Note 20. Income taxes

Financial statements>Consolidated financial statements>Notes to the Consolidated financial statements>Note 20

The components of income before income taxes consist of:

	Year ended December 31,
	2016	2017
The Netherlands	77,645	381,618
Other countries	60,115	75,419
Income before income taxes	137,760	457,037

The income tax expense consists of:

	Year ended December 31,
	2016	2017
Current:
The Netherlands	(959)	(1,666)
Other countries	(2,221)	(5,651)
	(3,180)	(7,317)
Deferred:
The Netherlands	–	2,812
Other countries	891	(130)
Income tax (expense) benefit	(2,289)	(4,635)

The provisions for income taxes as shown in the Consolidated statements of profit or loss differ from the amounts computed by applying the Dutch statutory income tax rate to earnings before taxes. A reconciliation of the provisions for income taxes and the amounts that would be computed using the Dutch statutory income tax rate is set forth as follows:

	Year ended December 31,
	2016		2017
Earnings before income taxes from continuing operations	137,760	100.0%	457,037	100.0%

Income tax provision based on Dutch statutory income tax rate	(34,440)	25.0%	(114,259)	25.0%
Non-deductible expenses	(3,044)	2.2%	(2,998)	0.7%
Foreign taxes at a rate other than the Dutch statutory rate	(315)	0.2%	(885)	0.2%
Recognition of net operating losses	692	(0.5%)	(2,905)	0.6%
Utilization of net operating losses, previously not recognized	12,192	(8.9%)	4,394	(1.0%)
Non-taxable income ¹	11,819	(8.6%)	102,450	(22.4%)
Adjustments in respect of prior years' current taxes	1,935	(1.4%)	(161)	0.0%
Other ²	8,872	(6.4%)	9,729	(2.1%)
Tax income / (expense)	(2,289)	1.7%	(4,635)	1.0%

Non-taxable income mainly consists of revenues deriving from the share in income of investments and associates which are exempted under the Dutch participation exemption.
Other mainly consists of tax credits, withholding taxes, changes in (enacted) tax laws and revaluation of certain assets.

On June 8, 2009, the Singapore Economic Development Board (EDB) granted a Pioneer Certificate to ASM Front-end Manufacturing Singapore Pte Ltd (FEMS), a principal subsidiary of the Group, to the effect that profits arising from certain manufacturing activities by FEMS of Front-end equipment will in principle be exempted from tax for a period of 10 years effective from July 1, 2008, subject to fulfillment of certain criteria during the period.

Since 2011 the Dutch statutory tax rate is 25%. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. The Company’s deferred tax assets and liabilities have been determined in accordance with these statutory income tax rates.

Deferred income taxes consist of the following:

	January 1, 2016	Consolidated statement of profit or loss	Equity	Exchange differences	December 31, 2016
Deferred tax assets:
Reserves and allowances	1,911	95	–	128	2,134
Depreciation	2,353	386	–	117	2,856
Recognition net operating losses	6,545	692	–	20	7,257
Other	754	925	–	(7)	1,672
Deferred tax assets	11,563	2,098	–	258	13,919

Deferred tax liabilities:
Capitalized development expenses	(11,282)	(1,207)	–	(581)	(13,070)
Other	(50)	–	–	2	(48)
Deferred tax liabilities	(11,332)	(1,207)	–	(579)	(13,118)

Net deferred income taxes	231	891	–	(321)	801

	January 1, 2017	Consolidated statement of profit or loss	Equity	Exchange differences	December 31, 2017
Deferred tax assets:
Reserves and allowances	2,134	(169)	366	(30)	2,301
Depreciation	2,856	4,156	–	(261)	6,751
Recognition net operating losses	7,257	(2,771)	–	(60)	4,426
Other	1,672	3,153	–	(187)	4,638
Deferred tax assets	13,919	4,369	366	(538)	18,116

Deferred tax liabilities:
Capitalized development expenses	(13,070)	(1,737)	–	943	(13,864)
Other	(48)	50	–	(2)	–
Deferred tax liabilities	(13,118)	(1,687)	–	941	(13,864)

Net deferred income taxes	801	2,682	366	403	4,252

Based on tax filings, ASMI and its individual subsidiaries have net operating losses available at December 31, 2017 of €114,341 to reduce future income taxes, mainly in the Netherlands. The Company believes that realization of its net deferred tax assets is dependent on the ability of the Company to generate taxable income in the future. Given the volatile nature of the semiconductor equipment industry, past experience, and the tax jurisdictions where the Company has net operating losses, the Company believes that there is currently sufficient evidence to recognize a deferred tax asset in the amount of €4,426. Deferred tax assets for temporary differences are recognized in the Netherlands, United States, Japan, South Korea and Singapore.

The amounts and expiration dates of the net operating losses for tax purposes are as follows:

EXPIRATION YEAR	Total of net operating losses for tax purposes	Net operating losses for tax purposes the Netherlands	Net operating losses for tax purposes other countries
2019	13,345	13,345	–
2020	204	–	204
2021	58,478	58,478	–
2022	26,815	26,815	–
2023	16	–	16
2026	11,456	11,456	–
2030	1,585	–	1,585
2035	2,442	–	2,442
Total	114,341	110,094	4,247

The Company has not provided for deferred foreign withholding taxes, if any, on undistributed earnings of its foreign subsidiaries. At December 31, 2017, the undistributed earnings of subsidiaries, subject to withholding taxes, were approximately €39,375. These earnings could become subject to foreign withholding taxes if they were remitted as dividends and/or if the Company should sell its interest in the subsidiaries.

A summary of open tax years by major jurisdiction is as follows:

Jurisdiction
Japan		2013-2017
The Netherlands		2014-2017
Singapore		2013-2017
United States of America		1998-2017
South Korea		2012-2017

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws. The Company’s estimate for the potential outcome of any unrecognized tax benefits is highly judgmental. Settlement of unrecognized tax benefits in a manner inconsistent with the Company’s expectations could have a material impact on the Company’s financial position, net earnings and cash flows. The Company is subject to tax audits in its major tax jurisdictions, and local tax authorities may challenge the positions taken by the Company.

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