Note 12 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

12.  INCOME TAXES

The components of income before income taxes are as follows (in thousands):

	Year Ended December 31,
	2019			2018			2017
United States	$	(4,134	)	$	(13,151	)	$	(19,115	)
Foreign		117,254			131,633			102,059
Income before income taxes	$	113,120		$	118,482		$	82,944

The components of the income tax expense are as follows (in thousands):

	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	1,682		$	11,023		$	31,025
State		8			4			2
Foreign		3,105			2,992			1,967
Deferred:
Federal		(213	)		(797	)		(15,426	)
Foreign		(301	)		(8	)		173
Income tax expense	$	4,281		$	13,214		$	17,741

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

	Year Ended December 31,
	2019			2018			2017
U.S. statutory federal tax rate		21.0	%		21.0	%		35.0	%
Foreign income at lower rates		(20.7	)		(22.0	)		(41.2	)
Impact of the 2017 Tax Act:
Remeasurement of deferred taxes		-			-			11.8
One-time deemed repatriation transition tax		-			0.6			50.5
Global intangible low-taxed income (“GILTI”)		11.0			14.4			-
Changes in valuation allowance		2.1			-			(36.2	)
Stock-based compensation		(1.5	)		(1.1	)		2.2
Tax credits		(6.2	)		(1.9	)		(2.1	)
Other adjustments		(1.9	)		0.2			1.4
Effective tax rate		3.8	%		11.2	%		21.4	%

The components of net deferred tax assets consist of the following (in thousands):

	December 31,
	2019			2018
Deferred tax assets:
Tax credits	$	18,080		$	11,833
Stock-based compensation		6,237			10,040
Deferred compensation		7,110			6,829
Net operating losses		615			1,133
Other expenses not currently deductible		2,323			1,852
Deferred tax assets, gross		34,365			31,687
Valuation allowance		(15,411	)		(13,041	)
Deferred tax assets, net of valuation allowance		18,954			18,646
Deferred tax liabilities:
Depreciation and amortization		(1,259	)		(711	)
Undistributed foreign earnings		(77	)		(1,105	)
Other expenses currently deductible		(425	)		-
Deferred tax liabilities		(1,761	)		(1,816	)
Net deferred tax assets	$	17,193		$	16,830

Deemed Repatriation Transition Tax:

As permitted by the 2017 Tax Act, the Company has elected to pay the one-time, deemed repatriation transition tax liability of $24.6 million in installments on an interest-free basis over eight years through 2025. For the years ended December 31, 2019 and 2018, the Company paid $1.3 million and $2.6 million of the transition tax, respectively. As of December 31, 2019 and 2018, $2.0 million and $1.3 million of the transition tax were recorded in current accrued liabilities, and $18.7 million and $20.7 million were recorded in long-term income tax liabilities, respectively.

GILTI:

The 2017 Tax Act subjects a U.S. parent shareholder to taxation of its GILTI, effective January 1, 2018. The GILTI inclusions impact companies that have foreign earnings generated without a large aggregate foreign fixed asset base and whose earnings are being taxed at a low tax rate. For the years ended December 31, 2019 and 2018, the Company included $58.6 million and $81.1 million, respectively, related to the GILTI provisions as additional Subpart F income, which was accounted for as a period cost.

Valuation Allowance:

The Company periodically evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize the assets using a more likely than not analysis. The realizability of the Company’s net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. As of December 31, 2019 and 2018, the Company has evaluated and concluded that no valuation allowance is required, except for a continued full valuation allowance on the deferred tax assets in California.

Undistributed Earnings of Subsidiaries:

The Company has analyzed its global working capital and cash requirements, and has determined that it plans to repatriate cash from its Bermuda subsidiary on an ongoing basis to fund its future U.S.-based expenditures and dividends.  For the year ended December 31, 2019, the Company repatriated $75 million from its Bermuda subsidiary. As of December 31, 2019, the Company maintained an insignificant deferred tax liability related to California state taxes upon future repatriations.

For all other foreign subsidiaries, the Company expects to indefinitely reinvest undistributed earnings to fund their operations and research and development. As of December 31, 2019, the undistributed earnings were approximately $32.9 million. An actual repatriation of the undistributed earnings could be subject to additional foreign withholding taxes and U.S. state taxes. The Company expects to be able to take a 100% dividend received deduction to offset any U.S. federal income tax liability on the undistributed earnings. Determination of the unrecognized state and withholding deferred tax liability is not practicable at this time due to the complexities associated with the hypothetical calculation.

Other Income Tax Provision Matters

As of December 31, 2019, the Company did not have federal net operating loss carryforwards. As of December 31, 2019, the state net operating loss carryforwards for income tax purposes were $12.6 million, which will expire beginning in 2028.

As of December 31, 2019, the Company had no R&D tax credit carryforwards for federal income tax purposes, and $24.1 million for state income tax purposes, which can be carried forward indefinitely.

In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax credit carryforwards could be subject to annual limitations. The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior to utilization.

At December 31, 2019, the Company had $25.4 million of unrecognized tax benefits, $17.3 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2018, the Company had $20.5 million of unrecognized tax benefits, $12.8 million of which would affect its effective tax rate if recognized after considering the valuation allowance.

A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): 

Balance as of January 1, 2017	$	14,431
Increase for tax position of prior year		169
Increase for tax position of current year		2,360
Decrease due to lapse of statute of limitation		(688	)
Balance as of December 31, 2017		16,272
Increase for tax position of prior year		1,474
Increase for tax position of current year		2,957
Decrease due to lapse of statute of limitation		(212	)
Balance as of December 31, 2018		20,491
Increase for tax position of prior year		1,589
Increase for tax position of current year		4,663
Decrease due to settlement with tax authorities		(560	)
Decrease due to lapse of statute of limitation		(776	)
Balance as of December 31, 2019	$	25,407

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2019 and 2018, the Company has $1.6 million and $0.9 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the research and development tax credit. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require the Company to increase or decrease its reserves and effective income tax rate over the next twelve months. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

The Company currently has reduced tax rates in its subsidiaries in Chengdu and Hangzhou, China through 2020 and 2021, respectively, for performing research and development activities.

In  July 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, invalidating the Treasury regulations that require participants in qualified intercompany cost-sharing arrangements to share stock-based compensation costs. A final decision was issued by the Tax Court in  December 2015, and the IRS appealed the decision in  June 2016. In  June 2019, the Ninth Circuit Court of Appeals upheld the cost-sharing regulations. In  July 2019, Altera filed a petition for rehearing en banc in the Ninth Circuit Court of Appeals. In November 2019, the Ninth Circuit Court of Appeals declined to rehear the case. As of  December 31, 2019, it has not been determined if this ruling will be appealed. Due to the uncertainty surrounding the status of the current regulations, the Company has not recorded any adjustments as of  December 31, 2019. The Company will continue to monitor and evaluate the impact of any new developments on its financial statements. 

Income Tax Examination

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. In general, the tax years for 2007 and forward are open for examination for U.S. federal and state income tax purposes. The Company is currently not under any significant tax examinations in any jurisdictions.