Note 6. Income Taxes

For the years ended December 31, 2017, 2016 and 2015, Income before provision for income taxes, includes the following components (amounts in thousands):

	2017			2016		2015
Domestic income	$	9,984		$	10,997	$	9,663
Foreign (loss) income		(4,714	)		17,375		13,118

	$	5,270		$	28,372	$	22,781

For the years ended December 31, 2017, 2016 and 2015, income tax expense is composed of the following (amounts in thousands):

	2017		2016			2015
Current income tax expense	$	4,233	$	15,801		$	11,880
Deferred income tax (benefit)		14,473		(5,429	)		(2,838	)

	$	18,706	$	10,372		$	9,042

Current tax expense for the years ended December 31, 2017, 2016 and 2015 includes $1.5 million, $1.7 million and $1.5 million of foreign withholding tax, respectively.

For the years ended December 31, 2017, 2016 and 2015 the Company's income tax expense and effective tax rates were as follows:

	2017			2016			2015
Pre-tax book income—US Only		35.0	%		35.0	%		35.0	%
Pre-tax book income—Foreign Only		31.3	%		21.4	%		20.2	%
Permanent items		15.7	%		3.2	%		4.0	%
Return to provision true-ups—Current/Deferred		–4.2	%		–1.1	%		–1.4	%
Foreign rate differential		6.6	%		2.4	%		2.2	%
Foreign tax credits		–51.7	%		–32.0	%		–24.5	%
Foreign valuation allowance		59.0	%		—			—
Change in FTC valuation allowance due to tax reform		200.0	%		—			—
Tax Cut and Jobs Act Law Changes		56.2	%		—			—
Foreign withholding taxes		29.0	%		6.0	%		6.7	%
Deferred foreign tax credit offset		–21.9	%		0.0	%		–2.2	%
State taxes and state rate change		1.1	%		1.4	%		–0.3	%
UTP adjustment		–2.6	%		0.3	%		0.0	%

		353.5	%		36.6	%		39.7	%

The 2017 Tax Cut and Jobs Act ("Tax Act") was signed into law on December 22, 2017. While the effective date of the new corporate tax rates for the Company is January 1, 2018, the Company is required to calculate the effects of changes in tax rates and laws on deferred tax balances in 2017, the period in which the legislation was enacted. The 2017 Tax Act revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% in 2018, eliminating certain deductions, imposing a mandatory one-time transition tax, or deemed repatriation tax on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduced the likelihood or our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance of $10.6 million. Additionally, the remeasurement of net deferred tax asset at the lower enacted rate resulted in a $3.0 million increase in income tax expense. The Company evaluated the effects of the one-time transition tax and determined there was no impact for the period ended December 31, 2017.

For the year ended December 31, 2017, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax expense recorded related primarily to the Tax Act that reduced the federal tax rate to 21%, and the loss on the Company's equity investment in Colombia, which created a deferred tax asset against which we established a $3.1 million valuation allowance. The investment in Colombia also impacted the foreign rate differential, as the Colombia tax rate was lower than the federal corporate tax rate in 2017. Increases in deferred tax liabilities in Puerto Rico increased the offsetting deferred tax asset in the U.S. The impact of permanent items as a percentage were higher due to lower income in 2017, but as a dollar amount were actually lower as compared to prior years.

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.

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, 2017 and 2016 (amounts in thousands):

	2017			2016
Deferred tax assets:
Allowances for doubtful accounts	$	1,308		$	2,046
Deferred branch tax benefit		10,846			15,859
State tax Federal deduction true-up		42			70
NOL credit and other carryovers		111			—
Fixed assets		47			43
Accrued expenses		935			1,204
Foreign tax credit		10,588			11,449
Stock compensation		3,081			3,865
Pension		397			690
Intangibles		1,355			2,286
Other DTA		438			533
Less: Foreign income valuation allowance		(3,117	)		—
Less: Foreign tax credit valuation allowance		(10,588	)		—

Total deferred tax assets		15,443			38,045

Deferred tax liabilities:
Prepaid expenses		(328	)		(505	)
Intangibles		(17,676	)		(20,910	)
Interest Rate Swap		(173	)		—
Property and equipment		(1,443	)		(3,117	)
Amortization expense		(9,784	)		(12,704	)

Total deferred tax liabilities		(29,404	)		(37,236	)

	($	13,961	)	$	809

The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets at December 31, 2017 and 2016 as follows (amounts in thousands):

	2017		2016
Non-current assets	$	4,802	$	18,638


Non-current liabilities	$	18,763	$	17,829

At December 31, 2017 and 2016, the Company has foreign tax credit carryforwards for U.S. federal purposes and foreign minimum credits totaling $10.6 million and $11.4 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, and Latin America. 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. As the Tax Act significantly reduced the U.S. tax rate to 21%, the Company anticipates generating excess foreign tax credits and would not be able to use its historic foreign tax credits before they expire. As a result, in 2017, the Company recorded a valuation allowance against our foreign tax credits of $10.6 million. In addition, the Colombia operations incurred a significant loss in 2017 and the Company evaluated the ability to use the created deferred tax assets and recorded a valuation allowance of $3.1 million against the balance at December 31, 2017. The Company has foreign net operating losses carryforwards related to its Colombia operations totaling $0.3 million and $0 million, at December 31, 2017 and 2016, respectively, which expire beginning in 2029.

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, 2017 and 2016, the Company has uncertain tax position reserves of $0.3 million and $0.4 million, respectively. Additionally, upon filing for an accounting method change related to an uncertain tax position, the Company reduced its uncertain tax position reserves in the amount of $0.1 million for related interest expense. 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 in 2014.