Income Taxes

The income tax expense (benefit) consists of the following:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In thousands)
Current:
US federal	$	2,390		$	1,259		$	1,267
US state	1,153			310			191
Non US	8,266			3,266			4,789
	11,809			4,835			6,247
Deferred:
US federal	(5,558		)	78			808
US state	(976		)	295			720
Non US	(4,498		)	(3,571		)	(669		)
	(11,032		)	(3,198		)	859

Total	$	777		$	1,637		$	7,106

Income before income taxes includes the following components:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In thousands)
US	$	(13,355	)	$	(80	)	$	1,384
Non US	116,715			96,011			85,255
Total	$	103,360		$	95,931		$	86,639

A reconciliation of the statutory federal income tax rate to the effective income tax rate consists of the following:



	Year Ended December 31, 2017		Year Ended December 31, 2016		Year Ended December 31, 2015
Statutory US federal income tax rate	34.0	%	35.0	%	35.0	%
US state income taxes, net of federal benefit	(0.8	)%	0.4	%	1.0	%
Non-US tax rate differential	(28.7	)%	(22.8	)%	(2.6	)%
Tax holidays	(3.5	)%	(14.0	)%	(23.5	)%
Tax Credits	(1.4	)%	—	%	—	%
Passive income exemption	(2.1	)%	(1.4	)%	(2.9	)%
Acquisition contingent earnout liability adjustments	—	%	(0.9	)%	(0.6	)%
Foreign enhanced R&D deductions	—	%	(0.9	)%	(1.0	)%
Nondeductible items	2.5	%	9.1	%	0.8	%
Effect of valuation allowance	(3.6	)%	(2.3	)%	(2.2	)%
Release of deferred tax liability on intangibles transferred	—	%	(3.5	)%	—	%
Prior year true-ups	1.1	%	2.8	%	3.2	%
Uncertain tax positions	5.8	%	0.1	%	0.1	%
Rate change on deferred taxes primarily due to tax reform	(2.4	)%	—	%	—	%
Other	(0.1	)%	0.1	%	0.8	%
Effective income tax rate	0.8	%	1.7	%	8.1	%

Our effective tax rate decreased to 0.8% in 2017, compared with 1.7% in 2016, largely due to the remeasurement of US deferred taxes under tax reform, release of valuation allowance on foreign loss carryforwards, recording tax credits based on filed tax returns, partially offset by an increase in uncertain tax position accrual.

Beginning in 2009, we were granted a 100% tax holiday for certain of our Indian operations, which was in effect until March 31, 2014 and March 31, 2015 for some of our locations and continues until March 31, 2020 for other locations. When these tax holidays expire, these locations become 50% taxable for an additional five years. The impact of this tax holiday decreased our non-US income tax expense by $2.9 million and $13.7 million for 2017 and 2016, respectively.

The Company’s consolidated worldwide effective tax rate is relatively low because of the effect of conducting significant operations in certain foreign jurisdictions, specifically India, Dubai, and Singapore, where we have tax holidays or tax concessions.

Deferred tax assets and liabilities are comprised of the following:



	December 31, 2017					December 31, 2016
	Deferred					Deferred
	Assets			Liabilities		Assets			Liabilities
	(In thousands)
Depreciation and amortization	$	683		$	—	$	95		$	—
Share-based compensation	590					1,612
Accruals and prepaids	2,700					842
Bad debts	1,076					859
Acquired intangible assets	—			19,421		—			22,508
Net operating loss carryforwards	15,233					19,019
Tax credit carryforwards (primarily MAT in India)	43,044					35,514
	63,326			19,421		57,941			22,508
Valuation allowance	(35		)	—		(3,747		)	—
Total deferred taxes	$	63,291		$	19,421	$	54,194		$	22,508

Amounts recognized in the consolidated balance sheets:



	2017		2016
	(In thousands)
Non-current deferred tax assets	43,870		31,686
ASU 2013-11 reclass, described below	(341	)	(341	)
Net deferred tax assets	43,529		31,345

The valuation allowance changed by ($3.7) million and $(2.2) million during the years ended December 31, 2017 and 2016, respectively. The presentation above has been modified to correctly show the valuation allowances that should have been recorded and to gross up the Company’s deferred tax assets for implied valuation allowances that were inherited through acquisitions.

We have US Federal, state and foreign operating losses and credit carryforwards as follows:



	Year Ended December 31, 2017		Year Ended December 31, 2016
	(In thousands)
US Federal loss carryforwards	$	42,981	$	47,796
US state loss carryforwards	25,186		15,535
Foreign loss carryforwards	29,852		25,849

US Federal credit carryforwards	4,679		1,235
Foreign credit carryforwards	38,364		34,278

The US federal and state operating loss carryforwards expire at varying dates through 2038. The federal credits begin to expire in 2018. We also have non-US loss carryforwards of approximately $29.9 million as of December 31, 2017, the majority of which may be carried forward indefinitely. We released the valuation allowance on our UK entity in the current year due to recent and projected profitability.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted, substantially changing the U.S. tax system and affecting the Company in a number of ways. Notably, the TCJA: establishes a flat corporate income tax rate of 21.0% on U.S. earnings; imposes a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”);imposes a new minimum tax on certain non-U.S. earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional U.S. taxes by transitioning to a territorial system of taxation; subjects certain payments made by a U.S. company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax); eliminates certain prior tax incentives for manufacturing in the United States and creates an incentive for U.S. companies to sell, lease or license goods and services abroad by allowing for a reduction in taxes owed on earnings related to such sales; allows the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017 to be immediately expensed; and reduces deductions with respect to certain compensation paid to specified executive officers.

While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”) allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. The Company is required to complete its tax accounting for the TCJA within a one-year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting.

Due to insufficient guidance, as well as the availability of information to accurately analyze the impact of the TCJA, we have made a reasonable estimate of the effects, as described below, and in other cases we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under FASB ASC Topic 740, Income Taxes and the provisions of the tax laws that were in effect immediately prior to enactment.

U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally 21.0%, resulting in an income tax benefit of approximately $2.5 million. As we complete our analysis, collect and prepare necessary data, and interpret any additional regulatory or accounting guidance, the Company may make adjustments to the provisional amounts we have recorded during a measurement period of up to one year from the enactment of the TCJA that could impact our provision for income taxes in the reporting period in which we make such adjustments.

The Transition Tax is based on the Company’s total post-1986 earnings and profits that were previously deferred from U.S. income taxes. The Company has not recorded an amount for the Transition Tax expense, as they do not have the necessary information to determine a reasonable estimate to include as a provisional amount. The Company will work to gather the necessary information to calculate the transition tax and will record the impact of this in the reporting period when the analysis is complete.

The Company has not recognized a deferred U.S. tax liability and associated income tax expense for the undistributed earnings of its foreign subsidiaries which we consider indefinitely invested because those foreign earnings will remain permanently reinvested in those subsidiaries to fund ongoing operations and growth. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to income taxes and withholding taxes payable in various jurisdictions, which could potentially be partially offset by foreign tax credits. At December 31, 2017 the cumulative amount of the Company’s undistributed foreign earnings was approximately $523.3 million, inclusive of income previously taxed in the United States.

The following table summarizes the activity related to our unrecognized tax benefits:



	December 31, 2017		December 31, 2016		December 31, 2015
	(in thousands)
Beginning Balance	$	3,265	$	3,115	$	3,020
Additions for tax positions related to current year	—		43		41
Additions for tax positions of prior years	5,879		107		131
Reductions for tax position of prior years	—		—		(77		)
Ending Balance	$	9,144	$	3,265	$	3,115

The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense. Interest assessed upon settlement of a tax return position is classified as interest expense. The Company accrued as of December 31, 2017 and 2016 approximately $1.0 million and $771 thousand, respectively, of estimated interest and penalties. These amounts are included in the December 31, 2017 and 2016 balances in the preceding table of $9.1 million and $3.3 million, respectively, which is included in other long term liabilities in the accompanying Consolidated Balance Sheet.

We file income tax returns in the US federal, many US state and local jurisdictions, and certain foreign jurisdictions. We have substantially resolved all US federal income tax matters for tax years prior to 2014. Our state and foreign tax matters may remain open from 2008 forward.

The Company has applied the new provisions under Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU 2013-11. Under these provisions, an unrecognized tax benefit is to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. The Company has applied this provision and $341 thousand and $341 thousand of unrecognized tax benefits have been applied against the deferred tax assets for net operating loss carryforwards, as of December 31, 2017 and 2016 respectively.