Income Taxes

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



	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
	(In thousands)
Current:
US federal	$	22,353		$	2,390		$	1,259
US state	847			1,153			310
Non US	15,212			8,266			3,266
	38,412			11,809			4,835
Deferred:
US federal	5,617			(5,558		)	78
US state	(1,031		)	(976		)	295
Non US	(10,497		)	(4,498		)	(3,571		)
	(5,911		)	(11,032		)	(3,198		)

Total	$	32,501		$	777		$	1,637

Income (loss) before income taxes includes the following components:



	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
	(In thousands)
US	$	(36,202	)	$	(13,355	)	$	(80	)
Non US	161,783			116,715			96,011
Total	$	125,581		$	103,360		$	95,931

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



	Year Ended December 31, 2018		Year Ended December 31, 2017		Year Ended December 31, 2016
Statutory US federal income tax rate	21.0	%	34.0	%	35.0	%
US state income taxes, net of federal benefit	(0.3	)%	(0.8	)%	0.4	%
Non-US tax rate differential	(15.2	)%	(28.7	)%	(22.8	)%
GILTI Related	15.1	%	—	%	—	%
SubPart F	0.7	%	—	%	—	%
Tax holidays	(3.4	)%	(3.5	)%	(14.0	)%
Tax Credits	(10.6	)%	(1.4	)%	—	%
Passive income exemption	(0.9	)%	(2.1	)%	(1.4	)%
Acquisition contingent earnout liability adjustments	(0.2	)%	—	%	(0.9	)%
Foreign enhanced R&D deductions	—	%	—	%	(0.9	)%
Nondeductible items	(0.1	)%	2.5	%	9.1	%
Effect of valuation allowance	(0.1	)%	(3.6	)%	(2.3	)%
Release of deferred tax liability on intangibles transferred	—	%	—	%	(3.5	)%
Prior year Transition Tax and related true-ups	19.5	%	1.1	%	2.8	%
Uncertain tax positions	0.1	%	5.8	%	0.1	%
Rate change on deferred taxes primarily due to tax reform	—	%	(2.4	)%	—	%
Other	0.1	%	(0.1	)%	0.1	%
Effective income tax rate	25.9	%	0.8	%	1.7	%

Our effective tax rate increased to 25.9% in 2018, compared with 0.8% in 2017. This increase was substantial on account of recording of one time Transition tax liability resulting from enactment of the TCJA, which has been included in Prior year Transaction tax and relataed true-ups. Excluding this, the remaining increase in the effective tax rate was primarily on account of Global Intangible Low-taxed Income (“GILTI”) tax, becoming applicable on the Company from enactment of TCJA.

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 $4.3 million and $2.9 million for 2018 and 2017, respectively.

Excluding one-time impact of Transition tax and related true-ups, the Company’s consolidated worldwide effective tax rate benefits from the effects of conducting significant operations in certain foreign jurisdictions, specifically India and Dubai, where certain units enjoys tax holidays or tax concessions.

Deferred tax assets and liabilities are comprised of the following:



	December 31, 2018					December 31, 2017
	Deferred					Deferred
	Assets			Liabilities		Assets			Liabilities
	(In thousands)
Depreciation and amortization	$	—		$	2,315	$	683		$	—
Share-based compensation	521					590
Accruals and prepaids	8,143					2,700
Bad debts	3,215					1,076
Acquired intangible assets	—			17,800		—			19,421
Net operating loss carryforwards	19,958					15,233
Tax credit carryforwards (primarily Minimum Alternative Tax ("MAT") in India)	43,656					43,044
	75,493			20,115		63,326			19,421
Valuation allowance	(2,031		)	—		(35		)	—
Total deferred taxes	$	73,462		$	20,115	$	63,291		$	19,421

Amounts recognized in the consolidated balance sheets:



	2018	2017
	(In thousands)
Non-current deferred tax assets	54,629	43,870
ASU 2013-11 reclass, described below	—	(341	)
Net deferred tax assets	54,629	43,529

Non-current deferred tax liabilities	1,282	—

The valuation allowance changed by $2.0 million and $(3.7) million during the years ended December 31, 2018 and 2017, 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, 2018		Year Ended December 31, 2017
	(In thousands)
US Federal loss carryforwards	$	43,116	$	42,981
US state loss carryforwards	38,307		25,186
Foreign loss carryforwards	40,349		29,852

US Federal credit carryforwards	901		4,679
Foreign credit carryforwards	42,755		38,364

The US federal and state operating loss carryforwards expire at varying dates through 2027. The federal credits begin to expire in 2028. We also have non-US US tax credits (primarily MAT paid in India) carried forward of approximately $42.8 million as of December 31, 2018, which is available for set-off against the future tax liability of certain Indian operations on a staggered basis over a period up-to fifteen years.

On December 22, 2017, the 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.

In March 2018, the FASB Issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 was issued to incorporate into Topic 740 recent SEC guidance related to the income tax accounting implications of the TCJA. Due to the complexities involved in accounting for the enactment of the TCJA, the SEC Staff had issued SAB No. 118 which allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. ASU 2018-05 became effective immediately and permitted companies to use provisional amounts for certain income tax effects of the TCJA during a one-year measurement period. 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 did not recorded an amount for the Transition Tax expense in 2017, as they did not have the necessary information to determine a reasonable estimate to include as a provisional amount. The Company completed its tax accounting for the TCJA during Q4 2018 and recorded an adjustment of $24.5 million related to the transition tax after taking into consideration carried forward NOLs and other tax attributes available for set-off.

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, 2018 the cumulative amount of the Company’s undistributed foreign earnings was approximately $644.2 million, inclusive of income previously taxed in the United States.

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



	December 31, 2018		December 31, 2017		December 31, 2016
	(in thousands)
Beginning Balance	$	9,144	$	3,265	$	3,115
Additions for tax positions related to current year	150		—		43
Additions for tax positions of prior years	—		5,879		107
Reductions for tax position of prior years	—		—		—
Ending Balance	$	9,294	$	9,144	$	3,265

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, 2018 and 2017 approximately $1.1 million and $1.0 million, respectively, of estimated interest and penalties. These amounts are included in the December 31, 2018 and 2017 balances in the preceding table of $9.3 million and $9.1 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 zero and $341 thousand of unrecognized tax benefits have been applied against the deferred tax assets for net operating loss carryforwards, as of December 31, 2018 and 2017, respectively.