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, 2018

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



	Year Ended December 31,
	2018			2017
Domestic	$	(3,391	)	$	(2,965	)
Foreign	37,912			46,391
Income before income taxes	$	34,521		$	43,426

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



	Year Ended December 31,
	2018		2017
Current:
Federal	$	1,815	$	20,277
State	13		2
Foreign	1,300		1,216
Total current taxes	3,128		21,495
Deferred taxes	358		(1,647		)
Income tax provision	$	3,486	$	19,848

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



	Year Ended December 31,
	2018			2017
Income tax at federal statutory rate	$	7,249		$	15,200
Effect of permanent differences	346			459
Tax Cut & Jobs Act one-time transition tax	(738		)	20,792
Global Intangible Low Taxed Income	3,964			—
Tax Cut & Jobs Act federal rate change	(6		)	954
Change in valuation allowance	(9		)	(43		)
Foreign rate differential	(6,541		)	(15,002		)
Foreign tax credits	(786		)	(2,738		)
Other reconciling items	7			226
Income tax provision	$	3,486		$	19,848

Income 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		2018		2017
Cayman Islands	—	%	$	31,560	$	39,954
Hong Kong	16.5	%	3,545		3,315
China	25.0	%	2,725		2,584

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



	December 31,
	2018			2017
Deferred tax assets:
Net operating losses	$	183		$	192
Stock-based compensation	191			270
Accrued expenses	1,062			1,374
Other	11			6
Total deferred tax assets	1,447			1,842
Valuation allowance	(183		)	(192		)
Net deferred tax assets	1,264			1,650
Deferred tax liabilities:
Foreign earnings	(2		)	(4		)
Other	(241		)	(267		)
Total deferred tax liabilities	(243		)	(271		)
Net deferred tax assets	$	1,021		$	1,379

The effective income tax rate for the year ended December 31, 2018 was impacted by recording the effect of the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. The Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, as amended, which has affected the Company’s year ended December 31, 2018, including, but not limited to, requiring an annual tax on the earnings and profits of any greater than 10% owned foreign controlled corporation.

On December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provided 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,

Income Taxes. In accordance with the expiration of the SAB 118 measurement period, we completed the assessment of the income tax effect of the Tax Act by the fourth quarter of tax year 2018. All adjustments recorded to the provisional amounts have been included as an adjustment to income tax expense.

As a result of the Tax Act, the Company recorded additional income tax expense due to the Global Intangible Low Taxed Income inclusion on current earnings and profits of greater than 10% owned foreign controlled corporations (“GILTI”). To determine the amount of GILTI inclusion, the Company must determine, in addition to other factors, the current earnings of foreign controlled corporations, as well as the amount of foreign taxes paid by the foreign entities. The law provides that corporate taxpayers may benefit from a 50% reduction in the GILTI inclusion, which effectively reduces the 21% U.S. corporate tax rate on the foreign income to an effective rate of 10.5%. The GILTI inclusion further provides for a foreign tax credit in connection with the foreign taxes paid. The Company recorded a tax expense for GILTI of $2.9 million, net of $1.0 million foreign tax credits.

As of December 31, 2018, 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, 2018, 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, 2018, the Company has no U.S. federal net operating loss or credit carryforwards as any attributes generated are expected to be fully utilized to offset tax in the current year. At December 31, 2018, the Company has foreign net operating loss carryforwards of approximately $1.2 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. As of December 31, 2018, the Company has recorded a state deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods. Due to the Tax Act, 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, 2018.

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. For purposes of this audit, fiscal years 2007 through 2016 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 2014. The Taiwan Taxation Administration closed the audit for the 2016 tax year with immaterial tax adjustments that have been recorded in the foreign income tax provision. No other jurisdictions are currently examining any income tax returns of the Company.