| Income Taxes | 12. Income taxes The components of income (loss) before income taxes are as follows (in thousands):
Year ended December 31,
2021
2020
2019
U.S.
$
(27,850
)
$
(22,127
)
$
(14,732
)
Non-U.S.
27,562
24,159
18,120
$
(288
)
$
2,032
$
3,388
The significant components of the income tax expense are as follows (in thousands):
Year ended December 31,
2021
2020
2019
Current
U.S. Federal
$
—
$
—
$
—
Non-U.S.
9,781
23,197
11,434
U.S. State and Local
227
(315
)
446
Total current
10,008
22,882
11,880
Deferred
U.S. Federal
26
(881
)
193
Non-U.S.
(1,550
)
(9,849
)
(1,143
)
U.S. State and Local
22
380
—
Total deferred
(1,502
)
(10,350
)
(950
)
Income tax expense
$
8,506
$
12,532
$
10,930
The reconciliation of income taxes calculated at the U.S. Federal statutory income tax rate to income tax expense is as follows (in thousands):
Year ended December 31,
2021
2020
2019
U.S. federal statutory rate
21
%
21
%
21
%
Income taxes at U.S. federal statutory rate
$
(60
)
$
427
$
711
Foreign income taxes at rates other than the federal statutory rate
2,950
1,161
1,247
U.S. state and local income taxes, net of U.S. federal tax benefit
(4,826
)
(4,892
)
(6,836
)
U.S. effect of changes in tax laws
—
4,946
—
U.S. effect of foreign operations
1,827
1,205
8,609
Change in valuation allowance
20,212
5,215
18,138
Foreign withholding taxes
(4,545
)
5,236
5,975
U.S. foreign tax credit and deduction
(288
)
(1,308
)
(7,059
)
Research and development tax credit
(784
)
2,576
(2,600
)
Stock-based compensation
(12,791
)
(5,034
)
(4,628
)
Other
753
825
(768
)
Uncertain tax positions
6,058
2,175
(1,859
)
Income tax expense
$
8,506
$
12,532
$
10,930
The Tax Cuts and Jobs Act, or the Tax Act, subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The impact of GILTI resulted in no incremental tax expense for the years ended December 31, 2021 and 2020 due to a full valuation allowance on U.S. net deferred tax assets. In addition, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. On July 23, 2020, the Department of Treasury published final regulations under the GILTI and Subpart F provisions of the Code regarding the treatment of income that is subject to a high rate of foreign tax (“high-tax exclusion”). These regulations, among other things, permit U.S. shareholders of foreign corporations to make an election for a controlled foreign corporation to exclude from subpart F income any item of income received by the controlled foreign corporation if that income is subject to an effective tax rate greater than 90% of the maximum U.S. corporate income tax rate of 21%. The Company has evaluated the impact of these regulations and made an election to avail the high-tax exclusion for tax years 2018, 2019 and 2020. Since this is an annual election, the Company intends to make a high-tax exclusion election for 2021 tax year and has recorded the impact of the election in its 2021 year-end tax provision. Deferred income tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial statements purposes. The approximate tax effect of each type of temporary difference, and operating losses and tax credit carryforwards that give rise to a significant portion of the deferred tax assets and liabilities are as follows (in thousands):
December 31,
2021
2020
Deferred tax assets:
Deferred revenue
$
12,217
$
12,135
Net operating loss carryforwards
87,144
66,160
Tax credit carryforwards
26,035
26,299
Stock-based compensation
5,011
3,766
Capitalized research and development
4,408
6,472
Lease obligation
8,518
9,956
Employee benefits
6,460
5,980
Other
3,866
2,618
Total gross deferred tax assets
153,659
133,386
Less: valuation allowances
(119,981
)
(96,831
)
Net deferred tax assets (1)
33,678
36,555
Deferred tax liabilities:
Prepaid royalties
—
584
Property and equipment and intangibles
21,834
16,177
Deferred tax on investment in subsidiary
1,500
790
Lease right of use asset
8,283
9,610
Convertible debt, net of issuance costs
6,331
8,685
Other
2,624
1,612
Total deferred tax liabilities
40,572
37,458
Total net deferred tax (liabilities) assets
$
(6,894
)
$
(903
)
(1)
Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities. Deferred tax assets and liabilities are determined separately for each tax jurisdiction on a separate or on a consolidated tax filing basis, as applicable, in which the Company conducts its operations or otherwise incurs taxable income or losses. A valuation allowance is recorded when it is more likely than not that some portion or all of the gross deferred tax assets will not be realized. The realization of deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character within the carryback or
•
taxable income in prior carryback years;
•
future reversals of existing taxable temporary differences;
•
future taxable income exclusive of reversing temporary differences and carryforwards; and
•
prudent and feasible tax planning strategies that the Company would be willing to undertake to prevent a deferred tax asset from otherwise expiring. The assessment regarding whether a valuation allowance is required or whether a change in judgment regarding the valuation allowance has occurred also considers all available positive and negative evidence, including but not limited to:
•
nature, frequency, and severity of cumulative losses in recent years;
•
duration of statutory carryforward and carryback periods;
•
statutory limitations against utilization of tax attribute carryforwards against taxable income;
•
historical experience with tax attributes expiring unused; and
•
near‑ and medium‑term financial outlook. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company uses the actual results for the last two years and current year results as the primary measure of cumulative losses in recent years. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or tax returns and future profitability. The recognition of deferred tax assets represents the Company’s best estimate of those future events. Changes in the current estimates, due to unanticipated events or otherwise, could have a material effect on the Company’s results of operations and financial condition. In certain tax jurisdictions, the Company’s analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence, which is objective and verifiable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative and, accordingly, the Company considers all other available positive and negative evidence in its analysis. Based on its analysis, the Company has recorded a valuation allowance for the portion of deferred tax assets where based on the weight of available evidence it is unlikely to realize those deferred tax assets. Based on the evidence available including a lack of sustainable earnings, the Company in its judgment previously recorded a valuation allowance against substantially all of its net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, the Company will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period. The Company continues to record deferred foreign taxes on gross book-tax basis differences to the extent of foreign distributable reserves and excess cash balances for its subsidiary in India. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings is not practicable. The following table summarizes the changes to the valuation allowance balance (in thousands):
December 31,
2021
2020
2019
Beginning balance
$
96,831
$
84,356
$
78,155
Additions charged to expense
20,212
5,215
18,138
Other
2,938
7,260
(11,937
)
Ending balance
$
119,981
$
96,831
$
84,356
The change in valuation allowance in Other for 2021 of $2.9 million is primarily related to a valuation allowance recorded on deferred tax assets established during purchase accounting from the World Programming acquisition. The change in valuation allowance in Other for 2020 of $7.3 million is primarily related to a valuation allowance recorded on deferred tax assets established during purchase accounting from the Univa acquisition. The change in valuation allowance in Other for 2019 of $11.9 million is related to the issuance of convertible debt, net of issuance costs. The following table summarizes the amount and expiration dates of operating loss and tax credit carryforwards as of December 31, 2021 (in thousands):
Expiration dates
Amounts
U.S. general business credits and loss carryforwards
2022-Indefinite
$
91,144
Foreign general business credits and loss carryforwards
2022-Indefinite
17,593
U.S. foreign tax credits
2027
4,442
Total operating loss and tax credit carryforwards
$
113,179
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
Year ended December 31,
2021
2020
2019
Unrecognized tax benefits—January 1
$
8,310
$
12,114
$
13,743
Additions (reductions) for tax positions of current period
1,042
209
50
Additions for tax positions of prior periods
8,983
1,849
600
Reductions for tax positions of prior periods
(1,934
)
(5,862
)
(2,117
)
Reductions due to statute of limitations
(25
)
—
(162
)
Unrecognized tax benefits—December 31
$
16,376
$
8,310
$
12,114
As of December 31, 2021, the Company had $11.0 million of gross unrecognized tax benefits that if recognized would affect the effective tax rate. The Company expects a reduction over the next 12 months in the gross unrecognized tax benefits of approximately $0.2 million which if recognized would not impact the effective tax rate during 2022. The Company operates globally but considers its more significant tax jurisdictions to include the United States, India, Germany, Japan, and China. India has tax years open for examination from 2010 through 2021. All other significant jurisdictions have open tax years from 2016 through 2021. The Company records interest and penalties with respect to unrecognized tax benefits as a component of the provision for income taxes. For the years ended December 31, 2021, 2020, and 2019, accrued interest and penalties related to unrecognized tax benefits were approximately $1.0 million, $0.5 million, and $3.4 million, respectively. |
