Income Taxes

The components of income before income taxes consist of the following:



	Year ended December 31,
	2017		2016		2015
Domestic	$	4,626	$	12,652	$	25,045
Foreign	80,408		71,232		50,731
	$	85,034	$	83,884	$	75,776

The income tax expense consists of the following:



	Year ended December 31,
	2017			2016			2015
Current provision:
Domestic	$	17,407		$	7,107		$	9,951
Foreign	18,008			18,428			12,022
	$	35,415		$	25,535		$	21,973
Deferred provision/(benefit):
Domestic	$	2,618		$	(2,506	)	$	3,041
Foreign	(1,887		)	(878		)	(803		)
	$	731		$	(3,384	)	$	2,238
Income tax expense	$	36,146		$	22,151		$	24,211

The effective income tax rate differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes approximately as follows:



	Year ended December 31,
	2017			2016			2015
Expected tax expense	$	29,762		$	29,361		$	26,521
Change in valuation allowance	(21		)	22			19
Impact of tax holiday	(4,396		)	(4,027		)	(2,991		)
Foreign tax rate differential	(2,616		)	(2,716		)	(2,797		)
Deferred tax (benefit)/provision	(1,887		)	(878		)	(803		)
Unrecognized tax benefits and interest	(3,905		)	495			324
State taxes, net of Federal taxes	339			202			1,327
Non-deductible expenses	825			144			26
Prior year tax expense/(benefit)	—			—			2,450
US Tax Reform Act impact	29,185			—			—
Excess tax benefit for stock-based compensation	(9,797		)	—			—
Other	(1,343		)	(452		)	135
Tax expense	$	36,146		$	22,151		$	24,211

The effective income tax rate was 42.5% and 26.4% during the year ended December 31, 2017 and 2016, respectively. The effective tax rate for the year ended December 31, 2017 was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”), enacted on December 22, 2017 by the U.S. government. The Tax Reform Act makes broad and complex changes to the U.S. tax code that has affected our fiscal year ended December 31, 2017, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018 and (2) implementing a modified territorial tax system that includes a one-time transition tax on the mandatory deemed repatriation of accumulated earnings and profits (“E&P”) of foreign subsidiaries that is payable over eight years.

The Company has re-measured its net deferred tax assets and liabilities using the enacted Federal Tax Rate that will apply when these amounts are expected to reverse. The effect of the re-measurement of $1,949 is reflected entirely in the current period that includes the enactment date and is allocated directly to income tax expense from continuing operations.

The Deemed Repatriation Transition Tax (the “Transition Tax”) is a tax on previously untaxed accumulated E&P of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate and recorded a provisional Transition Tax obligation of $27,236.

On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Reform Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Reform Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Reform Act. While the Company was able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Reform Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions the Company may take. The Company continues to gather additional information to determine the final impact.

Company also derive benefit from a corporate tax holiday in the Philippines for our operations centers established there over the last several years. The tax holiday expired for two of our centers in 2014 and in 2016 and will expire over the next few years for other centers, which may lead to an increase in our overall tax rate. Following the expiry of the tax exemption, income generated from centers in the Philippines will be taxed at the prevailing annual tax rate, which is currently 5.0% on gross income.

Certain operations centers in India, which were established in Special Economic Zones (“SEZs”), are eligible for tax incentives until 2025. These operations centers are eligible for a 100% income tax exemption for first five years of operations and 50% exemption for a period of five years thereafter.

The diluted earnings per share effect of the tax holiday is $0.13, $0.12 and $0.09 for the years ended December 31, 2017, 2016 and 2015, respectively.

The components of the deferred tax balances as of December 31, 2017 and 2016 are as follows:



	As of
	December 31, 2017			December 31, 2016
Deferred tax assets:
Tax credit carry forward	$	1,474		$	4,806
Depreciation and amortization	2,183			3,765
Stock-based compensation	7,647			10,385
Accrued employee costs and other expenses	3,673			5,130
Net operating loss carry forwards	2,068			1,856
Unrealized exchange loss	252			2,099
Deferred rent	2,064			1,307
Others	1,007			484
	$	20,368		$	29,832
Valuation allowance	(108		)	(454		)
Deferred tax assets	$	20,260		$	29,378
Deferred tax liabilities:
Unrealized exchange gain	$	5,069		$	1,414
Intangible assets	4,648			13,165
Others	1,958			—
Deferred tax liabilities:	$	11,675		$	14,579
Net deferred tax assets	$	8,585		$	14,799

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases and operating loss carry forwards. At December 31, 2017 and 2016, the Company performed an analysis of the deferred tax asset valuation allowance for net operating loss carry forward for its domestic entities. Based on this analysis, the Company continues to carry a valuation allowance on the deferred tax assets on certain net operating loss carry forwards. Accordingly, the Company had recorded a valuation allowance of $20 and $351 as of December 31, 2017 and 2016, respectively. The Company also recorded a valuation allowance of $88 and $103 related to tax credit carry forward as of December 31, 2017 and 2016, respectively.

As a result of the multiple acquisitions over the last few years, the Company acquired federal and state net operating losses in the United States. As of December 31, 2017 and 2016, the Company has federal net operating loss carry forwards of approximately of $1,554 and $4,052, respectively, which expire through various years until 2032. The Company’s federal net operating loss carry forwards are subject to certain annual utilization limitations under Section 382 of the United States Internal Revenue Code. The Company also has state and local net operating loss carry forwards of varying amounts, which are subject to limitations under the applicable rules and regulations of those taxing jurisdictions. The Company estimates that it will be able to utilize all of the losses before their expiration.

At December 31, 2017, undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $376,649. Not all of the undistributed earnings may be available for repatriation due to foreign legal restrictions that require minimum reserves to be maintained in those Countries and additional taxes that could be imposed on the distribution of those earnings. U.S. federal deferred income taxes on these earnings are not required because under the Tax Reform Act such earnings have been subject to U.S. federal tax as a result of the mandatory repatriation provision. Additionally, such earnings will not be subject to U.S. federal tax when actually distributed as provided in the Tax Reform Act, except that certain foreign jurisdictions may impose a tax on such distributions.

The Company’s income tax expense also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC topic 740, “Income Taxes”, as well as the related net interest. Tax exposures can involve complex issues and may require an extended resolution period. Although the Company believes that it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the income tax expense in the period in which such determination is made.

The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2017 through December 31, 2017



Balance as of January 1, 2017	$	3,087
Increases related to prior year tax positions	—
Decreases related to prior year tax positions	(2,520		)
Increases related to current year tax positions	169
Decreases related to current year tax positions	—
Effect of exchange rate changes	88
Balance as of December 31, 2017	$	824

The unrecognized tax benefits as of December 31, 2017 of $824, if recognized, would impact the effective tax rate.

The Company has recognized interest of nil and $315 during the years ended December 31, 2017 and 2016, respectively, which is included in the income tax expense in the consolidated statements of income. As of December 31, 2017 and 2016, the Company has accrued interest and penalties of $68 and $1,553 relating to unrecognized tax benefits.