25. Income taxes

Income tax expense (benefit) for the years ended December 31, 2014, 2015 and 2016 is allocated as follows:

	Year ended December 31,
	2014			2015			2016

Income from continuing operations	$	57,419		$	61,937		$	62,098
Other Comprehensive Income:
Unrealized gains (losses) on cash flow hedges		48,966			13,816			23,809
Retirement benefits		(413	)		1,304			(1,885	)
Additional paid-in capital:
Excess tax benefit on stock-based compensation		—		$	(6,560	)		—
Retained earnings:
Deferred tax assets recognized on early adoption of ASU 2016-09		—			—			(24,912	)

The components of income before income tax expense from continuing operations are as follows:

	Year ended December 31,
	2014		2015		2016
Domestic (U.S.)	$	19,614	$	23,122	$	44,110
Foreign (Non-U.S.)		229,976		278,632		285,535
Income before income taxes	$	249,590	$	301,754	$	329,645

25. Income taxes (Continued)

Income tax expense (benefit) attributable to income from continuing operations consists of:

	Year ended December 31,
	2014			2015			2016
Current taxes :
Domestic (U.S. federal taxes)	$	3,768		$	12,142		$	78
Domestic (U.S. state taxes)		666			301			1,069
Foreign (Non-U.S.)		65,237			68,207			30,497
	$	69,671		$	80,650		$	31,644
Deferred taxes :
Domestic (U.S. federal taxes)	$	2,761		$	(5,396	)	$	11,379
Domestic (U.S. state taxes)		(193	)		344			(459	)
Foreign (Non-U.S.)		(14,820	)		(13,661	)		19,534
	$	(12,252	)	$	(18,713	)	$	30,454
Total income tax expense (benefit)	$	57,419		$	61,937		$	62,098

Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. federal statutory income tax rate of 35% to income before income taxes, as a result of the following:

	Year ended December 31,
	2014			2015			2016
Income before income tax expense	$	249,590		$	301,754		$	329,645
Statutory tax rates		35	%		35	%		35	%
Computed expected income tax expense		87,356			105,614			115,376
Increase (decrease) in income taxes resulting from:
Foreign tax rate differential		(4,703	)		(16,550	)		(18,574	)
Tax benefit from tax holiday		(35,868	)		(38,039	)		(32,893	)
Non-deductible expenses		3,789			1,884			2,295
Effect of change in tax rates		176			1,436			353
Change in valuation allowance		(2,880	)		(33	)		(4,830	)
Unrecognized tax benefits		1,423			6,272			(627	)
Others		8,126			1,353			998
Reported income tax expense (benefit)	$	57,419		$	61,937		$	62,098

A portion of the profits of the Company’s operations is exempt from income tax in India. One of the Company’s Indian subsidiaries has fourteen units eligible for a tax holiday as a special economic zone unit in respect of 100% of the export profits it generates for a period of 5 years from commencement, 50% of such profits for the next 5 years (year 6 to year 10 from commencement) and 50% of the profits for an additional period of 5 years (year 11 to year 15 from commencement), subject to the satisfaction of certain capital investment requirements. The tax holidays for the Company’s existing special economic zone units will begin to expire on March 31, 2022 and will have fully expired on March 31, 2029, assuming the Company satisfies the capital investment requirements.

The effect of the Indian tax holiday on basic earnings per share was $0.16, $0.18 and $0.19, respectively, for the years ended December 31, 2014, 2015 and 2016. The effect of the tax holiday on diluted earnings per share was $0.16, $0.17 and $0.18, respectively, for the years ended December 31, 2014, 2015 and 2016.

25. Income taxes (Continued)

The components of the Company’s deferred tax balances as of December 31, 2015 and 2016 are as follows:

	As of December 31,
	2015			2016
Deferred tax assets
Net operating loss carryforwards	$	48,626		$	52,997
Accrued liabilities and other expenses		16,680			19,840
Provision for doubtful receivables		5,655			6,419
Property, plant and equipment		4,538			3,445
Unrealized losses on cash flow hedges, net		10,296			558
Share-based compensation		14,253			19,054
Retirement benefits		2,772			5,067
Deferred revenue		39,547			44,892
Tax credit carryforwards		52,993			34,509
Others		9,173			8,876
Gross deferred tax assets	$	204,533		$	195,657
Less: Valuation allowance		(20,091	)		(14,746	)
Total deferred tax assets	$	184,442		$	180,911
Deferred tax liabilities
Intangible assets	$	20,987		$	13,519
Property, plant and equipment		3,406			2,745
Deferred cost		31,953			41,950
Investments in foreign subsidiaries not indefinitely reinvested		23,097			29,546
Unrealized gains on cash flow hedges, net	—				14,350
Others		7,697			11,073
Total deferred tax liabilities	$	87,140		$	113,183
Net deferred tax asset	$	97,302		$	67,728

	As of December 31,
Classified as	2015		2016
Deferred tax assets
Non-current	$	99,395	$	70,143
Deferred tax liabilities
Non-current	$	2,093	$	2,415
	$	97,302	$	67,728

The change in the total valuation allowance for deferred tax assets as of December 31, 2014, 2015 and 2016 is as follows:

	Year ended December 31,
	2014			2015			2016
Opening valuation allowance	$	24,654		$	21,094		$	20,091
Reduction during the year		(8,662	)		(3,499	)		(7,299	)
Addition during the year		5,102			2,496			1,954
Closing valuation allowance	$	21,094		$	20,091		$	14,746

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible.

25. Income taxes (Continued)

Management considers the scheduled reversal of deferred tax liabilities and projected taxable income in making this assessment. In order to fully realize a deferred tax asset, the Company must generate future taxable income prior to the expiration of the deferred tax asset under applicable law. Based on the level of historical taxable income and projections for future taxable income over the periods during which the Company’s deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2016. The amount of the Company’s deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.

In 2014, the Company determined that it was more likely than not that the deferred tax assets of a foreign subsidiary would be partially realized after considering all positive and negative evidence. Prior to 2014, because of significant negative evidence, including a history of losses, an uncertain revenue stream, and potential reorganization activity that could adversely affect the foreign subsidiary’s future operations and profitability on a continuing basis in future years, the Company determined that it was more likely than not that the subsidiary’s deferred tax assets would not be realized. However, as of December 31, 2014, such subsidiary had realized cumulative pre-tax income for the preceding three years and had forecasted future pre-tax income sufficient to realize a portion of its deferred tax assets. After consideration of the relative impact of all evidence, both negative and positive, and the weight accorded to each, the Company concluded that it was more likely than not that a portion of the subsidiary’s deferred tax assets would be realized and that the applicable valuation allowance should be partially released up to $3,000.

25. Income taxes (Continued) In 2016, one of the Company’s subsidiaries filed amended tax returns with respect to prior years, resulting in revised assessments, higher taxable income and the utilization of operating loss carryforwards. The use of operating loss carryforwards resulted in the complete reversal of the subsidiary’s remaining valuation allowance of $3,377.

On January 1, 2016, the Company elected the early adoption of ASU 2016-09, which was applied using a modified retrospective approach. Accordingly, excess tax benefits relating to the exercise of stock options prior to December 31, 2015 amounting to $24,912 were recorded through retained earnings. For the year ended December 31, 2016, the Company has recognized net excess tax benefits of $1,004 in income tax expense attributable to continuing operations.

The Company recorded excess tax benefits of $0, $6,560, and $0 through additional paid-in capital during the years ended December 31, 2014, 2015 and 2016, respectively.

As of December 31, 2016, the Company’s deferred tax assets related to net operating loss carryforwards amounted to $52,997. Net operating losses of subsidiaries in the United Kingdom, Hungary, Singapore, Malaysia, China, Australia, Brazil, Spain, Israel and Luxembourg amounted to $143,029 and can be carried forward for an indefinite period. The Company’s remaining tax loss carryforwards expire as set forth in the table below:

	US - Federal		Europe		Others
Year ending December 31,
2017	$	—	$	3	$	—
2018		—		5		19
2019		—		5		67
2020		—		234		697
2021		—		2,335		2,790
2022		—		1,829		57
2023		—		4,576		1,133
2024		—		5,820		8,577
2025		—		3,485		2,379
2026		—		348		2,329
2027		—		—		—
2028		—		31		—
2029		—		-		—
2030		—		196		—
2031		14,607		188		—
2032		21		65		—
2033		4,538		83		—
2034		37		—		—
2035		30		—		—
2036		—		—		—
2037		—		—		1,097
	$	19,233	$	19,203	$	19,145

As of December 31, 2016, the Company had additional deferred tax assets on U.S. state and local tax loss carryforwards amounting to $6,295 with varying expiration periods between 2017 and 2035.

As of December 31, 2016, the company had a total foreign tax credit of $31,490, which will expire as set forth in the table below:

25. Income taxes (Continued)

Year ending December 31,	Amount
2022	$	893
2023		1,202
2024		15,552
2025		8,481
2026		5,362
	$	31,490

Undistributed earnings of the Company’s foreign (non-Bermuda) subsidiaries amounted to $795,398 as of December 31, 2016. The Company plans to indefinitely reinvest such undistributed earnings, except for those earnings for which a deferred tax liability has already been accrued or which can be repatriated in a tax-free manner. Accordingly, with limited exceptions, the Company does not accrue any income, distribution or withholding taxes that would arise if such earnings were repatriated. Due to the Company’s changing corporate structure, the various methods that are available to repatriate earnings, and uncertainty relative to the applicable taxes at the time of repatriation, it is not practicable to determine the amount of tax that would be imposed upon repatriation. If undistributed earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the company will accrue the applicable amount of taxes associated with such earnings at that time.

As of December 31, 2016, $412,533 of the Company’s $422,623 in cash and cash equivalents was held by the Company’s foreign (non-Bermuda) subsidiaries. $148,158 of this cash is held by foreign subsidiaries for which the Company expects to incur and has accrued a deferred tax liability on the repatriation of $35,902 of retained earnings. $92,254 of the Company’s cash and cash equivalents is held by foreign subsidiaries in jurisdictions where no tax is expected to be imposed upon repatriation. The remaining $172,121 in cash and cash equivalents held by certain foreign subsidiaries of the Company is being permanently reinvested.

The following table summarizes activities related to our unrecognized tax benefits from January 1 to December 31 for each of 2014, 2015 and 2016:

	Year Ended December 31,
	2014			2015			2016
Opening Balance at January 1	$	21,832		$	22,718		$	26,357
Increase related to prior year tax positions, including recorded in acquisition accounting		2,472			2,000			370
Decrease related to prior year tax positions		(1,002	)		—			(1,506	)
Decrease related to divestiture of business		—			—			(345	)
Decrease related to prior year tax position due to lapse of applicable statute of limitation		(753	)		(820	)		(2,122	)
Increase related to current year tax positions, including recorded in acquisition accounting		442			3,544			3,225
Decrease related to settlements with tax authorities		—			—			(2,000	)
Effect of exchange rate changes		(273	)		(1,085	)		(512	)
Closing Balance at December 31	$	22,718		$	26,357		$	23,467

As of December 31, 2014, 2015 and 2016, the Company had unrecognized tax benefits amounting to $21,268, $24,935 and $22,469, respectively, which, if recognized, would impact the effective tax rate.

As of December 31, 2014, 2015 and 2016, the Company had accrued $3,417, $4,223 and $3,856, respectively, in interest relating to unrecognized tax benefits. During the years ended December 31, 2014, 2015 and 2016, the Company recognized $44, $1,152 and $(206), respectively, excluding exchange rate differences, in interest on unrecognized tax benefits. As of December 31, 2014, 2015 and 2016 the company had accrued $561, $958 and $977, respectively, for penalties.

25. Income taxes (Continued)

In the next twelve months and for all tax years that remain open to examinations by U.S. federal and various state, local, and non-U.S. tax authorities, the Company estimates that it is reasonably possible that the total amount of its unrecognized tax benefits will vary. However, the Company does not expect significant changes within the next twelve months other than depending on the progress of tax matters or examinations with various tax authorities, which are difficult to predict.

With exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years prior to 2013. The Company’s subsidiaries in India and China are open to examination by relevant taxing authorities for tax years beginning on or after April 1, 2009, and January 1, 2007, respectively. The Company regularly reviews the likelihood of additional tax assessments and adjusts its reserves as additional information or events require.