Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

Note 8. Income Taxes

For the years ended December 31, 2021 and 2020, Income before provision for income taxes, includes the following components (amounts in thousands):

	2021		2020
Domestic income	$	2,475	$	8,112
Foreign gain (loss)		13,550		(1,258)
Income before provision for income taxes	$	16,025	$	6,854

For the years ended December 31, 2021 and 2020, income tax expense is comprised of the following (amounts in thousands):

	2021		2020
Current income tax expense	$	5,071	$	7,405
Deferred income tax (benefit) expense		(77)		1,587
Income tax expense	$	4,994	$	8,992

Current tax expense for the years ended December 31, 2021 and 2020, includes foreign withholding tax of $2.0 million and $1.3 million, respectively.

For the years ended December 31, 2021 and 2020, the reconciliation of income tax expense computed at the U.S. federal statutory rates to income tax expense is (amounts in thousands):

	2021		2020
Income tax expense at federal statutory rate-US Only	$	3,362	$	1,439
Income tax expense at federal statutory rate-Foreign Only		5,452		4,402
Permanent items		1,815		1,325
Gain from Pantaya Acquisition		(6,319)		—
Return to provision true-ups -Current/Deferred		3,725		(2,042)
Foreign rate differential		(10)		(1,117)
Foreign tax credits		(4,358)		(5,693)
Foreign valuation allowance		3,727		4,615
Change in FTC valuation allowance		(1,153)		543
Revaluation of Puerto Rico deferred taxes		686		84
Foreign withholding taxes		1,971		1,283
Deferred foreign tax credit offset		73		29
State taxes and state rate change		(77)		2,073
Puerto Rico Tax Credit		(3,900)		—
Foreign rate tax change		—		2,051
Income tax expense	$	4,994	$	8,992

The effective tax rate for the years ended December 31, 2021 and 2020, excluding our share of the operating results from our equity investment in Canal 1 was 18% and 31%, respectively.

The 2017 Tax Cuts and Jobs Act (“Jobs Act”) was enacted on December 22, 2017. The Jobs Act revised the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21% in 2018. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal U.S. corporate tax rate reduces the likelihood of our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance. Additionally, the Company evaluated the potential interest limitation established under the Jobs Act and determined that no limitation would affect the 2021 provision for income taxes.

For the year ended December 31, 2021, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Jobs Act, which impacted the valuation allowance on foreign tax credits, limitations on the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, the gain related to the step acquisition of Pantaya that is not a gain for tax purposes and Puerto Rico tax credits.

For the year ended December 31, 2020, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Jobs Act, which impacted the valuation allowance on foreign tax credits, limitations on the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, the tax impact of state filings and filings in Puerto Rico related to prior years. The Company has evaluated the impact related the state filings and tax incentives in Puerto Rico which resulted in a net tax beneficial position. The impact of the Company’s state filings related to prior years is a net tax payable of $1.0 million. The impact of the tax incentives in Puerto Rico is a net refund benefit of $3.0 million related to Puerto Rico tax returns in prior years. During 2020, the Company accounted for the reduction in the Colombia tax rate related to its deferred tax assets. However, as these deferred tax assets have a full valuation allowance there was no effect on the provision expense.

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, 2021 and 2020 (amounts in thousands):

	2021		2020
Deferred tax assets:
Allowances for doubtful accounts	$	1,117	$	1,078
Deferred branch tax benefit		11,763		11,645
Deferred revenue		165		114
NOL credit and other carryovers		294		290
Fixed assets		149		140
Accrued expenses		1,541		1,353
Foreign tax credit		17,887		19,040
Stock compensation		4,265		3,594
Pension		337		449
Interest rate swap		102		510
Intangibles		3,252		1,335
Equity method losses		31,827		26,996
Other deferred tax assets		9		4
Less: Foreign losses valuation allowance		(30,913)		(27,186)
Less: Foreign tax credit valuation allowance		(17,887)		(19,040)
Total deferred tax assets		23,908		20,322
Deferred tax liabilities:
Prepaid expenses		(616)		(535)
Intangibles		(18,303)		(15,506)
Property and equipment		(9,306)		(7,992)
Amortization expense		(18,110)		(15,595)
Total deferred tax liabilities		(46,335)		(39,628)
	$	(22,427)	$	(19,306)

The deferred tax amounts mentioned above have been classified on the accompanying Consolidated Balance Sheets as of December 31, 2021 and 2020 as follows (amounts in thousands):

	2021		2020
Non-current assets	$	—	$	—
Non-current liabilities	$	22,427	$	19,306

At December 31, 2021 and 2020, the Company has foreign tax credit carryforwards for U.S. federal purposes and foreign minimum credits totaling $17.9 million and $19.0 million, respectively, which expire during the years 2022 through 2031. In addition, the impact of foreign tax credits and related valuation allowance had an impact on the tax rate. These tax credits were generated on

revenues earned by our networks 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 Jobs 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 2021 and in 2020, the Company recorded a valuation allowance against our foreign tax credits of $17.9 million and $19.0 million, respectively. In addition, Canal 1, in which the Company has an equity investment, incurred losses for the years ended December 31, 2021 and 2020, and the Company has a cumulative valuation allowance of $30.9 million and $27.2 million, respectively, against the related deferred tax asset. The Company has foreign net operating losses carryforwards totaling $1.0 million and $0.9 million, at December 31, 2021 and 2020, respectively, which expire beginning in 2030.

During 2021, the Company completed its acquisition of the remaining 75% equity interest in Pantaya, which resulted in additional deferred tax liabilities related to the historic 25% owned interest that has carryover basis for tax purposes. As a result, $2.7 million of additional deferred tax liabilities were recorded as an adjustment to goodwill.

In 2021, the company qualified for a Puerto Rico tax credit of $3.9 million, of which, 50% is eligible to offset the Puerto Rico income tax liability for 2021 and the remaining 50% will reduce the 2022 tax liability.

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, 2020, the Company recorded a gross uncertain tax position reserve of $0.1 million related to state tax filings. As of December 31, 2021, the Company continues to have a gross uncertain tax position reserve of $0.1 million related to state tax filings originally recorded in 2020.