Note 12 - Income Taxes

12 Months Ended

Dec. 31, 2020

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,
	2020		2019			2018
United States	$	39,286	$	(4,134	)	$	(13,151	)
Foreign		130,056		117,254			131,633
Income before income taxes	$	169,342	$	113,120		$	118,482

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

	Year Ended December 31,
	2020			2019			2018
Current:
Federal	$	2,842		$	1,682		$	11,023
State		(1	)		8			4
Foreign		3,814			3,105			2,992
Deferred:
Federal		(1,221	)		(213	)		(797	)
Foreign		(467	)		(301	)		(8	)
Income tax expense	$	4,967		$	4,281		$	13,214

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

	Year Ended December 31,
	2020			2019			2018
U.S. statutory federal tax rate		21.0	%		21.0	%		21.0	%
Foreign income at lower rates		(15.2	)		(20.7	)		(22.0	)
Impact of the 2017 Tax Act:
One-time deemed repatriation transition tax		-			-			0.6
GILTI		11.1			11.0			14.4
Changes in valuation allowance		1.6			2.1			-
Stock-based compensation		(11.2	)		(1.5	)		(1.1	)
Tax credits, net of reserves		(3.8	)		(6.2	)		(1.9	)
State income taxes		(1.6	)		(0.7	)		-
Other adjustments		1.0			(1.2	)		0.2
Effective tax rate		2.9	%		3.8	%		11.2	%

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

	December 31,
	2020			2019
Deferred tax assets:
Tax credits	$	23,501		$	18,080
Stock-based compensation		2,392			6,237
Deferred compensation		7,895			7,110
Net operating losses		1,150			615
Other expenses not currently deductible		4,617			2,323
Deferred tax assets, gross		39,555			34,365
Valuation allowance		(18,190	)		(15,411	)
Deferred tax assets, net of valuation allowance		21,365			18,954
Deferred tax liabilities:
Depreciation and amortization		(1,600	)		(1,259	)
Undistributed foreign earnings		(77	)		(77	)
Other expenses currently deductible		(1,132	)		(425	)
Deferred tax liabilities		(2,809	)		(1,761	)
Net deferred tax assets	$	18,556		$	17,193

 GILTI:

 The Company accounts for GILTI 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, 2020 and 2019, the Company has evaluated the realization of its deferred tax assets and recorded a valuation allowance for assets that do not meet the more-likely-than-not recognition threshold.

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 years ended December 31, 2020 and 2019, the Company repatriated $30 million and $75 million from its Bermuda subsidiary, respectively. 

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, 2020 and 2019, the undistributed earnings were approximately $27.7 million and $32.9 million, respectively. 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, 2020, the Company did not have federal net operating loss carryforwards. As of December 31, 2020, the state net operating loss carryforwards for income tax purposes were $20.2 million, which will expire beginning in 2024.

As of December 31, 2020, the Company had $7.1 million R&D tax credit carryforwards for federal income tax purposes, which will begin to expire in 2040, and $30.5 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, 2020, the Company had $33.5 million of unrecognized tax benefits, $24.3 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 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. 

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

Balance as of January 1, 2018	$	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
Increase for tax position of current year		9,782
Decrease for tax position of prior year		(907	)
Decrease due to settlement with tax authorities		(560	)
Decrease due to lapse of statute of limitation		(223	)
Balance as of December 31, 2020	$	33,499

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2020 and 2019, the Company has $2.4 million and $1.6 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities on 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 2030 and 2023, 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. In  February 2020, Altera filed a petition with the U.S. Supreme Court to review the case. In  June 2020, the Supreme Court denied Altera's petition for writ of certiorari, declining to review the decision of the Ninth Circuit Court of Appeals. Based on the Supreme Court’s denial to hear the Altera case, until and unless there is further litigation on this matter in the future, the Company considers the matter resolved and there was no impact on the Company’s current treatment of stock-based compensation costs.  

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.