Natural Health Trends Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2019

The components of income (loss) before income taxes consist of the following (in thousands):



	Year Ended December 31,
	2019			2018
Domestic	$	(4,917	)	$	(3,391	)
Foreign	(680		)	37,912
Income (loss) before income taxes	$	(5,597	)	$	34,521

The components of the income tax provision consist of the following (in thousands):



	Year Ended December 31,
	2019			2018
Current:
Federal	$	399		$	1,815
State	33			13
Foreign	398			1,300
Total current taxes	830			3,128
Deferred taxes	(816		)	358
Income tax provision	$	14		$	3,486

A reconciliation of the reported income tax provision to the provision (benefit) that would result from applying the domestic federal statutory tax rate to pretax income (loss) is as follows (in thousands):



	Year Ended December 31,
	2019			2018
Income tax at federal statutory rate	$	(1,175	)	$	7,249
Effect of permanent differences	260			346
Goodwill impairment	375			—
Tax Cut & Jobs Act one-time transition tax	—			(738		)
Global Intangible Low-Taxed Income	364			3,964
Change in valuation allowance	106			(9		)
Foreign rate differential	13			(6,541		)
Foreign tax credits	10			(786		)
Other reconciling items	61			1
Income tax provision	$	14		$	3,486

Income (loss) before income taxes and the statutory tax rate for each country that materially contributed to the foreign rate differential presented above is as follows (in thousands):



			Year Ended December 31,
	Statutory Tax Rate		2019			2018
Cayman Islands	—	%	$	(2,746	)	$	31,560
Hong Kong	16.5	%	3,441			3,545
China	25.0	%	(1,644		)	2,725

Deferred income taxes consist of the following (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Net operating losses	$	1,477		$	183
Stock-based compensation	925			191
Operating lease liabilities	335			—
Accrued expenses	67			1,248
Other	6			11
Total deferred tax assets	2,810			1,633
Valuation allowance	(289		)	(183		)
Net deferred tax assets	2,521			1,450
Deferred tax liabilities:
Operating lease assets	(313		)	—
Foreign deferreds	(202		)	(186		)
Other	(169		)	(243		)
Total deferred tax liabilities	(684		)	(429		)
Net deferred tax assets	$	1,837		$	1,021

The effective income tax rate for the year ended December 31, 2019 was impacted by permanent differences including a true-up of the Global Intangible Low-Taxed Income (“GILTI”) provision for the tax year ended December 31, 2018 and goodwill impairment for the year ended December 31, 2019.

As of December 31, 2019, the Company does not have a valuation allowance against its U.S. deferred tax assets. The Company analyzed all sources of available income and determined that they are more likely than not to realize the tax benefits of their deferred assets. As of December 31, 2019, the Company has a valuation allowance against certain foreign deferred tax assets. The Company is recording a valuation allowance in foreign jurisdictions with an overall net operating loss. The valuation allowance will be reduced at such time as management believes it is more likely than not that the deferred tax assets will be realized. Any reductions in the valuation allowance will reduce future income tax provision.

As of December 31, 2019, the Company has U.S. federal net operating loss carryforwards of $3.6 million with no expiration. The Company has U.S. state net operating loss carryforwards of $2.4 million that begin expiring in 2040. At December 31, 2019, the Company has foreign net operating loss carryforwards of approximately $3.3 million in various jurisdictions with various expirations.

As a result of capital return activities, the Company determined that a portion of its current undistributed foreign earnings is no longer deemed reinvested indefinitely by its non-U.S. subsidiaries. For state income tax purposes, the Company will continue to periodically reassess the needs of its foreign subsidiaries and update its indefinite reinvestment assertion as necessary. To the extent that additional foreign earnings are not deemed permanently reinvested, the Company expects to recognize additional income tax provision at the applicable state corporate income tax rate(s). As of December 31, 2019, the Company has not recorded a state deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods. Due to the U.S. Tax Cuts and Jobs Act in 2017, repatriation from foreign subsidiaries will be offset with a dividends received deduction, resulting in little to no impact on federal tax expense. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be reinvested indefinitely as of December 31, 2019.

The Company and its subsidiaries file tax returns in the United States, California, New Jersey and Texas and various foreign jurisdictions. During the fourth quarter of 2018, the Company was notified that it was selected for audit of the 2016 tax year by the U.S. Internal Revenue Service. The audit was recently expanded to also include the 2017 and 2018 tax years. For purposes of this audit, fiscal years since 2007 are open for examination by tax authorities as a result of net operating loss carryovers from older years being used to offset income in recent tax years. No adjustments have been proposed at this time. The Company is no longer subject to state income tax examinations for years prior to 2015.