Income Taxes

The provisions for income taxes were calculated based on the following components of income (loss) before income taxes:



Year ended December 31, (dollars in thousands)	2016			2015		2014
United States	$	29,742		$	27,146	$	(15,488	)
Non-U.S.	(1,958		)	971		29,018
Total income before income taxes	$	27,784		$	28,117	$	13,530

The current and deferred provisions (benefit) for income taxes were:



Year ended December 31, (dollars in thousands)	2016			2015			2014
Current:
U.S. federal	$	470		$	300		$	59
Non-U.S.	7,625			9,142			10,180
U.S. state and local	201			162			157
Total current income tax provision (benefit)	8,296			9,604			10,396

Deferred:
U.S. federal	9,981			(44,068		)	227
Non-U.S.	334			(3,078		)	(2,066		)
U.S. state and local	(900		)	(674		)	10
Total deferred income tax provision (benefit)	9,415			(47,820		)	(1,829		)

Total:
U.S. federal	10,451			(43,768		)	286
Non-U.S.	7,959			6,064			8,114
U.S. state and local	(699		)	(512		)	167
Total income tax provision (benefit)	$	17,711		$	(38,216	)	$	8,567

Deferred income tax assets and liabilities result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and from income tax carryovers and credits. The significant components of our deferred income tax assets and liabilities are as follows:



December 31, (dollars in thousands)	2016			2015
Deferred income tax assets:
Pension	$	11,799		$	9,644
Non-pension postretirement benefits	22,810			21,751
Other accrued liabilities	19,244			20,432
Receivables	2,756			2,341
Net operating loss and charitable contribution carry forwards	16,861			25,754
Tax credits	11,502			10,245
Total deferred income tax assets	84,972			90,167

Deferred income tax liabilities:
Property, plant and equipment	23,921			22,882
Inventories	3,866			2,378
Intangibles and other	5,255			7,883
Total deferred income tax liabilities	33,042			33,143
Net deferred income tax asset before valuation allowance	51,930			57,024
Valuation allowance	(13,773		)	(11,184		)
Net deferred income tax asset (liability)	$	38,157		$	45,840

The net deferred income tax assets and liabilities at December 31 of the respective year-ends were included in the Consolidated Balance Sheets as follows:



December 31, (dollars in thousands)	2016			2015
Non-current deferred income tax asset	40,016			48,662
Non-current deferred income tax liability	(1,859		)	(2,822		)
Net deferred income tax asset (liability)	$	38,157		$	45,840

The 2016 deferred income tax asset for net operating loss carry forwards of $16.8 million relates to cumulative pretax losses incurred in the Netherlands of $24.8 million, in Portugal of $0.6 million, in China of $0.9 million, and in the U.S. of $23.0 million for federal and $58.6 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $26.3 million will expire between 2017 and 2027. Our U.S. federal net operating loss carry forward of $23.0 million will expire between 2031 and 2034. This $23.0 million is lower than the actual amount reported on our U.S. federal income tax return by $6.6 million. The difference is attributable to tax deductions in excess of financial statement expenses for stock based compensation. Effective January 1, 2017, Libbey will implement ASU 2016-09 resulting in this amount being recorded as an increase to additional paid in capital and an increase to our U.S. federal net operating loss carry forward. The U.S. state and local net operating loss carry forward of $58.6 million will expire between 2017 and 2034. The 2015 deferred income tax asset for net operating loss carry forwards of $25.5 million related to pretax losses incurred in the Netherlands of $16.9 million, in Portugal of $1.8 million, in China of $1.3 million, and in the U.S. of $53.8 million for federal and $68.5 million for state and local jurisdictions.

The 2016 deferred tax credits of $11.5 million consist of $3.8 million U.S. federal tax credits and $7.7 million non-U.S. credits. The U.S. federal tax credits consist of $2.6 million of general business research and development credits which will expire between 2024 and 2036 and $1.2 million of alternative minimum tax credits which do not expire. The non-U.S. credit of $7.7 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. The 2015 deferred tax credits of $10.2 million consisted of $2.6 million U.S. federal tax credits and $7.6 million non-U.S. credits.

In assessing the need for a valuation allowance, management considers on a quarterly basis whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income (including reversals of deferred income tax liabilities) during the periods in which those deductible temporary differences reverse. As a result, we consider the historical and projected financial results of the tax paying component recording the net deferred income tax asset as well as all other positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused and whether there were unusual, infrequent, or extraordinary items to be considered. We currently have a valuation allowance in place on our deferred income tax assets in the Netherlands. We intend to maintain this allowance until a period of sustainable income is achieved and management concludes it is more likely than not that those deferred income tax assets will be realized.

As of December 31, 2015, management considered the evidence, both positive and negative, in assessing the realizability of our deferred tax assets in the U.S. The positive evidence, including achievement of cumulative income in recent years and expectations for sustainable future income, was strong enough to conclude that it is more likely than not that nearly all of our deferred tax assets are realizable and the valuation allowance was reduced accordingly. In order to fully realize our deferred tax assets in the U.S., the Company needs to generate approximately $176.6 million of future taxable income.

Our European operations in the Netherlands incurred an operating loss in 2016, continues to be in cumulative loss positions in recent years, and has a history of tax loss carry-forwards expiring unused. In addition, European economic conditions continue to be unfavorable. Accordingly, management believes it is not more likely than not that a portion of the deferred tax assets related to these operations will be realized and a valuation allowance continues to be recorded as of December 31, 2016.

The valuation allowance activity for the years ended December 31 is as follows:



Year ended December 31, (dollars in thousands)	2016		2015			2014
Beginning balance	$	11,184	$	66,486		$	46,048
Charge (benefit) to provision for income taxes	2,589		(49,877		)	3,507
Charge (benefit) to other comprehensive income	—		(5,425		)	16,931
Ending balance	$	13,773	$	11,184		$	66,486

The valuation allowance increased $2.6 million in 2016 from $11.2 million at December 31, 2015 to $13.8 million at December 31, 2016. The 2016 increase of $2.6 million is attributable to changes in deferred tax assets in foreign jurisdictions where valuation allowances are recorded. The 2016 valuation allowance of $13.8 million relates to net operating losses and foreign tax credits in the Netherlands. The valuation allowance decreased $55.3 million in 2015 from $66.5 million at December 31, 2014 to $11.2 million at December 31, 2015. The 2015 decrease of $55.3 million was primarily attributable to the 2015 reversal of substantially all of the U.S. valuation allowance, partially offset by changes in deferred tax assets in foreign jurisdictions where valuation allowances were recorded. The 2014 increase in valuation allowance of $20.4 million was attributable to the 2014 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward and other comprehensive income losses related to pensions.

Reconciliation from the statutory U.S. federal income tax rate to the consolidated effective income tax rate was as follows:



Year ended December 31,	2016			2015			2014
Statutory U.S. federal income tax rate	35.0		%	35.0		%	35.0		%
Increase (decrease) in rate due to:
Non-U.S. income tax differential	(2.1	)		(0.9	)		(25.9	)
U.S. state and local income taxes, net of related U.S. federal income taxes	(1.3	)		(2.0	)		0.8
U.S. federal credits	(2.2	)		—			—
Permanent adjustments	3.8			7.5			20.1
Foreign withholding taxes	5.7			4.7			14.8
Valuation allowance	11.1			(174.8	)		42.9
Unrecognized tax benefits	10.0			(0.3	)		(9.3	)
Impact of foreign exchange	3.4			(19.8	)		(14.0	)
Tax effect of intercompany capitalization	—			11.7			—
Other	0.3			3.0			(1.1	)
Consolidated effective income tax rate	63.7		%	(135.9	)	%	63.3		%

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside of the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences totaled $27.7 million as of December 31, 2016 and $35.0 million as of December 31, 2015. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation.

We are subject to income taxes in the U.S. and various foreign jurisdictions. Management judgment is required in evaluating our tax positions and determining our provision for income taxes. Throughout the course of business, there are numerous transactions and calculations for which the ultimate tax determination is uncertain. When management believes uncertain tax positions may be challenged despite our belief that the tax return positions are supportable, we record unrecognized tax benefits as liabilities in accordance with the requirements of ASC 740. When our judgment with respect to these uncertain tax positions changes as a result of a change in facts and circumstances, such as the outcome of a tax audit, we adjust these liabilities through increases or decreases to the income tax provision.

The Company and its subsidiaries are subject to examination by various countries' tax authorities. These examinations may lead to proposed or assessed adjustments to our taxes. In August 2016, one of our Mexican subsidiaries received a tax assessment from the Mexican tax authority (SAT) related to the audit of its 2010 tax year. The amount assessed was approximately 3 billion Mexican pesos, which was equivalent to approximately $157 million U.S. dollars as of the date of the assessment. The Company has filed an administrative appeal with SAT requesting that the assessment be fully nullified. We are awaiting the outcome of the appeal. Management, in consultation with external legal counsel, believes that if contested in the Mexican court system, it is more likely than not that the Company would prevail on all significant components of the assessment. Management intends to continue to vigorously contest all significant components of the assessment in the Mexican courts if they are not nullified at the administrative appeal level. We believe that our tax reserves related to uncertain tax positions are adequate at this time.

A reconciliation of the beginning and ending gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(dollars in thousands)	2016			2015			2014
Beginning balance	$	431		$	378		$	1,312
Additions based on tax positions related to the current year	382			293			—
Additions for tax positions of prior years	3,001			—			—
Reductions for tax positions of prior years	(293		)	—			(325		)
Changes due to lapse of statute of limitations	—			(240		)	(609		)
Ending balance	$	3,521		$	431		$	378

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. Other disclosures relating to unrecognized tax benefits are as follows:



December 31, (dollars in thousands)	2016		2015			2014
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	3,414	$	378		$	306
Interest and penalties, net of tax benefit, accrued in the Consolidated Balance Sheets	$	273	$	28		$	174
Interest and penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	245	$	(146	)	$	(363	)

Based upon the outcome of tax examinations, judicial proceedings, other settlements with taxing jurisdictions, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. It is also reasonably possible that gross unrecognized tax benefits may decrease within the next twelve months by approximately $3.9 million due to settlements with tax authorities.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of December 31, 2016, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2012	–	2016
China	2007	–	2016
Mexico	2010	–	2016
Netherlands	2015	–	2016
Portugal	2013	–	2016
United States (excluding 2009 which is closed)	2008	–	2016