Note 13. Income taxes

In applying the statutory tax rate in the effective income tax rate reconciliation, the Company used the statutory U.S. federal income tax rate of 21% rather than the Cayman Islands zero percent rate. The table below reconciles the Company's tax (benefit) provision for income taxes based on the statutory U.S. federal income tax rate to its effective tax rate for the years ended December 31, 2023 and 2024 (in thousands):

Foreign rate differential represents the non-U.S. jurisdictions. The country having the greatest impact on the tax rate adjustment line shown in the above table as “foreign rate differential” for the years ended December 31, 2023 and 2024 is the UK where the statutory income tax rate was 23.5% for 2023, and was 25% for 2024.

The Company recorded income tax provision of $17.5 million and a benefit of $1.9 million for the years ended December 31, 2023 and 2024, with an effective tax rate of (30.9)% and 2.4%, respectively. For the year ended December 31, 2023, the Company's effective tax rate was (30.9)%. The effective tax rate differed from the U.S. statutory rate of 21.0% primarily due to a pretax loss, the net increase in the valuation allowance of $37.3 million, a tax benefit on Foreign Derived Intangible Income of $2.9 million, and a benefit on research and development credits of $2.4 million. For the year ended December 31, 2024, the Company's effective tax rate was 2.4%. The effective tax rate differed from the U.S. statutory rate of 21.0% primarily due to a pretax loss, the net increase in the valuation allowance of $12.3 million, a foreign tax rate differential of $(2.5) million, $2.7 million return to provision adjustment primarily due to a tax method change in the U.S. 2023 tax return related to the tax capitalization of our research and development expenditures, $1.5 million for establishment of a deferred tax liability for withholding tax on non-permanent investment in subsidiaries, a $1.2 million tax expense related to share-based compensation, and a benefit on research and development credits of $(0.3) million.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. The Company considers projected future taxable income, reversing taxable temporary differences, carryback opportunities, and tax-planning strategies in making this assessment.

As of each reporting date, management considers new evidence, both positive and negative, to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets before they otherwise expire. Cumulative losses are objective evidence that limit the ability to consider other subjective evidence such as the Company’s projections for future growth. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s projections for growth.

During the third quarter of 2023, management determined that it was more likely than not that its worldwide deferred tax assets will not be realizable due to the Company generating net operating losses and being in a three-year cumulative loss position. This resulted in sufficient negative evidence when evaluating the realizability of deferred tax assets and the Company recorded a full valuation allowance against its worldwide deferred tax assets as of September 30, 2023.

At December 31, 2023, the Company recorded a full valuation allowance of $38.6 million on its worldwide deferred tax assets. Due to continued losses in 2024, the Company maintained its full valuation allowance position and recorded a valuation allowance of $51.0 million on its deferred tax assets as of December 31, 2024.

The Company historically asserted that earnings of its foreign subsidiaries are indefinitely reinvested outside the United States. As of December 31, 2023, the cumulative amount of undistributed earnings was approximately $32.0 million. The Company had not made a provision for taxes on the undistributed earnings of foreign subsidiaries as it was not practicable to estimate the unrecognized deferred tax liability due to the complexity of the tax calculation. As of March 31, 2024, conditions existed that raised substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. As a result, the Company can no longer assert indefinite reinvestment with respect to earnings of foreign subsidiaries. Accordingly, the Company recorded a deferred tax liability for the outside basis difference of its foreign affiliates and estimated future tax consequences associated with the potential sale of its foreign investments, including applicable foreign withholding taxes and other incremental taxes. As of December 31, 2024, the Company had approximately $28.0 million of undistributed earnings of foreign subsidiaries for which the Company does not assert indefinite reinvestment. As a result, the Company recognized a deferred tax liability of $1.5 million, which was included in income tax expense for 2024. The actual tax costs may differ from the amounts recorded due to changes in tax laws, foreign exchange rates, and other factors, including the timing and manner of repatriation.

The Company files income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and many foreign jurisdictions. The U.S., UK, and India are the main taxing jurisdictions in which the Company operates. Open tax years subject to audit vary depending on the tax jurisdiction. In the U.S., as of December 31, 2024, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2021. In the UK, as of December 31, 2024, the tax returns that are open are for the tax years 2023 and 2024. In India, the tax returns that are open are for India assessment years 2018 through 2024.

The Company believes its tax positions comply with applicable tax law and intends to vigorously defend its position. However, differing positions on certain issues could be upheld by tax authorities, which could adversely affect the Company’s financial condition and results of operations. The Company does not have any unrecognized tax positions as of December 31, 2023 and 2024.