Income Taxes

New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted on December 22, 2017. In connection with the Company's initial analysis of the impact of the Tax Act, the Company recorded provisional net tax expense of $94.4 million for the period ended December 31, 2017. This amount consists of net expense of $66.5 million for the transition tax and net expense of $12.8 million for the remeasurement of the Company's net deferred tax assets using the reduced United States tax rate. In addition, the Company also recorded net tax expense of $15.1 million for state income and foreign taxes estimated to be due upon distribution of approximately $1.0 billion of previously undistributed foreign earnings no longer permanently reinvested as of December 31, 2017.

The Company has completed the accounting for the tax effects of the Tax Act, and during the year ended December 31, 2018 recognized a measurement period adjustment resulting in a $9.9 million reduction of tax expense. In addition, the Company reduced by $6.3 million the estimated state and foreign liability for tax due upon distribution of approximately $902.4 million of previously undistributed foreign earnings no longer permanently reinvested as of December 31, 2017.

As of December 31, 2018 and 2017, we have accrued income tax liabilities of $42.9 million and $66.5 million, respectively, related to the transition tax. The decrease in the liability is primarily attributed to transition tax payments of $9.0 million for 2017 and 2018, application by the United States Internal Revenue Service of a $4.7 million overpayment, and a $9.9 million reduction in the initial liability as described above. Of the amounts accrued, none are expected to be due within one year due to the overpayment discussed above. The transition tax will be paid in installments over an eight-year period and will not accrue interest.

Other significant provisions of the Tax Act include: an exemption from United States tax on dividends of future foreign earnings, a deduction related to foreign derived intangible income ("FDII"), limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, an incremental tax (base erosion anti-abuse tax or "BEAT") on excessive amounts paid to foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or "GILTI"), which the Company has elected to treat as a period expense.


Note 15.	Income Taxes - (Continued)

In 2016, the Company, in accordance with FASB ASC Topic 740, "Income Taxes," recorded discrete tax charges totaling $39.6 million related to the January 11, 2016 announcement from the European Commission of a decision concluding that certain rules under Belgian tax legislation were deemed to be incompatible with European Union regulations on state aid. As a result of this decision, the European Commission directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid, which impacted one of the Company’s international subsidiaries. The Belgian Government announced they have appealed this decision and filed action for an annulment in the General Court of the European Union, and in July 2016 the Company filed a separate appeal with the General Court of the European Union. On January 10, 2017, the Company received tax assessments from the Belgium government approximating the discrete tax charge recorded during 2016. The Company filed a complaint against the Belgian tax assessments, and on October 23, 2018 the Belgian government canceled $33.1 million of the tax assessments and accrued interest. As a result, the Company reversed a similar amount of previously accrued income tax plus interest associated with the assessments during the three-month period ending December 31, 2018. In addition, the euro equivalent of $35.7 million held in a restricted cash account as of September 30, 2018 became unrestricted during the three-month period ending December 31, 2018. While the Company believes the matter has been effectively settled, an adverse opinion from the European Commission with regards to the cancellation of the tax assessments could be cause for accrual of tax in a future period.

During the three-month period ending December 31, 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of the Company's non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $334.5 million (Swedish kroner 3.0 billion). The Company believes the STA’s assertions in the reassessment are not in accordance with Swedish tax regulations and plans to defend the Company's positions with the STA and through the Swedish court system, as necessary. Consequently, no adjustment to the Company's unrecognized tax benefits has been recorded in relation to this matter.

Management believes that the Company's recorded tax liabilities are adequate in the aggregate for its income tax exposures.

Pre-tax earnings by significant geographical locations are as follows (in thousands):



	Year Ended December 31,
	2018		2017		2016
United States	$	165,719	$	143,924	$	124,500
Foreign	141,384		135,141		151,457
	$	307,103	$	279,065	$	275,957

The provisions for income taxes are as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current tax expense (benefit):
Federal	$	17,900		$	112,673		$	36,771
State	5,980			5,035			5,785
Foreign	(16,008		)	19,689			64,109
	7,872			137,397			106,665
Deferred tax expense (benefit):
Federal	1,273			34,857			1,404
State	235			473			267
Foreign	15,298			(885		)	995
	16,806			34,445			2,666
Total income tax provision	$	24,678		$	171,842		$	109,331


Note 15.	Income Taxes - (Continued)

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events and basis differences that have been recognized in the Company’s financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amount and the tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse.

Net deferred tax assets (liabilities) were classified on the balance sheet as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets, non-current	100,620			21,001
Deferred tax liabilities, non-current	(22,927		)	(12,496		)
Net deferred tax assets	$	77,693		$	8,505

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Accrued liabilities and allowances	$	19,783		$	20,425
Tax credit and loss carry-forwards	30,831			30,979
Stock-based compensation	12,461			11,715
Inventory basis differences	10,749			8,555
Deferred revenue	2,900			2,732
Intangible assets	20,882			—
Unremitted earnings of foreign subsidiaries	2,121			—
Other assets	1,156			2,527
Gross deferred tax assets	100,883			76,933
Valuation allowance	(3,196		)	(3,392		)
Total deferred tax assets, net	97,687			73,541
Deferred tax liabilities:
Intangible assets	—			(29,117		)
Property and equipment	(14,070		)	(16,499		)
Unremitted earnings of foreign subsidiaries	—			(15,100		)
Other liabilities	(5,924		)	(4,320		)
Total deferred tax liabilities	(19,994		)	(65,036		)
Net deferred tax assets	$	77,693		$	8,505


Note 15.	Income Taxes - (Continued)

The provision for income taxes differs from the amount of tax determined by applying the applicable United States statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended December 31,
	2018		2017		2016
Statutory federal tax rate	21.0	%	35.0	%	35.0	%
(Decrease) increase in rates resulting from:
State taxes	2.5		1.8		2.3
Difference between statutory rate and foreign effective rate	(0.2	)	(10.7	)	(11.3	)
Foreign, federal and state income tax credits	(1.5	)	(2.0	)	(1.2	)
European Union state aid matter	(10.8	)	0.1		14.4
United States transition tax	(3.4	)	23.8		—
Tax rate change on deferred items	—		5.1		—
Unremitted earnings of foreign subsidiaries	—		5.4		—
Other	0.4		3.1		0.4
Effective tax rate	8.0	%	61.6	%	39.6	%

The Company's effective tax rate in 2018 was lower than the United States Federal tax rate of 21.0 percent mainly due to recognition of previously unrecognized tax benefits relating to the European Union state aid recovery discussed above, excess tax benefits from stock compensation and a reduction in the accrual for the United States transition tax, offset partially by state taxes, higher tax rates applied to income earned in certain foreign jurisdictions, and other discrete items. The Company's effective tax rate in 2017 was higher than the United States federal tax rate of 35 percent mainly due to the Company's estimate of the impact of the Tax Act. Unrecognized tax benefits for intercompany pricing increased in various jurisdictions in 2017, but this was partially offset by excess tax benefits for stock compensation and the mix of lower foreign tax rates. The foreign tax rate differential in 2016 was mainly due to the impact of amortization and lower statutory rates. The European Union state aid recovery in 2016 relates to the European Commission’s decision regarding the three-year agreement in Belgium, discussed above.

At December 31, 2018, the Company had United States tax net operating loss carry-forwards totaling approximately $3.5 million which expire between 2019 and 2031 and are subject to annual limitation under Section 382 of the Internal Revenue Code. In addition, the Company has various state net operating loss carry-forwards totaling approximately $0.9 million which expire between 2023 and 2036. Finally, the Company has various foreign net operating loss carry-forwards totaling approximately $111.7 million, a portion of which expire between 2019 and 2036, and a portion of which have an indefinite carry-forward period.

The tax benefits described above are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. To the extent that management assesses the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded. As of December 31, 2018, the Company has determined that a valuation allowance against its deferred tax assets of $3.2 million is required, primarily related to certain foreign deductions carried forward and acquired net operating losses. A review of all available positive and negative evidence is considered, including past and future performance, the market environment in which the Company operates, utilization of tax attributes in the past, length of carry-back and carry-forward periods, and evaluation of potential tax planning strategies, when evaluating the realizability of deferred tax assets. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

We have not provided United States, state or foreign income taxes for earnings generated after January 1, 2018 by certain subsidiaries outside the United States as we currently intend to reinvest the earnings in operations and other activities outside of the United States indefinitely. Should we subsequently elect to repatriate such foreign earnings, we would need to accrue and pay state and foreign income taxes, thereby reducing the amount of our cash. United States taxes would generally not be payable due to changes made by the Tax Act.


Note 15.	Income Taxes - (Continued)

The following table summarizes the activity related to unrecognized tax benefits, including amounts accrued for potential interest and penalties (in thousands):



	Year Ended December 31,
	2018			2017			2016
Balance, beginning of year	$	77,275		$	51,851		$	14,967
Increases related to current year tax positions	—			17,264			40,840
Increases related to prior year tax positions	2,229			5,022			456
Lapse of statute of limitations	(1,558		)	(1,260		)	(4,070		)
Settlements	(40,514		)	(986		)	(342		)
Change due to currency translation	(4,227		)	5,384			—
Balance, end of year	$	33,205		$	77,275		$	51,851

The unrecognized tax benefits at December 31, 2018 relate to the United States, Belgium, United Kingdom, France and various other foreign jurisdictions, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates approximately $5.1 million of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.

The Company classifies interest and penalties related to unrecognized tax benefits in the income tax provision. As of December 31, 2018, the Company had $6.1 million of accrued interest and penalties related to unrecognized tax benefits that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.

The Company files United States federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company currently has the following tax years open to examination by major taxing jurisdictions:



	Tax Years:
United States Federal	2015 - 2017
State of California	2014 - 2017
State of Massachusetts	2014 - 2017
State of Oregon	2015 - 2017
Sweden	2012 - 2017
United Kingdom	2014 - 2017
Belgium	2011 - 2017