11.  INCOME TAXES

The components of income before income taxes are as follows (in thousands):

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

The components of net deferred tax assets consist of the following (in thousands):

GILTI:

The Company accounts for GILTI as a period cost. 

Valuation Allowance:

The Company periodically evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize the assets using a more likely than not analysis. The realizability of the Company’s net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. As of December 31, 2022 and 2021, the Company has evaluated the realization of its deferred tax assets and recorded a valuation allowance for assets that do not meet the more-likely-than-not recognition threshold. 

Undistributed Earnings of Subsidiaries:

The Company has analyzed its global working capital and cash requirements, and has determined that it plans to repatriate cash from its Bermuda subsidiary on an ongoing basis to fund its future U.S.-based expenditures and dividends.  No cash was repatriated from the subsidiary during the year ended December 31, 2022. For the years ended December 31, 2021 and 2020, the Company repatriated $70.0 million and $30.0 million from its Bermuda subsidiary, respectively. 

For all other foreign subsidiaries, the Company expects to indefinitely reinvest undistributed earnings to fund their operations and R&D. As of December 31, 2022 and 2021, the undistributed earnings were approximately $67.4 million and $46.2 million, respectively. An actual repatriation of the undistributed earnings could be subject to additional foreign withholding taxes and U.S. state taxes. The Company expects to be able to take a dividend received deduction to offset any U.S. federal income tax liability on the undistributed earnings. Determination of the unrecognized state and withholding deferred tax liability is not practicable at this time due to the complexities associated with the hypothetical calculation.

Other Income Tax Provision Matters

As of December 31, 2022, the Company did not have federal net operating loss carryforwards. As of December 31, 2022, the state net operating loss carryforwards for income tax purposes were $6.0 million, which will expire beginning in 2028. As of December 31, 2022, the Company has foreign net operating loss carryforwards for income tax purposes of $67.2 million, which will expire beginning in 2029. 

As of December 31, 2022, the Company had no R&D tax credit carryforwards for federal income tax purposes, and $36.7 million for state income tax purposes, which can be carried forward indefinitely.

In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax credit carryforwards could be subject to annual limitations. The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior to utilization.

As of December 31, 2022, the Company had $49.3 million of unrecognized tax benefits, $38.3 million of which would affect its effective tax rate if recognized after considering the valuation allowance. As of December 31, 2021, the Company had $41.5 million of unrecognized tax benefits, $31.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 

A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): 

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2022 and 2021, the Company has $4.3 million and $3.3 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities on the Consolidated Balance Sheets.

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the R&D tax credit. It is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

The Company currently has reduced tax rates in its subsidiaries in Chengdu and Hangzhou, China through 2023 and 2030, respectively, for performing R&D activities.

On August 9, 2022, the U.S. government enacted the CHIPS Act to provide certain financial and tax incentives to the semiconductor industry, primarily for manufacturing activities within the United States. On August 16, 2022, the IRA was enacted and signed into law. The IRA, among other things, introduces a new 15% corporate minimum tax, based on adjusted financial statement income of certain large corporations, and imposes a 1% surcharge on stock repurchases. This excise tax is effective January 1, 2023. The Company does not believe the CHIPS Act or the IRA had a material impact on its income tax provisions, results of operations or financial condition for the year ended  December 31, 2022.

Income Tax Examination

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. In general, the tax years for 2007 and forward are open for examination for U.S. federal and state income tax purposes.