Income Taxes | Note 13—Income Taxes Income Tax Expense The components of the income tax expense are: Year Ended December 31, 2017 2016 2015 (in thousands) Current: Federal $ — $ 23 $ 305 State 495 43 141 Foreign 2,638 4,386 7,619 Total current 3,133 4,452 8,065 Deferred: Federal (2,020 ) 458 (5,456 ) State (8 ) 419 (288 ) Foreign 2,367 496 88 Total deferred 339 1,373 (5,656 ) Income tax expense $ 3,472 $ 5,825 $ 2,409 The following table sets forth the components of income (loss) before income taxes: Year Ended December 31, 2017 2016 2015 (in thousands) Income (loss) before income taxes: United States $ (15,019 ) $ (18,361 ) $ (27,741 ) Foreign 2,294 12,889 13,490 $(12,725) $(5,472) $(14,251) Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35.0% to income (loss) before taxes as follows: Year Ended December 31, 2017 2016 2015 (in thousands) United States statutory federal income tax rate $ (4,454 ) $ (1,915 ) $ (4,988 ) Non-deductible (294 ) 290 131 Non-taxable — — (1,498 ) Noncash compensation (30 ) 761 349 U.S. tax on foreign earnings, net of tax credits (1,283 ) 587 50 Changes in valuation allowances (5,956 ) 6,681 10,358 Tax credits (699 ) (4,403 ) 410 State taxes 224 53 (130 ) Effect of operating in foreign jurisdictions 2,101 1,818 1,216 Deemed repatriation transition tax 3,807 — — Reduction of federal corporate tax rate 8,190 — — Changes in prior year estimates (26 ) 293 (58 ) Changes in uncertain tax benefits 1,798 1,243 (3,430 ) Revisions of deferred tax accounts (10 ) 313 98 Other 104 104 (99 ) Income tax expense $ 3,472 $ 5,825 $ 2,409 Deferred Tax Assets and Liabilities The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities are as follows: December 31, 2017 2016 (in thousands) Deferred tax assets: Net operating loss carryforwards $ 15,598 $ 16,474 Federal, state and foreign tax credits 17,833 21,972 Depreciation and amortization 13,009 17,907 Unrealized loss on functional currency 565 444 Allowance for doubtful accounts 704 1,390 Accruals not currently deductible 1,027 2,101 Stock-based compensation 812 1,012 Intercompany Interest 1,985 2,044 Other 351 78 Valuation allowance (45,129 ) (50,298 ) Total deferred tax assets 6,755 13,124 Deferred tax liabilities: Depreciation and amortization (605 ) (1,055 ) Tax on foreign earnings — (2,140 ) Other (280 ) (142 ) Total deferred tax liabilities (885 ) (3,337 ) Net deferred tax assets $ 5,870 $ 9,787 At December 31, 2017, on an as filed basis, the Company has U.S. domestic net operating loss carry forwards of approximately $9.0 million which will begin to expire in varying amounts in 2036, state net operating loss carry forwards of approximately $8.1 million which will expire in varying amounts beginning in 2023, and foreign net operating losses of $54.5 million of which almost all can be carried forward for an unlimited period. As of December 31, 2017, the Company, on an as filed basis, has U.S. domestic foreign tax credit carry forwards of $13.6 million which begin expiring in varying amounts in 2020. The amount reported on an as filed basis can differ from the amount recorded in the deferred tax assets of the Company’s financial statements due to the utilization or creation of assets in recording uncertain tax benefits. In assessing deferred tax assets, the Company considers whether a valuation allowance should be recorded for some or all of the deferred tax assets which may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Among other items, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. As of December 31, 2017, a valuation allowance of $45.1 million had been recorded. $27.5 million related to US federal and local deferred tax assets, $11.4 million related to Norway assets, $4.2 million related to Australia assets, $1.9 million related to United Kingdom assets, and $0.1 million related to other insignificant foreign jurisdictions that were not more likely than not to be realized. While the Company expects to realize the remaining net deferred tax assets, changes in future taxable income or in tax laws may alter this expectation and result in future increases to the valuation allowance. Previously the Company considered the earnings in its non-U.S. non-U.S. As of December 31, 2017, the Company continues to consider the excess amount for financial reporting over the tax basis of investments in its foreign subsidiaries to be indefinitely reinvested outside the United States. This determination is based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and on its specific plan for reinvestment of the foreign subsidiaries’ undistributed earnings, with the exception of RigNet Qatar W.L.L. The Company has not provided for deferred taxes where the determination of any deferred taxes on the amount the Company considers indefinitely reinvested is not practicable. The Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and has determined that it will be repatriating approximately $10.4 million from RigNet Qatar W.L.L. The Company has made a reasonable estimate of the tax effects of such repatriation, and determined that after the effects of the Transition Tax no additional liability should be recorded. Under SAB 118, we have provided a reasonable estimate of the Tax Act’s impact on its unremitted earnings. During the measurement period, the Company will continue to gather additional information to compute the full tax effects of the Tax Act on its unremitted earnings. Because the Company has asserted that all foreign undistributed earnings, excluding Qatar’s earnings, are permanently reinvested, no provision is recorded for the deferred tax liability related to other comprehensive income. Corporate Tax Reform On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21 percent, (2) requiring a one-time The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. For various reasons that are discussed below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. If the Company was able to make reasonable estimates of the effects of elements for which its analysis is not yet complete, the Company recorded provisional adjustments. If the Company was not yet able to make reasonable estimates of the impact of certain elements, the Company has not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. The Company’s accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows: Reduction of US Federal Corporate Tax Rate : Deemed Repatriation Transition Tax : non-U.S. Global Intangible Low Taxed Income (GILTI ): CFC-tested Uncertain Tax Benefits The Company evaluates its tax positions and recognizes only tax benefits that, more likely than not, will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized upon settlement. At December 31, 2017, 2016 and 2015, the Company’s uncertain tax benefits totaling $18.8 million, $21.8 million and $19.3 million, respectively, are reported as other liabilities in the consolidated balance sheets. Changes in the Company’s gross unrecognized tax benefits are as follows: Year Ended December 31, 2017 2016 2015 (in thousands) Balance, January 1, $ 13,244 $ 15,718 $ 15,454 Additions for the current year tax — 794 1,501 Additions related to prior years 110 602 — Reductions related to settlements with taxing authorities — (3,701 ) (154 ) Reductions related to lapses in statue of limitations (327 ) (169 ) (1,083 ) Reductions related to prior years (3,390 ) — — Balance, December 31, $ 9,637 $ 13,244 $ 15,718 As of December 31, 2017, the Company’s gross unrecognized tax benefits which would impact the annual effective tax rate upon recognition were $9.6 million. In addition, as of December 31, 2017, the Company has recorded related assets, net of a valuation allowance of $2.3 million. The related asset might not be recognized in the same period as the contingent tax liability and like interest and penalties does have an impact on the annual effective tax rate. The Company has elected to include income tax related interest and penalties as a component of income tax expense. As of December 31, 2017, 2016 and 2015, the Company has accrued penalties and interest of approximately $9.2 million, $8.8 million and $7.3 million, respectively. The Company has recognized $0.3 million, $1.6 million and $0.1 million of interest and penalties in income tax expense for the years ended December 31, 2017, 2016 and 2015, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, accruals will be reduced and reflected as a reduction to income tax expense. The Company believes that it is reasonably possible that a decrease of up to $2.5 million in unrecognized tax benefits, including related interest and penalties, may be necessary within the coming year due to lapse in statute of limitations. The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. All of the Company’s federal filings are still subject to tax examinations. With few exceptions, the Company is no longer subject to the foreign income tax examinations by tax authorities for years before 2007. |