Note 6. Income Taxes

For the years ended December 31, 2016, 2015 and 2014, Income before provision for income taxes, includes the following components (amounts in thousands):

	2016		2015		2014
Domestic income	$	10,997	$	9,663	$	6,764
Foreign income		17,375		13,118		6,222

	$	28,372	$	22,781	$	12,986

For the years ended December 31, 2016, 2015 and 2014, income tax expense is composed of the following (amounts in thousands):

	2016			2015			2014
Current income tax expense	$	15,800		$	11,880		$	4,693
Deferred income tax (benefit)		(5,428	)		(2,838	)		(2,264	)

	$	10,372		$	9,042		$	2,429

Current tax expense for the years ended December 31, 2016, 2015 and 2014 includes $1.7 million, $1.5 million and $1.1 million of foreign withholding tax, respectively.

For the years ended December 31, 2016, 2015 and 2014 the Company's income tax expense and effective tax rates were as follows:

	2016			2015			2014
Pre-tax book income—US Only		35.0	%		35.0	%		35.0	%
Pre-tax book income—PR Only		21.4	%		20.2	%		16.9	%
Permanent items		3.2	%		4.0	%		3.2	%
Return to provision true-ups—Current/Deferred		–1.1	%		–1.4	%		–3.8	%
Foreign rate differential		2.4	%		2.2	%		3.4	%
Foreign tax credits		–32.0	%		–24.5	%		–31.1	%
Change in valuation allowance		0.0	%		0.0	%		–19.6	%
Foreign withholding taxes		6.0	%		6.7	%		8.9	%
Deferred foreign tax credit offset		0.0	%		–2.2	%		4.0	%
State taxes and state rate change		1.4	%		–0.3	%		1.9	%
UTP adjustment		0.3	%		0.0	%		0.0	%

		36.6	%		39.7	%		18.8	%

For the year ended December 31, 2016, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded primarily relate to increases in taxes in Puerto Rico and foreign withholding taxes that will generate offsetting U.S. foreign tax credits. The foreign rate differential is created by significant operations taxed in Puerto Rico which has a higher tax rate than the US federal rate. The operations that are taxed in Puerto Rico are also taxed in the U.S., generating a foreign tax credit. As a result, Puerto Rico timing differences creating deferred tax liabilities represent future Puerto Rico taxes and future potential foreign tax credits. The deferred foreign tax credit offset represents the future foreign tax credits related to the Puerto Rico timing differences. The Company receives revenue from various foreign jurisdictions that are subject to withholding taxes. These withholding taxes have been recorded in the provision for income taxes and generate foreign tax credits.

For the year ended December 31, 2015, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded relate to increases in taxes in Puerto Rico and foreign withholding taxes that will generate offsetting U.S. foreign tax credits.

For the year ended December 31, 2014, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded relate to increases in taxes in Puerto Rico that will generate offsetting U.S. foreign tax credits and the reduction of the valuation allowance. The realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction during the future periods in which the related temporary differences become deductible. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. The Company reversed a valuation allowance of $2.5 million on the deferred tax assets to increase the total amount that management believed would be ultimately realized, due to the expected increase in income following the Cable Networks Acquisition on April 1, 2014.

The Company may be audited by federal, state and local tax authorities, and from time to time these audits could result in proposed assessments. The Company has open tax years from 2012 forward for federal and state tax purposes. During 2015, the Company received a notice that the Hemisphere Media Group, Inc. 2013 tax return was selected for examination by the IRS. The audit was closed with no findings in 2016.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated for preparing its income tax returns in accordance with tax regulations and the net tax effects of operating loss and tax credits carried forward. Net deferred tax liabilities consist of the following components as of December 31, 2016 and 2015 (amounts in thousands):

	2016			2015
Deferred tax assets:
Allowances for doubtful accounts	$	2,046		$	1,976
Deferred branch tax benefit		15,859			15,813
State tax Federal deduction true-up		70			—
Deferred income		—			29
Fixed assets		43			39
Accrued expenses		1,204			1,440
Foreign tax credit		11,449			5,572
Stock compensation		3,865			3,465
Pension		690			651
Intangibles		2,286			2,376

Other DTA		533			—

		38,045			31,361

Deferred tax liabilities:
Prepaid expenses		(505	)		(196	)
Intangibles		(20,910	)		(23,000	)
Property and equipment		(3,117	)		(3,098	)
Amortization expense		(12,704	)		(9,715	)

Total deferred tax liabilities		(37,236	)		(36,009	)

	$	809		$	(4,648	)

The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets at December 31, 2016 and 2015 as follows (amounts in thousands):

	2016		2015
Non-current assets	$	18,638	$	13,280


Non-current liabilities	$	17,829	$	17,928

At December 31, 2016 and 2015, the Company has foreign tax credit carryforwards for U.S. federal purposes and foreign minimum credits totaling $11.4 million and $5.6 million, respectively, which expire during the years 2021 through 2025. These tax credits were generated on revenues earned by our channels for airing content in Puerto Rico, Mexico and Latin America.

Upon audit, taxing authorities may prohibit the realization of all or part of an uncertain tax position. The Company regularly assesses the outcome of potential examinations in each of the tax jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2016, the Company has uncertain tax position reserves of $0.4 million and $0.3 million recorded related interest expense of $0.0 million as of December 31, 2016 and 2015. During 2014, the Company identified an uncertain tax position and recorded a liability of $0.7 million with an offsetting deferred tax asset. The company accrued no interest related to this item.