NOTE 12. INCOME TAXES

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and includes significant changes to the U.S. corporate tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent, and transitioned the U.S. federal tax system from a worldwide tax system to a territorial tax system, and eliminated or reduced certain domestic deductions among other changes. In converting to the new territorial tax system, a deemed repatriation tax on previously tax-deferred earnings of certain foreign subsidiaries was required to be recognized as of December 31, 2017, and will be payable over eight years.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) that provides additional guidance allowing companies to apply a measurement period of up to twelve months to account for the impacts of the Tax Act in their financial statements.

As of December 31, 2017, we have accounted for the impacts of the Tax Act to the extent a reasonable estimate could be made and we recognized provisional amounts related to the deemed repatriation tax, offset by the remeasurement of our deferred tax assets and liabilities, and other adjustments. The provisional amounts are included as a component of income tax expense from continuing operations as a reasonable estimate of the effects of the Tax Act on our U.S. federal and state tax obligations. We will continue to refine our estimates throughout the measurement period or until the accounting is complete as allowed under SAB 118.

As a result of the Tax Act we are no longer asserting indefinite reversal under ASC 740-30-25 for undistributed earnings of non-U.S. subsidiaries as of December 31, 2017. We have recorded a provisional amount of $48.8 million for the deemed repatriation tax liability related to these earnings.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the period such determination was made.

We record a liability for uncertain tax positions that do not meet the more likely than not standard as prescribed by the authoritative guidance for income tax accounting. We record tax benefits for only those positions that we believe will more likely than not be sustained. Unrecognized tax benefits are the differences between tax positions taken, or expected to be taken, in tax returns, and the benefits recognized for accounting purposes. We classify uncertain tax positions as long-term liabilities.

Significant judgment is required in determining our worldwide provision for income taxes and our income tax filings are regularly under audit by tax authorities. Any audit result differing from amounts recorded would increase or decrease income in the period that we determine such adjustment is likely. Interest expense and penalties associated with the underpayment of income taxes are included in income tax expense.

Earnings before income taxes were as follows (in thousands):


	For the Years Ended December 31,
		2017		2016		2015

Domestic	$	268,714	$	227,875	$	187,200
International		112,343		93,971		85,941
	$	381,057	$	321,846	$	273,141

The provision (benefit) for income taxes comprised the following (in thousands):



	For the Years Ended December 31,
		2017		2016		2015
Current
Federal	$	92,453	$	53,285	$	52,966
State		9,258		6,608		5,353
International		23,993		19,291		17,681
		125,704		79,184		76,000
Deferred
Federal		(1,201)		20,305		5,762
State		(4,102)		1,196		526
International		(2,613)		(893)		(1,282)
		(7,916)		20,608		5,006
	$	117,788	$	99,792	$	81,006

The provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate as follows:


	For the Years Ended December 31,
		2017		2016		2015

U.S. federal statutory rate		35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit		1.9		1.8		1.6
International income taxes		(5.5)		(4.8)		(5.3)
Shares-based compensation from settlements (1)		(6.7)		-		-
Domestic manufacturing exclusions		(1.1)		(1.0)		(1.5)
Research and development credit		(0.9)		(0.8)		(1.2)
Impact of the Tax Cuts and Jobs Act		9.4		-		-
State income tax carryforwards		(1.4)		-		-
Other, net		0.2		0.8		1.1
Effective tax rate		30.9	%	31.0	%	29.7	%

(1)

See Note 2(w) for the impact of the adoption of ASU 2016-09.

Our effective income tax rate was 30.9 percent for the year ended December 31, 2017, and 31.0 percent for the year ended December 31, 2016. Our effective income tax rate for the year ended December 31, 2017, was lower as a result of the adoption of ASU 2016-09 related to share-based compensation, which decreased our effective tax rate by approximately 7 percent (see Note 2 for more information regarding the adoption of ASU 2016-09) and the utilization of foreign tax credits, which reduced our effective tax rate by approximately 1 percent. These decreases were offset by the following non-recurring items: A deemed repatriation tax, net of the remeasurement of our deferred tax assets and liabilities resulting from the Tax Act and a tax benefit related to state tax credit carryforwards, which combined, increased our tax rate by approximately 8 percent.

Our effective income tax rate was 31.0 percent for the year ended December 31, 2016, and 29.7 percent for the year ended December 31, 2015. The increase in our effective income tax rate for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily related to a change in earnings mix in 2016, with relatively higher earnings subject to domestic tax rates as opposed to lower international tax rates including the impact of foreign currency exchange rates.

Income taxes paid for the periods ended December 31, 2017, 2016 and 2015 was $81.2 million, $74.7 million, and $54.9 million, respectively.

We have business operations in Switzerland and the Netherlands and have been granted tax rulings by each jurisdiction. Our Netherlands ruling is set to expire on December 31, 2022, and our Switzerland ruling remains in effect as long as our business operations comply with the ruling requirements during the period or until Switzerland adopts new international tax rules. As a result of the tax rulings, our net income was higher by $8.9 million, $7.8 million, and $8.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The benefit from these tax rulings is reflected within the overall benefit received from international income taxes in the table above.

The components of the net deferred tax assets (liabilities) included in the accompanying consolidated balance sheets are as follows (in thousands):



	December 31, 2017		December 31, 2016

Assets
Accrued expenses	$	13,843	$	22,145
Accounts receivable reserves		2,624		2,715
Deferred revenue		10,618		13,400
Inventory basis differences		3,039		3,959
Property-based differences		1,324		1,382
Share-based compensation		9,035		13,021
Other		918		678
Net operating loss carryforwards		3,350		4,182
Tax credit carryforwards		8,096		-
Unrealized losses on foreign currency exchange contracts, interest rate swaps and investments		2,355		148
Total assets		55,202		61,630
Valuation allowance		(6,211)		(4,891)
Total assets, net of valuation allowance		48,991		56,739

Liabilities
Deferred instrument costs		(20,399)		(24,142)
Property-based differences		(31,859)		(43,159)
Intangible asset basis differences		(13,574)		(17,672)
Other		(656)		(771)
Unrealized gains on foreign currency exchange contracts, interest rate swaps and investments		(158)		(4,575)
Total liabilities		(66,646)		(90,319)
Net deferred tax assets (liabilities)	$	(17,655)	$	(33,580)

The passage of the Tax Act, which reduced the U.S. federal income tax rate from 35 percent to 21 percent, resulted in a decrease to our net deferred tax liabilities by approximately $17 million.

As of December 31, 2017, we have recorded a valuation allowance of $6.2 million against certain deferred tax assets related to temporary differences including net operating loss (“NOL”) and tax credit carryforwards, as it is more likely than not that they will not be realized or utilized within the carryforward period. The increase in the valuation allowance from the prior period primarily relates to recording a deferred tax asset for certain state tax credits that we do not believe will be utilized due to insufficient taxable income in that jurisdiction. There was no impact to income tax expense.

As of December 31, 2017, we have NOL’s in certain state and international jurisdictions of approximately $13.1 million available to offset future taxable income. Most of these NOL’s will expire at various dates between 2021 and 2026 and the remainder have indefinite lives.

The following table summarizes the changes in unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015 (in thousands):



	For the Years Ended December 31,
		2017		2016		2015

Total amounts of unrecognized tax benefits, beginning of period	$	18,463	$	7,204	$	5,942
Gross increases in unrecognized tax benefits as a result of tax positions taken during a prior period		74		75		47
Gross increases in unrecognized tax benefits as a result of tax positions taken in the current period		4,681		12,657		1,569
Decreases in unrecognized tax benefits relating to settlements with taxing authorities		(713)		(1,326)		-
Decreases in unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations		(1,088)		(147)		(354)
Total amounts of unrecognized tax benefits, end of period	$	21,417	$	18,463	$	7,204

The total amount of unrecognized tax benefits at December 31, 2017 and December 31, 2016, was $21.4 million and $18.5 million, respectively. Of the total unrecognized tax benefits at December 31, 2017 and 2016, $9.1 million and $5.9 million, respectively, comprise unrecognized tax positions that would, if recognized, affect our effective tax rate. The increase in net liability primarily relates to an uncertain tax position taken during the year related to the deemed repatriation tax provided in the Tax Act.

During the years ended December 31, 2017, 2016 and 2015, we recorded interest expense and penalties of $0.9 million, $0.3 million, and $0.3 million, respectively, as income tax expense in our consolidated statement of income. At December 31, 2017 and 2016, we had $1.0 million and $0.6 million, respectively, of estimated interest expense and penalties accrued in our consolidated balance sheets.

In the ordinary course of our business, our income tax filings are regularly under audit by tax authorities. While we believe we have appropriately provided for all uncertain tax positions, amounts asserted by taxing authorities could be greater or less than our accrued position. Accordingly, additional provisions on income tax matters, or reductions of previously accrued provisions, could be recorded in the future as we revise our estimates due to changing facts and circumstances or the underlying matters are settled or otherwise resolved. We are currently under tax examinations by various state and international tax authorities. We anticipate that these examinations will be concluded within the next year. With few exceptions, we are no longer subject to income tax examinations in any state and local, or international jurisdictions in which we conduct significant taxable activities for years before 2013.