Income Taxes

9 Months Ended

Sep. 30, 2017

Note 8 – Income Taxes
Income tax expense consists of the following:
	Nine Months Ended
	September 30,
(in thousands)		2017		2016
Federal – current	$	(1,280)	$	(164)
Foreign – current		6,039		(2,340)
State – current		275		238
Deferred		1,505		2,577
	$	6,539	$	311

Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income tax primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, and state income taxes (net of federal benefit). The increase in income tax expense during 2017 is primarily the result of an $8.3 million decrease in the reserve for uncertain tax benefits in 2016. Excluding this item from 2016, the decrease in income tax expense during 2017 is primarily the result of a tax incentive in China and the recognition of excess tax benefits in the U.S. attributable to the adoption of an accounting standard effective January 1, 2017. See Note 1. Under this standard, the excess tax benefits or deficiencies resulting from the exercise or vesting of awards are included in income tax expense in the reporting period in which they occur. Therefore, the tax effect of stock option exercises and RSU vesting is not spread over the entire year through the use of the annual effective tax rate, but instead is recorded entirely in the period in which the tax deduction arises. Accordingly, the Company recorded the income tax benefit as a discrete item for the nine months ended September 30, 2017. The Company’s effective tax rate could fluctuate significantly on a quarterly basis due to the tax effects of stock-based compensation.

The Company considers earnings from foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings in the form of dividends or otherwise, such distributed earnings would be subject to U.S. income taxes and foreign withholding taxes, reduced by any applicable foreign tax credits. Determination of the amount of any unrecognized deferred tax liability on these undistributed earnings is not practicable.

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2018 in China, 2021 in Malaysia and 2028 in Thailand, and are subject to certain conditions with which the Company expects to comply. The net impact of these tax incentives was to lower income tax expense for the nine months ended September 30, 2017 and 2016 by approximately $7.3 million (approximately 0.15 per diluted share) and $3.5 million (approximately $0.07 per diluted share), respectively, as follows:

	Nine Months Ended
	September 30,
(in thousands)		2017		2016
China	$	888	$	-
Malaysia		3,151		1,594
Thailand		3,294		1,953
	$	7,333	$	3,547

As of September 30, 2017, the total amount of the reserve for uncertain tax benefits including interest was $0.5 million. The reserve is classified as a current or long-term liability in the condensed consolidated balance sheets based on the Company’s expectation of when the items will be settled. The amount of accrued potential interest on unrecognized tax benefits included in the reserve as of September 30, 2017, was $17.0 thousand. There was no reserve for potential penalties.

During the nine months ended September 30, 2017, the Company released $0.9 million of uncertain tax benefits related to the liquidation of a foreign subsidiary company. Also during 2017, the Company received a denial of its appeal to the local tax authorities related to an examination for a subsidiary in Thailand for the years 2004 to 2005. Consequently, the Company recorded $0.9 million of additional accruals for uncertain tax benefits. The Company has decided not to challenge this decision, therefore, the $7.3 million reserve for unrecognized tax benefits was written off. This decrease in the unrecognized tax benefit reserve as of September 30, 2017 did not impact the Company’s effective tax rate.

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, The Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2011 to 2016.

The Company is currently under examination by the U.S. Internal Revenue Service for 2014. In addition, Secure Communication Systems, Inc. and its subsidiaries (the Secure Group), companies that the Company acquired on November 11, 2015, are under a U.S. income tax audit for calendar years 2013, 2014 and through November 11, 2015. Since this audit is for the period of time prior to the acquisition of the Secure Group by the Company, any resulting tax liabilities are the responsibility of the seller. The Company does not expect to incur any income tax costs with respect to this audit. During the course of such examinations, disputes may occur as to matters of fact or law. Also, in most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.