018 is $9.6 million. The ending net UTB results from adjusting the gross balance at December 31, 2018 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, 2018, 2017, and 2016, total interest and penalties expensed were $0.1 million, $(0.4) million, and $0.6 million, respectively. As of December 31, 2018 and 2017, accrued interest and penalties on a gross basis was $3.4 million, and $3.3 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 has changed its indefinite reinvestment assertion on overseas earning with the exception of earnings in Taiwan related to its research and development facility. Accordingly, the Company recorded foreign withholding tax of $1.0 million on earnings of approximately $188.4 million through December 31, 2018. The Company does not anticipate additional US tax on the repatriation of these earnings. Further, no foreign tax credits have been recognized, as their benefit is uncertain.