Income Taxes

The U.S. Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law on December 22, 2017. Tax Reform makes broad and complex changes to the U.S. tax code, for which complete guidance may have not yet been issued. Tax Reform changes included, but were not limited to, (i) reducing the U.S. corporate statutory tax rate, (ii) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that is payable over an eight-year period, (iii) eliminating U.S. federal income taxes on dividends from foreign subsidiaries, and (iv) bonus depreciation that will allow for full expensing of qualifying property. Tax Reform reduces the U.S. corporate statutory tax rate from 35% to 21%. For our fiscal year ended June 30, 2018, we had a blended U.S. corporate tax rate of 28.1%, which was based on the applicable tax rates before and after Tax Reform and the number of days in the fiscal year. The aggregate unremitted earnings of the Company’s foreign subsidiaries were approximately $270 million as of June 30, 2020. Most of these accumulated unremitted foreign earnings have been invested in active non-U.S. business operations, and it is not anticipated such earnings will be remitted to the United States. Our intent is to permanently reinvest these funds outside of the United States. However, if such funds were repatriated, a portion of the funds remitted may be subject to applicable non-U.S. income and withholding taxes.

Accounting guidance provided a measurement period of one year from the Tax Reform enactment date, during which a company could complete the accounting for the impacts of Tax Reform. In accordance with the accounting guidance, the Company recorded provisional tax expense of $17.8 million related to Tax Reform for fiscal year 2018, including $4.4 million for the revaluation of the net deferred tax assets and $13.4 million for the deemed repatriation tax.

In accordance with the expiration of the one-year measurement period, the Company completed the assessment of the income tax effects of Tax Reform in fiscal year 2019. In finalizing the tax expense resulting from Tax Reform, the Company reversed $0.4 million of previous tax expense for the deemed repatriation tax. At June 30, 2020, $9.8 million is recorded in Long-term income taxes payable on the Consolidated Balance Sheet for the deemed repatriation tax.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The components of the deferred tax assets and liabilities as of June 30, 2020 and 2019, were as follows:



(Amounts in Thousands)	2020			2019
Deferred Tax Assets:
Receivables	$	145		$	105
Inventory	1,894			1,914
Employee benefits	224			193
Deferred compensation	5,338			6,149
Other current liabilities	265			1,275
Tax credit carryforwards	2,445			1,638
Goodwill	1,608			268
Net operating loss carryforward	2,398			2,339
Net foreign currency losses	—			11
Miscellaneous	4,020			2,970
Valuation Allowance	(1,637		)	(658		)
Total asset	$	16,700		$	16,204
Deferred Tax Liabilities:
Other intangible assets	$	1,313		$	1,412
Property and equipment	1,211			1,116
Net foreign currency gains	22			—
Miscellaneous	581			477
Total liability	$	3,127		$	3,005
Net Deferred Income Taxes	$	13,573		$	13,199

Income tax benefits associated with the net operating loss carryforwards expire from fiscal year 2023 to 2040. Income tax benefits associated with tax credit carryforwards primarily expire from fiscal year 2021 to 2029. A valuation allowance was provided as of June 30, 2020 and 2019 for deferred tax assets related to certain state credits of, in millions, $1.6 and $0.7, respectively. Except as reserved for in the valuation allowance, we believe our tax credit and net operating loss carryforwards are more likely than not to be realized in the future.

The components of income before taxes on income are as follows:



	Year Ended June 30
(Amounts in Thousands)	2020			2019		2018
United States	$	(6,117	)	$	11,191	$	5,609
Foreign	31,274			27,294		39,166
Total income before taxes on income	$	25,157		$	38,485	$	44,775

The provision for income taxes is composed of the following items:



	Year Ended June 30
(Amounts in Thousands)	2020			2019			2018
Current Taxes:
Federal	$	(1,666	)	$	872		$	13,132
Foreign	8,479			7,545			11,982
State	(29		)	203			459
Total payable	$	6,784		$	8,620		$	25,573
Deferred Taxes:
Federal	$	99		$	67		$	5,015
Foreign	237			(1,177		)	(2,427		)
State	(1,138		)	(603		)	(776		)
Valuation allowance	979			20			638
Total deferred	$	177		$	(1,693	)	$	2,450
Total provision for income taxes	$	6,961		$	6,927		$	28,023

A reconciliation of the statutory U.S. income tax rate to the Company’s effective income tax rate follows:



	Year Ended June 30
	2020					2019					2018
(Amounts in Thousands)	Amount			%		Amount			%		Amount			%
Tax computed at U.S. federal statutory rate	$	5,283		21.0	%	$	8,082		21.0	%	$	12,582		28.1	%
State income taxes, net of federal income tax benefit	(1,128		)	(4.5	)	(320		)	(0.8	)	(408		)	(0.9	)
Foreign tax rate differential	714			2.8		313			0.8		(1,615		)	(3.6	)
Impact of foreign exchange rates on foreign income taxes	867			3.4		156			0.4		180			0.4
Non-deductible goodwill impairment	388			1.5		—			—		—			—
Valuation allowance	979			3.9		20			0.1		638			1.4
Research credit	(1,056		)	(4.2	)	(627		)	(1.6	)	(378		)	(0.8	)
Deemed repatriation	—			—		(416		)	(1.1	)	13,436			30.0
Revaluation of net deferred tax assets	—			—		(10		)	—		4,357			9.7
Global intangible low tax income	607			2.4		—			—		—			—
Other - net	307			1.4		(271		)	(0.8	)	(769		)	(1.7	)
Total provision for income taxes	$	6,961		27.7	%	$	6,927		18.0	%	$	28,023		62.6	%

Net cash payments for income taxes were, in thousands, $9,096, $10,172 and $14,724 in fiscal years 2020, 2019, and 2018, respectively.

Changes in the unrecognized tax benefit, excluding accrued interest and penalties, during fiscal years 2020, 2019, and 2018 were as follows:



(Amounts in Thousands)	2020			2019			2018
Beginning balance - July 1	$	904		$	160		$	102
Tax positions related to prior fiscal years:
Additions	116			758			78
Reductions	—			—			(20		)
Tax positions related to current fiscal year:
Additions	—			—			—
Reductions	—			—			—
Settlements	—			—			—
Lapses in statute of limitations	(66		)	(14		)	—
Ending balance - June 30	$	954		$	904		$	160
Portion that, if recognized, would reduce tax expense and effective tax rate	$	262		$	214		$	137

We do not expect the change in the amount of unrecognized tax benefits in the next 12 months to have a significant impact on our results of operations or financial position. We recognize interest and penalties related to unrecognized tax benefits in Provision for Income Taxes on the Consolidated Statements of Income.

Interest and penalties accrued for unrecognized tax benefits as of both June 30, 2020 and 2019 was $1.6 million. Interest and penalties accrued for unrecognized tax benefits as of June 30, 2018 and expenses related to interest and penalties in fiscal years 2020, 2019, and 2018 were not material.

Liabilities for unrecognized tax benefits, including interest and penalties, have been recorded as a result of the GES acquisition related to pre-closing tax periods of Global Equipment Services & Manufacturing Vietnam Company Limited. This reflects management’s best assessment of the estimated taxes, interest, and penalties that are more likely than not to be paid under the applicable laws in the various jurisdictions. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. See Note 2 - Acquisitions of Notes to Consolidated Financial Statements for more information related to the GES acquisition.

The Company or its wholly-owned subsidiaries file U.S. federal income tax returns and income tax returns in various state, local, and foreign jurisdictions. We are no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2017. We are subject to various state and local income tax examinations by tax authorities for years after June 30, 2015, and various foreign jurisdictions for years after June 30, 2015.

Global Equipment Services & Manufacturing Vietnam Company Limited is subject to U.S. federal tax examinations and various state and local jurisdictions by tax authorities for years after December 31, 2007 and for various foreign jurisdictions for years after December 31, 2009 relating to periods prior to the acquisition date.