Etsy 2015 Annual Report Download - page 102

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Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the valuation allowance activity for the periods indicated (in thousands):





Balance as of the beginning of period $ —
$ —
$ 1,892
Additions charged to expense —
3,915
7,983
Deletions credited to expense —
(1,850)
—
Currency translation —
(173)
(335)
Balance as of the end of period $ —
$ 1,892
$ 9,540
The Company has not recorded deferred income taxes with respect to undistributed earnings of foreign subsidiaries as such earnings are expected to remain
reinvested indefinitely. Upon distribution as dividends or otherwise, such amounts would be subject to taxation in the U.S. However, U.S. tax liabilities
would be offset, in whole or part, by allowable tax credits with respect to income taxes previously paid to foreign jurisdictions. The amount of undistributed
earnings of non-U.S. subsidiaries at December 31, 2015, as well as the related deferred income tax, if any, is not material.
As of December 31, 2013, the Company had no unrecognized income tax benefits. As of December 31, 2014 and 2015 the Company had unrecognized
income tax benefits of $0.4 million and $22.2 million, respectively.
The following table summarizes the unrecognized tax benefit activity for the periods indicated (in thousands):




Balance as of the beginning of period $ —
$ —
$ 398
Additions based on tax positions related to the current year —
398
21,797
Additions for tax positions of prior years —
—
34
Reductions for tax provisions of prior years —
—
—
Settlements —
—
—
Balance as of the end of period $ —
$ 398
$ 22,229
The Company files tax returns in the United States, New York, and various other state and foreign jurisdictions.
Generally, tax returns for the Company's tax year 2012 and later remain open to examination. To the extent tax attributes generated in earlier closed years are
carried forward into years that are open to examination, they may be subject to adjustment in audit.
In January 2015, the Company implemented an updated global corporate structure to more closely align with its global operations and future expansion
plans outside of the United States. The new structure changed how the Company uses its intellectual property and implemented certain intercompany
arrangements. The Company believes this may eventually result in a reduction in its overall effective tax rate and other operational efficiencies. The revised
structure resulted in the setup of a deferred tax liability in the amount of $66.0 million on the taxable gain created in the transaction. A deferred charge was
recorded for the same amount representing the future income tax which will be amortized into income tax expense over five years. During the twelve months
ended December 31, 2015, $13.2 million was recorded to income tax expense.
The amount of unrecognized tax benefits, included within “other liabilities” on the consolidated balance sheets, increased $21.8 million in the year ended
December 31, 2015, from $0.4 million at December 31, 2014 to $22.2 million at December 31, 2015. The increase was primarily in connection with the
implementation of the updated global corporate structure. A deferred charge of $19.7 million related to the unrecognized tax benefit of the implementation
was recorded representing the future income tax which will be amortized into income tax expense over five years. During the twelve months ended
December 31, 2015, $3.9 million was recorded to income tax expense for the implementation. The total amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective tax rate is $6.5 million at December 31, 2015.
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