Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.1
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

23. INCOME TAXES

The Company provides for income taxes using an asset and liability approach under which deferred income taxes are provided for based upon enacted tax laws and rates applicable to periods in which the taxes become payable.

The following table presents domestic and foreign components income (loss) before income tax expense for the years ended December 31, 2019 and 2018 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Domestic

 

$

(7,857

)

 

$

(635

)

Foreign

 

 

4,618

 

 

 

(5,041

)

Loss before income tax expense

 

$

(3,239

)

 

$

(5,676

)

 

The provision for federal and state income taxes consists of the following (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Current

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

US federal corporate income tax

 

$

 

 

$

 

US state corporate income tax

 

 

 

 

 

 

Foreign:

 

 

 

 

 

 

 

 

IRES (Italian corporate income tax)

 

 

66

 

 

 

248

 

IRAP (Italian regional tax on productive activities)

 

 

50

 

 

 

107

 

Foreign (India)

 

 

1,977

 

 

 

935

 

Other Italian taxes

 

 

194

 

 

 

62

 

Current

 

 

2,287

 

 

 

1,352

 

Deferred

 

 

(14

)

 

 

72

 

Income tax expense

 

$

2,273

 

 

$

1,424

 

 

The differences between income taxes expected by applying the U.S. federal statutory tax rate of 21% and the amount of income taxes provided for are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Loss before income taxes

 

$

(3,239

)

 

$

(5,676

)

Primary tax rate of the Company (1)

 

 

21.00

%

 

 

24.00

%

Tax benefit calculated according to the Company's primary tax rate

 

 

(680

)

 

 

(1,363

)

State income tax, net of Federal

 

 

(483

)

 

 

 

Foreign tax rates differences (2)

 

 

319

 

 

 

77

 

Change in applicable tax rates (3)

 

 

(513

)

 

 

 

Change in valuation allowance

 

 

2,027

 

 

 

213

 

Non-taxable income

 

 

(196

)

 

 

 

Costs not deductible for tax purposes

 

 

541

 

 

 

2,103

 

Costs not deductible associated with investments

 

 

36

 

 

 

19

 

CFC (Controlled Foreign Corporation rules) (4)

 

 

288

 

 

 

93

 

IRAP (Italian Regional Tax on Productive Activities)

 

 

4

 

 

 

154

 

Taxes on undistributed profits

 

 

926

 

 

 

180

 

Other taxes

 

 

4

 

 

 

(52

)

Reported income tax expense

 

$

2,273

 

 

$

1,424

 

 

 

(1)

For the year ended December 31, 2019, “primary tax rate of the Company” means the U.S. federal tax rate (21%); for the year ended December 31, 2018, “primary tax rate of the Company” means the applicable Italian Corporate Income Tax (IRES) rate (24%).

 

(2)

For the year ended December 31, 2019, “foreign” relates to tax jurisdictions outside the United States; for the year ended December 31, 2018, “foreign” relates to tax jurisdictions outside Italy.

 

(3)

During 2019, applicable tax rate for Solutions Infini was reduced from 29.12% to 25.17%, resulting in a tax benefit for the period.

 

(4)

Recorded by the Company in relation with the Dubai subsidiary (FZE).

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The following table presents the significant components of the Company’s deferred tax assets and liabilities (in thousands):

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Startup costs

 

$

2,755

 

 

$

 

Deferred compensation liabilities

 

 

398

 

 

 

128

 

Property and equipment

 

 

70

 

 

 

148

 

Goodwill

 

 

119

 

 

 

134

 

Net operating loss carryforward

 

 

3,370

 

 

 

1,736

 

Other

 

 

422

 

 

 

173

 

Total deferred tax assets

 

 

7,134

 

 

 

2,319

 

Less: valuation allowance

 

 

(5,591

)

 

 

(723

)

Total deferred tax assets, net

 

 

1,543

 

 

 

1,596

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

 

2,351

 

 

 

3,389

 

Undistributed profits

 

 

1,093

 

 

 

180

 

Property and equipment

 

 

134

 

 

 

140

 

Other

 

 

10

 

 

 

6

 

Total deferred tax liabilities

 

 

3,588

 

 

 

3,715

 

Net deferred tax liabilities

 

$

(2,045

)

 

$

(2,119

)

 

As of December 31, 2019, the Company has federal, state and foreign net operating loss carryforwards totaling $11.6 million, $11.7 million and $1.6 million, respectfully. If not utilized, federal net operating losses of $5.4 million will expire at various dates from 2026 through 2037, and $6.2 million have an indefinite life. State net operating losses of $10.1 million will expire at various dates from 2037 through 2039, and $1.6 million have an indefinite life. Foreign net operating losses originated in Switzerland and will expire at various dates from 2023 through 2026.

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses; the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Company does not believe that it is more likely than not that all of the deferred tax assets will be realized; accordingly a valuation allowance has been established for the amount of the deferred tax assets on net operating loss carryforward, startup costs, and other deferred tax assets in excess of the deferred tax liabilities that will reverse prior to any net operating loss carryforward expiration date.

The following table sets forth movement in the valuation allowance for the year ended December 31, 2019 and 2018 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Balance at the beginning of the period

 

$

723

 

 

$

206

 

Change in scope of consolidation

 

 

2,836

 

 

 

305

 

Increase during the period

 

 

2,027

 

 

 

213

 

Effect of exchange rate changes

 

 

5

 

 

 

(1

)

Balance at the end of the period

 

$

5,591

 

 

$

723

 

 

The Company recognizes interest and penalties, if any, related to an underpayment of income taxes in income tax expense. As of December 31, 2019, the Company has accumulated $91,000 in interest related to unrecognized tax benefits ($4,000 as of December 31, 2018).

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits as of December 31, 2019 and 2018 is as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

Gross unrecognized tax benefits, beginning of the year

 

$

190

 

 

$

91

 

Additions for tax positions of prior years

 

 

 

 

 

 

Additions for tax positions related to the current year

 

 

193

 

 

 

93

 

Change in scope of consolidation

 

 

 

 

 

 

Effect of exchange rate

 

 

(6

)

 

 

2

 

Subtotal

 

 

377

 

 

 

186

 

Interest and penalties

 

 

91

 

 

 

4

 

Total gross unrecognized tax benefits, end of the year

 

$

468

 

 

$

190

 

 

As of December 31, 2019, the Company had $5.0 million of undistributed earnings and profits generated by a foreign subsidiary (Solutions Infini) for which no deferred tax liabilities have been recorded, since the Company intends to indefinitely reinvest such earnings in the subsidiary to fund the international operations and certain obligations of the subsidiary. Should the above undistributed earnings be distributed in the form of dividends or otherwise, the distributions would result in $757,000 of tax expense.

The Company files income tax returns in the United States and in foreign jurisdictions including Italy, India, and Switzerland. As of December 31, 2019, the tax years 2007 through the current period remain open to examination in each of the major jurisdictions in which the Company is subject to tax.