Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

17. Income Taxes

The Company’s income tax expense (benefit) is composed of domestic and foreign income taxes depending on the relevant tax jurisdictions. Domestic income (loss) from continuing operations before income tax expense and income tax expense (benefit) are generated or incurred in the U.S, where the parent company resides.

The components of income tax expense (benefit) attributable to income (loss) from continuing operations are as follows (in thousands):

	Year Ended December 31,
	2021			2020			2019
Income (loss) from continuing operations before income tax expense
Domestic	$	41,566		$	(12,305	)	$	(24,752	)
Foreign		32,403			23,136			6,539
		73,969			10,831			(18,213	)
Current income tax expense (benefit)
Domestic		6,876			1			20
Foreign		9,415			(2,264	)		3,771
Uncertain tax position liability (domestic)		—			—			(1	)
Uncertain tax position liability (foreign)		(35	)		(20	)		2
		16,256			(2,283	)		3,792
Deferred income tax benefit
Domestic		1,314			(4,461	)		—
Foreign		(309	)		(39,484	)		63
		1,005			(43,945	)		63
Benefits from intra-period allocation		—			—			(1,655	)
Total income tax expense (benefit)	$	17,261		$	(46,228	)	$	2,200
Effective tax rate		23.3	%		—			—

The Company’s effective tax rate for the year ended December 31, 2021 was 23.3% as compared to negative effective tax rates for the years ended December 31, 2020 and 2019. The Company’s effective tax rate in 2021 was higher than the U.S. federal statutory rate of 21.0%, primarily due to the earnings from its operating subsidiary in Korea at a higher statutory tax rate. The increase in the effective tax rate in 2021 was primarily due to the higher taxable income from the Korean subsidiary and the reverse termination fee income recognized by the parent entity in the U.S. in relation to the Merger. The negative effective tax rate in 2020 as compared to the U.S. federal statutory rate of 21.0%, was primarily attributable to the reversal of the valuation allowances established against the deferred tax assets in connection with the Company’s operating subsidiary in Korea and parent entity in the U.S. The difference between the annual effective income tax rate and the U.S. federal statutory rate of 21.0% in 2019 primarily related to the non-income based withholding tax attributable to intercompany interest income of the Company’s Dutch subsidiary, application of different tax rates associated with certain earnings from the Company’s operations outside the U.S., the U.S. parent entity’s interest income, which is non-taxable for U.S. tax purposes, and the change of deferred tax assets and valuation allowances.

The Company’s Korean subsidiary recorded $1,655 thousand income tax benefits for the year ended December 31, 2019, primarily attributable to the application of the exception rule under ASC 740, in connection with the intra-period allocation, which resulted in the tax benefit in its continuing operations and tax expense in the discontinued operations for an equal and offsetting amount for the presentation purposes only.

The provision for domestic and foreign income taxes incurred is different from the amount calculated by applying the statutory tax rates to the income (loss) from continuing operations before income tax expense. The significant items causing this difference are as follows (in thousands):

	Year Ended December 31,
	2021			2020			2019
Provision computed at statutory rates	$	15,533		$	2,274		$	(3,825	)
State income taxes, net of federal effect		—			730			(1,139	)
Change in statutory tax rates		(259	)		5,735			2,329
Difference in foreign tax rates		2,820			1,077			3,002
Permanent differences
Derivative assets adjustment		(23	)		56			315
TPECs, hybrid and other interest		(3,400	)		(2,722	)		7,812
Thin capitalization		—			339			988
Equity-based compensation		(802	)		(73	)		(14	)
Permanent foreign currency gain (loss)		1,888			(1,813	)		(1,734	)
Penalty		427			176			151
GILTI		6,156			24,224			5,112
Intercompany debt restructuring		971			11,137			(18,435	)
Other permanent differences		(767	)		1,335			408
Withholding tax		2,060			2,291			3,043
State net operating loss write-off		9,844			—			—
Change in valuation allowance		(13,803	)		(75,452	)		7,817
Benefits from intra-period allocation		—			—			(1,655	)
Tax credits claimed		(5,508	)		(12,397	)		(651	)
Tax credits expired		—			—			170
Uncertain tax positions liability		(35	)		(20	)		1
Change in net operating loss carry-forwards		621			(3,314	)		—
Foreign local taxes		723			43			152
Others		815			146			(1,647	)
Income tax expense (benefit)	$	17,261		$	(46,228	)	$	2,200

Of the income tax benefit of $13,803 thousand attributable to the change in valuation allowances during the year ended December 31, 2021, $9,844 thousand is related to the release of the valuation allowance established against the deferred tax assets associated in the U.S. entity due to the dissolution of the Company’s domestic subsidiary in 2021 subsequent to the sale of the Foundry Services Group business and Fab 4. The offsetting expense of $9,844 thousand was included in the state net operating loss write-off in 2021, resulting in no income tax effect in the year. The Company’s parent entity in the U.S. will no longer be subject to state income taxes in 2022 and thereafter. The remaining $3,959 thousand represented the release of valuation allowances based on the assessment of the realizability of the related deferred tax assets in future tax years.

For the year ended December 31, 2020, a permanent difference of $24,224 thousand was included as Global intangible low-taxed income (“GILTI”) in the U.S., and was primarily attributable to the income earned by certain foreign subsidiaries of the Company, including its Korean subsidiary, from the sale of the Foundry Services Group business and Fab 4.

The income tax benefit of $75,452 thousand was due to the changes in valuation allowances during the year ended December 31, 2020, of which $31,578 thousand related to the release of valuation allowances related to the Company’s current year earnings, which were mainly driven by GILTI inclusion at the U.S. parent company. The remaining $43,874 thousand represented the release of valuation allowances based on the realizability of the related deferred tax assets in future years. The Company’s operating subsidiary in Korea had generated three years of cumulative profits adjusted for permanent differences and is anticipated to generate taxable basis for the subsequent years. As a result, $39,413 thousand of valuation allowances, established against the Korean subsidiary’s deferred tax assets, were released as of December 31, 2020. In addition, management believes it is more likely than not that the Company’s parent in the U.S. would be able to utilize its net operating loss in future tax years, which would provide incremental tax savings of approximately $4,461 thousand. Therefore, the Company released its valuation allowances established against the U.S. parent’s deferred tax assets up to these anticipated tax savings as of December 31, 2020.

Of the permanent tax expense of $11,137 thousand related to intercompany debt restructuring recorded for the year ended December 31, 2020, $11,890 thousand related to the waiver and release of unpaid interests of the intercompany loans granted to the Korean subsidiary by the Dutch subsidiary. This transaction created taxable income for the Korean subsidiary, but did not result in a liability because of the utilization of loss carryforwards, which were used against income from cancellation of intercompany loans.

During 2019, the Company completed a restructuring of its intercompany borrowings between the Company and the other entities within the group of the Company. The main purpose of this restructuring was to simplify the intercompany debt structure of the group in order to align with the anti-hybrid mismatch provision mandated by the Organization for Economic Co-operation and Development (OECD). A portion of hybrid instruments issued by the Company’s Luxembourg subsidiary to its parent in the U.S. were subject to this restructuring. The Company recorded a net deferred tax asset of $18,435 thousand related to the unrealized foreign exchange translation loss, which was attributable to the changes in the balances of hybrid instruments that are denominated in Euros. However, there was no impact on the provision for income taxes due to a full valuation allowance against the deferred tax assets of the Company’s Luxembourg subsidiary.

A summary of the composition of net deferred income tax assets (liabilities) as of December 31, 2021 and 2020 are as follows (in thousands):

	Year Ended December 31,
	2021			2020
Deferred tax assets
Inventory reserves	$	1,313		$	1,338
Accrued expenses		3,084			2,493
Property, plant and equipment		3,119			3,391
Accumulated severance benefits		11,842			12,343
Operating lease right-of-use liabilities		899			1,025
Foreign currency translation loss		17,280			9,129
NOL carry-forwards		87,636			121,389
Tax credit carry-forwards		14,164			15,395
Other long-term payable		2,457			944
Interest expense deduction limitation		4,731			—
Derivative liabilities		463			—
Others		1,610			1,629
Total deferred tax assets		148,598			169,076
Less: Valuation allowance		(94,212	)		(115,636	)
		54,386			53,440
Deferred tax liabilities
Derivative assets		—			417
Prepaid expense		2,300			1,071
Severance benefit deposits		4,227			3,156
Operating lease right-of-use assets		899			1,025
Foreign currency translation gain		5,139			2,431
Others		726			799
Total deferred tax liabilities		13,291			8,899
Net deferred tax assets	$	41,095		$	44,541

The Company has not recognized a deferred tax liability related to outside basis differences inherent in its foreign subsidiaries because the investments in those foreign subsidiaries within the group are essentially permanent in duration or earnings in foreign subsidiaries are intended to be indefinitely reinvested. It is not practicable to estimate the amount of deferred income taxes not recorded that are associated with those outside basis differences. If circumstances change and it becomes apparent that the undistributed earnings from foreign subsidiaries will be remitted or the parent entity will dispose of its interest in the subsidiaries in the foreseeable future, and related income taxes have not been recognized by the parent entity, the parent entity will accrue as an expense of the current period income taxes attributable to that remittance or disposition.

Changes in valuation allowance for deferred tax assets of continuing operations and discontinued operations for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

	Year Ended December 31,
	2021			2020			2019
Beginning balance	$	115,636		$	246,224		$	248,633
Additions		—			—			7,912
Reductions		(13,803	)		(75,452	)		—
Changes relating to the discontinued operations		—			(67,484	)		—
NOL/tax credit claimed/expired		—			3,686			(3,529	)
Translation adjustments		(7,621	)		8,662			(6,792	)
Ending balance	$	94,212		$	115,636		$	246,224

As of December 31, 2021, 2020 and 2019, respectively, the Company recorded a valuation allowance of $94,212 thousand, $115,636 thousand and $246,224 thousand on its deferred tax assets related to temporary differences, net operating loss carry-forwards and tax credits of domestic and foreign subsidiaries.

The Company has recorded a full valuation allowance against certain foreign subsidiaries’ deferred tax assets pertaining to its related tax loss carry-forwards that are not anticipated to generate a tax benefit. The valuation allowances at December 31, 2021, 2020 and 2019 were primarily attributable to its Luxembourg subsidiary.

	Year Ended December 31,
	2021		2020		2019
NOL carry-forwards	$	502,511	$	604,977	$	708,885

As of December 31, 2021, the Company had $502,511 thousand of net operating loss carry-forwards available to offset future taxable income, of which $288,548 thousand is associated with the Company’s Luxembourg subsidiary, mainly attributable to certain expenses incurred in connection with its shareholding in the Company’s Dutch subsidiary. Of the $288,548 thousand net operating loss carry-forwards, $279,848 thousand is carried forward indefinitely and the remaining $8,700 thousand expires from 2034 through 2037. The net operating loss carry-forwards retained by the Company’s U.S. parent and its domestic subsidiary (which was closed in 2021 subsequent to the sale of the Foundry Services Group business and Fab 4) amounts to $198,813 thousand, which expires at various dates through 2040. The amount associated with the Company’s Korean subsidiary of $11,499 thousand expires in 2026.

The Company utilized net operating loss of $70,672 thousand, $169,600 thousand and $30,945 thousand for the years ended December 31, 2021, 2020 and 2019, respectively. The Company also has Dutch tax credit carry-forwards of approximately $14,164 thousand as of December 31, 2021. The Dutch tax credits are carried forward to be used for an indefinite period of time.

Uncertainty in Income Taxes

The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, and the U.S. and in various other jurisdictions. The Company is subject to income- or non-income tax examinations by tax authorities of these jurisdictions for all open tax years.

As of December 31, 2021, 2020 and 2019, the Company recorded $386 thousand, $414 thousand and $445 thousand of unrecognized tax benefits of continuing operations and discontinued operations, respectively.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of each period is as follows (in thousands):

	Year Ended December 31,
	2021			2020			2019
Unrecognized tax benefits, balance at the beginning	$	414		$	445		$	426
Additions based on tax positions related to the current year		44			48			13
Reductions for tax positions of prior years		—			(34	)		(1	)
Lapse of statute of limitations		(79	)		(76	)		—
Translation adjustments		7			31			7
Unrecognized tax benefits, balance at the ending	$	386		$	414		$	445

No interest and penalties related to unrecognized tax benefits were recognized as of December 31, 2021, 2020 and 2019.

The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviations from this estimate over the next 12 months.