Income Taxes

12 Months Ended

Dec. 31, 2019

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



	Year ended December 31,
	2019			2018			2017
Domestic	$	(16,685	)	$	(24,442	)	$	4,626
Foreign	99,785			84,812			80,408
	$	83,100		$	60,370		$	85,034

The income tax expense consists of the following:



	Year ended December 31,
	2019			2018			2017
Current provision/(benefit):
Domestic	$	10,823		$	(13,249	)	$	17,407
Foreign	16,694			17,271			18,008
	$	27,517		$	4,022		$	35,415
Deferred provision/(benefit):
Domestic	$	(13,912	)	$	(1,999	)	$	2,618
Foreign	1,567			1,374			(1,887		)
	$	(12,345	)	$	(625	)	$	731
Income tax expense	$	15,172		$	3,397		$	36,146

Income taxes recognized in other comprehensive income are as follows:



	Year ended December 31,
	2019			2018			2017
Deferred taxes (expense)/benefit :
Unrealized gain/(loss) on cash flow hedges	$	(391	)	$	4,803		$	(3,711	)
Retirement benefits	328			(21		)	(268		)
Total Income tax (expense)/benefit recognized in other comprehensive income	$	(63	)	$	4,782		$	(3,979	)

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,
	2019			2018			2017
Expected tax expense	$	17,451		$	12,678		$	29,762
Change in valuation allowance	—			—			(21		)
Impact of tax holiday	(5,920		)	(5,448		)	(4,396		)
Foreign tax rate differential	1,660			5,014			(2,616		)
Deferred tax provision/(benefit)	3,026			(3,915		)	(1,887		)
Unrecognized tax benefits and interest	174			(88		)	(3,905		)
State taxes, net of Federal taxes	2,137			2,201			339
Non-deductible expenses	1,329			3,066			825
US Tax Reform Act impact	—			176			29,185
Excess tax benefit on stock-based compensation	(2,306		)	(7,227		)	(9,797		)
Research & Development credit	(1,650		)	(1,500		)	(844		)
Prior period items	(143		)	(1,466		)	—
Others	(586		)	(94		)	(499		)
Tax expense	$	15,172		$	3,397		$	36,146

The Company recorded income tax expense of $15,172 and $3,397 for the year ended December 31, 2019 and 2018, respectively. The effective tax rate increased from 5.6% during the year ended December 31, 2018 to 18.3% during the year ended December 31, 2019 primarily as a result of: (i) recording of a one-time tax benefit of $6,274 with respect to unused 2018 foreign branch income tax credits under the Internal Revenue Code of 1986, as amended, during the year ended December 31, 2018, (ii) recording of higher excess tax benefits related to stock awards of $7,227 pursuant to ASU No. 2016-09 during the year ended December 31, 2018 compared to $2,306 during the year ended December 31, 2019, (iii) lower tax expense of $3,072 on account of impairment and restructuring charges recorded during the year ended December 31, 2018 compared to $888 during the year ended December 31, 2019, partially offset by (iv) higher tax exemptions/incentives and a lower tax rate for qualifying Indian subsidiaries due to a change in legislation during the year ended December 31, 2019.

During the year 2018, the Company made an election to change the tax status of most of its controlled foreign corporations (“CFC”) to disregarded entities for U.S. 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 related to its investment in foreign subsidiaries. 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.

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.

In 2019, the Government of India introduced a new tax regime for certain Indian companies by enacting the Taxation Laws (Amendment) Act, 2019. The new tax regime is optional and provides for a lower tax rate for Indian companies, subject to certain conditions which among other things includes not availing of specified exemptions or incentives. Some of the Indian subsidiaries have opted for the new tax regime to obtain the benefit of a lower tax rate.

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 few of our centers in 2014, 2016, 2018 and in 2019 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 $0.17, $0.16 and $0.13 for the years ended December 31, 2019, 2018 and 2017, respectively.

The components of the deferred tax balances as of December 31, 2019 and 2018 are as follows:



	As of
	December 31, 2019			December 31, 2018
Deferred tax assets:
Depreciation and amortization expense	$	12,319		$	3,731
Stock-based compensation	9,313			8,614
Accrued employee costs and other expenses	9,805			3,596
Net operating loss carry forward	2,896			1,113
Unrealized exchange loss	1,136			6,671
Deferred rent	4,503			2,255
Others	745			1,380
	$	40,717		$	27,360
Valuation allowance	(202		)	(99		)
Deferred tax assets	$	40,515		$	27,261

Deferred tax liabilities:
Unrealized exchange gain	$	505		$	115
Intangible assets	20,696			19,289
Unamortized discount on convertible senior notes	3,395			4,105
Others	5,030			5,595
Deferred tax liabilities	$	29,626		$	29,104
Net deferred tax assets/(liabilities)	$	10,889		$	(1,843	)

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, 2019 and 2018, 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 $202 and $20 as of December 31, 2019 and 2018, respectively. The Company also recorded a valuation allowance of $nil and $79 related to the tax credit carry forward as of December 31, 2019 and 2018, 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, 2019 and 2018, the Company has federal net operating loss carry forward of $nil and $444, 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. 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, 2019, 2018 and 2017.



	2019			2018			2017
Balance as of January 1	$	804		$	824		$	3,087
Increases related to prior year tax positions	69			—			—
Decreases related to prior year tax positions	(156		)	(320		)	(2,520		)
Increases related to current year tax positions	330			300			169
Effect of exchange rate changes	—			—			88
Balance as of December 31	$	1,047		$	804		$	824

The unrecognized tax benefits as of December 31, 2019 of $1,047, if recognized, would impact the effective tax rate.

The Company has not recognized any interest in each of the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019 and 2018, the Company has not accrued interest and penalties relating to unrecognized tax benefits.