Income Taxes

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



	Year ended December 31,
	2018			2017		2016
Domestic	$	(24,442	)	$	4,626	$	12,652
Foreign	84,812			80,408		71,232
	$	60,370		$	85,034	$	83,884

The income tax expense consists of the following:



	Year ended December 31,
	2018			2017			2016
Current provision:
Domestic	$	(13,249	)	$	17,407		$	7,107
Foreign	17,271			18,008			18,428
	$	4,022		$	35,415		$	25,535
Deferred provision/(benefit):
Domestic	$	(1,999	)	$	2,618		$	(2,506	)
Foreign	1,374			(1,887		)	(878		)
	$	(625	)	$	731		$	(3,384	)
Income tax expense	$	3,397		$	36,146		$	22,151

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,
	2018			2017			2016
Expected tax expense	$	12,678		$	29,762		$	29,361
Change in valuation allowance	—			(21		)	22
Impact of tax holiday	(5,448		)	(4,396		)	(4,027		)
Foreign tax rate differential	5,014			(2,616		)	(2,716		)
Deferred tax (benefit)/provision	(3,915		)	(1,887		)	(878		)
Unrecognized tax benefits and interest	(88		)	(3,905		)	495
State taxes, net of Federal taxes	2,200			339			202
Non-deductible expenses	3,066			825			144
US Tax Reform Act impact	176			29,185			—
Excess tax benefit on stock-based compensation	(7,227		)	(9,797		)	—
Research & Development credit	(1,500		)	(844		)	(890		)
Other	(1,559		)	(499		)	438
Tax expense	$	3,397		$	36,146		$	22,151

The Company recorded income tax expense of $3,397 and $36,146 for the year ended December 31, 2018 and 2017, respectively. The effective tax rate decreased from 42.5% during the year ended December 31, 2017 to 5.6% during the year ended December 31, 2018 primarily as a result of: (i) reduction in federal statutory tax rate and (ii) the impact of one-time transition tax of $27,236 on the mandatory deemed repatriation of accumulated earnings and profits (“E&P”) of foreign subsidiaries and deferred tax re-measurement of $1,949 under the Tax Cuts and Jobs Act (the “Tax Reform Act”), during the year ended December 31, 2017 compared to $176 during the year ended December 31, 2018.

The SEC staff issued Staff Accounting Bulletin ("SAB 118"), which provides guidance on accounting for the 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, Income Taxes (“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 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 provisions of the tax laws that were in effect immediately before the enactment of the Tax Reform Act.

The deemed repatriation transition tax (the “Transition Tax”) is a tax on certain previously untaxed accumulated and current earnings & profits of the Company's foreign subsidiaries. The Company was able to reasonably estimate the Transition Tax and recorded an initial provisional Transition Tax obligation of $27,236, with a corresponding adjustment of $27,236 to income tax expense for the year ended December 31, 2017. On the basis of additional technical research and analysis, the Company recognized a measurement-period increase of $176 to the Transition Tax obligation, with a corresponding adjustment of $176 to the income tax expense during year ended December 31, 2018. The Company has completed its analysis of the transition tax and has recorded a final Transition Tax obligation of $27,412 with a corresponding income tax expense of $27,412.

During the first quarter of 2018, the Company made an election to change the tax status of most of its controlled foreign corporations (CFC) to disregarded entities for US income tax purposes. As a result, the Company no longer has undistributed earnings in connection with these CFCs. The Transition Tax resulted in previously taxed income (PTI) which may be subject to withholding taxes and currency gains or losses upon repatriation. The Company presently does not intend to distribute its PTI and has not recorded any deferred taxes. If, in the future, the Company changes its present intention regarding the distribution of PTI, additional taxes may be required and would be recorded in the period the intention changes. The Company has adopted an accounting policy to treat Global Intangible Low-Taxed Income (GILTI) as a period cost.

As of December 31, 2017, the Company was able to reasonably estimate and record initial provisional adjustments associated with the corporate rate change in the amount of $1,949. The Company has completed its analysis and no significant adjustment was recorded related to this item during the year ended December 31, 2018.

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 5 years of operations and 50% exemption for a period of 5 years thereafter.

The Company has also benefitted from a corporate tax holiday in the Philippines for our operations centers established there over the last several years. The tax holiday expired for three of our centers in 2014, 2016 and in 2018 and will expire for other centers by year 2022, 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.

The diluted earnings per share effect of the tax holiday is $0.16, $0.13 and $0.12 for the years ended December 31, 2018, 2017 and 2016, respectively.

The components of the deferred tax balances as of December 31, 2018 and 2017 are as follows:



	As of
	December 31, 2018			December 31, 2017
Deferred tax assets:
Depreciation and amortization	$	3,731		$	2,183
Stock-based compensation	8,614			7,647
Accrued employee costs and other expenses	3,596			3,673
Tax credit carry forward	—			1,474
Net operating loss carry forward	1,113			2,068
Unrealized exchange loss	6,671			252
Deferred rent	2,255			2,064
Others	1,380			1,007
	$	27,360		$	20,368
Valuation allowance	(99		)	(108		)
Deferred tax assets	$	27,261		$	20,260

Deferred tax liabilities:
Unrealized exchange gain	$	115		$	5,069
Intangible assets	19,289			4,648
Unamortized discount on convertible senior notes	4,105			—
Others	5,595			1,958
Deferred tax liabilities	$	29,104		$	11,675
Net deferred tax assets/(liabilities)	$	(1,843	)	$	8,585

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, 2018 and 2017, the Company performed an analysis of the deferred tax asset valuation allowance for net operating loss carry forward for its domestic and foreign 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 each as of December 31, 2018 and 2017. The Company also recorded a valuation allowance of $79 and $88 related to tax credit carry forward as of December 31, 2018 and 2017, respectively.

The Company in connection with its recent acquisitions has acquired federal and state net operating losses in the United States. As of December 31, 2018 and 2017, the Company has federal net operating loss carry forward of $444 and $1,554, respectively, which expire through various years until 2032. The Company’s federal net operating losses carry forward are subject to certain annual utilization limitations under Section 382 of the Code. The Company also has state and local net operating losses 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 substantially all of the losses before their expiration.

The Company’s income tax expense also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC 740 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 unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016.



	2018			2017			2016
Balance as of January 1	$	824		$	3,087		$	2,797
Increases related to prior year tax positions	—			—			156
Decreases related to prior year tax positions	(320		)	(2,520		)	—
Increases related to current year tax positions	300			169			178
Effect of exchange rate changes	—			88			(44		)
Balance as of December 31	$	804		$	824		$	3,087

The unrecognized tax benefits as of December 31, 2018 of $804, if recognized, would impact the effective tax rate.

The Company has not recognized any interest in each of the years ended December 31, 2018 and 2017 and has recognized interest of $315 during the year ended December 31, 2016. As of December 31, 2018 and 2017, the Company has accrued interest and penalties of $nil and $68 relating to unrecognized tax benefits.