| Income Taxes | Note 13—Income Taxes
Income Tax Expense
The components of the income tax expense are:
Year Ended
December 31,
2018 2017 2016
(in thousands)
Current:
Federal $
— $
— $ 23
State 659 495 43
Foreign 4,174 2,638 4,386
Total current 4,833 3,133 4,452
Deferred:
Federal (411 ) (2,020 ) 458
State (1 ) (8 ) 419
Foreign (7,167 ) 2,367 496
Total deferred (7,579 ) 339 1,373
Income tax expense (benefit) $ (2,746 ) $ 3,472 $ 5,825
The following table sets forth the components of income (loss)
before income taxes:
Year Ended
December 31,
2018 2017 2016
(in thousands)
Income (loss) before income taxes:
United States $ (63,266 ) $ (15,019 ) $ (18,361 )
Foreign (1,794 ) 2,294 12,889
$ (65,060 ) $ (12,725 ) $ (5,472 )
Income tax expense differs from the amount computed by applying the
2018 statutory federal income tax rate of 21.0% and the 2017 and
2016 statutory federal income tax rate of 35% to income (loss)
before taxes as follows:
Year Ended
December 31,
2018 2017 2016
(in thousands)
United States statutory federal income tax rate $ (13,663 ) $ (4,454 ) $ (1,915 )
Non-deductible 592 (294 ) 290
Deferred earnout adjustments 1,253
—
—
Noncash compensation 359 (30 ) 761
U.S. tax on foreign earnings, net of tax credits
— (1,283 ) 587
Changes in valuation allowances 7,920 (5,956 ) 6,681
Tax credits (1,025 ) (699 ) (4,403 )
State taxes 74 224 53
Effect of operating in foreign jurisdictions 1,545 2,101 1,818
Deemed repatriation transition tax
— 3,807
—
Reduction of federal corporate tax rate 1,823 8,190
—
Changes in prior year estimates (66 ) (26 ) 293
Changes in uncertain tax benefits (1,506 ) 1,798 1,243
Revisions of deferred tax accounts (56 ) (10 ) 313
Other 4 104 104
Income tax expense (benefit) $ (2,746 ) $ 3,472 $ 5,825
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,
2018 2017
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 17,934 $ 15,598
Federal, state and foreign tax credits 13,042 17,833
Depreciation and amortization 12,359 13,009
Unrealized loss on functional currency 1,203 565
Allowance for doubtful accounts 1,221 704
Accruals not currently deductible 12,559 1,027
Stock-based compensation 755 812
Intercompany interest 1,779 1,985
Other 193 351
Valuation allowance (51,316 ) (45,129 )
Total deferred tax assets 9,729 6,755
Deferred tax liabilities:
Depreciation and amortization (2,342 ) (605 )
Tax on foreign earnings
—
—
Other (398 ) (280 )
Total deferred tax liabilities (2,740 ) (885 )
Net deferred tax assets $ 6,989 $ 5,870
As of December 31, 2018, the Company’s as filed net
operating loss and tax credit carryforwards were as follows:
Jurisdiction Expiration Net Operating Tax Credit
(in thousands)
U.S. Federal 2036 $ 20,263 $
—
U.S. Federal Indefinite 5,728
—
U.S. Federal 2020
— 9,930
U.S. State 2020 6,763
—
Non-U.S. Indefinite 49,141
—
Non-U.S. 2019 1,607
—
$ 83,502 $ 9,930
As of December 31, 2018, the Company’s valuation
allowances were as follows:
Jurisdiction Valuation
(in thousands)
United States $ 38,450
Norway 10,093
United Kingdom 2,466
Other 307
$ 51,316
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. 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.
During 2018, the Company released the valuation allowance of
$4.2 million in Australia. Management determined that
sufficient positive evidence exists to conclude that it is more
likely than not that the deferred tax assets will be realized in
the future.
As of December 31, 2018, the Company intends to continue
reinvesting earnings outside of the United States for the
foreseeable future. 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 did recognize U.S.
taxes on the one-time
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), making broad and complex changes to the U.S. tax
code.
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 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.
During 2018, the Company has completed the accounting for the
income tax effects of the Tax Act based on current regulations and
available information. Any additional guidance issued by the IRS
could impact our recorded amounts in future periods.. The
adjustments related to The Tax Act are recorded as follows:
Reduction of US Federal Corporate Tax
Rate:
Deemed Repatriation Transition
Tax:
Global Intangible Low Taxed Income
(GILTI):
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, 2018, 2017 and 2016, the
Company’s uncertain tax benefits totaling $16.1 million,
$18.8 million and $21.8 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,
2018 2017 2016
(in thousands)
Balance, January 1, $ 9,637 $ 13,244 $ 15,718
Additions for the current year tax
—
— 794
Additions related to prior years
— 110 602
Reductions related to settlements with taxing authorities
—
— (3,701 )
Reductions related to lapses in statue of limitations (1,262 ) (327 ) (169 )
Reductions related to prior years (878 ) (3,390 )
—
Balance, December 31, $ 7,497 $ 9,637 $ 13,244
As of December 31, 2018, the Company’s gross
unrecognized tax benefits which would impact the annual effective
tax rate upon recognition were $7.5 million. In addition, as
of December 31, 2018, the Company has recorded related assets,
net of a valuation allowance of $1.1 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, 2018, 2017 and 2016,
the Company has accrued penalties and interest of approximately
$8.6 million, $9.2 million and $8.8 million,
respectively. The Company has recognized ($0.6) million,
$0.3 million and $1.6 million of interest and penalties
in income tax expense for the years ended December 31, 2018,
2017 and 2016, 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 $3.3 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 2008.
The Company received an IRS notice informing us of an audit of the
Company’s 2016 income tax return. It is unclear if the audit
and the appeals process, if necessary, will be completed within the
next twelve months. The Company is in the early stages of the audit
and is unable to quantify any potential settlement or outcome of
the audit at this time. |
