16. INCOME TAXES

Effective tax rate

The components of income before provision for income taxes are as follows for the years ended December 31:


(in thousands)	2015			2014		2013
Domestic	$	63,124		$	36,485	$	47,054
Foreign		(2,619	)		11,509		9,339

Total income before provision	$	60,505		$	47,994	$	56,393

The components of the provision for income taxes are as follows for the years ended December 31:


(in thousands)	2015			2014			2013
Current:
Federal	$	17,864		$	22,488		$	20,277
State		4,565			2,952			2,054
Foreign		3,853			3,195			3,027

Total current provision		26,282			28,635			25,358

Deferred:
Federal		2,075			(11,972	)		(6,069	)
State		(466	)		(1,209	)		(634	)
Foreign		(3,708	)		(715	)		(305	)

Total deferred expense (benefit)		(2,099	)		(13,896	)		(7,008	)

Total provision	$	24,183		$	14,739		$	18,350

The effective income tax rate differed from the statutory federal income tax rate due to the following:


	2015			2014			2013
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		0.7			0.5			—
Transaction costs		—			—			0.4
State income taxes, net of federal benefit and tax credits		4.6			1.8			1.4
Permanent differences		1.1			1.3			1.0
Domestic production activities		(3.1	)		(4.9	)		(3.8	)
Federal research and experimentation credits		(1.2	)		(1.7	)		(2.8	)
Tax effects of foreign activities		2.0			(2.2	)		(1.9	)
Tax-exempt income		(0.1	)		(0.1	)		(0.1	)
Provision to return adjustments		0.3			—			0.8
Non-deductible compensation		3.3			2.5			1.2
Provision for uncertain tax positions		(2.6	)		(0.7	)		1.5
Other		—			(0.8	)		(0.2	)

Effective income tax rate		40.0	%		30.7	%		32.5	%

Deferred income taxes

Deferred income taxes reflect the tax attributes and tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of net deferred tax assets and liabilities are as follows:


(in thousands)	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	65,601		$	86,770
Accruals and reserves		30,322			24,393
Software revenue		6,608			13,199
Depreciation		5,327			4,655
Tax credit carryforwards		6,686			6,028
Other		58			38

Total deferred tax assets		114,602			135,083
Less valuation allowances		(35,509	)		(35,620	)

Total net deferred tax assets	$	79,093		$	99,463

Deferred tax liabilities:
Intangibles	$	(13,363	)	$	(17,231	)

Total deferred tax liabilities		(13,363	)		(17,231	)

Total net deferred income taxes	$	65,730		$	82,232

Reported as:
Current net deferred tax asset	$	12,380		$	12,974
Long-term net deferred income tax assets		53,350			69,258

Total net deferred income taxes	$	65,730		$	82,232

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. There were no material adjustments to the Company’s valuation allowance position during 2015 and 2014. The $0.1 million net change in the valuation allowance during the period primarily relates to a $0.5 million decrease for movements in foreign exchange rates, partially offset by a $0.4 million increase in the assessment regarding the utilization of state tax credits.

The Company acquired approximately $39.6 million and $58.1 million of federal and foreign NOLs, respectively, in the Antenna acquisition. The Company has determined that it may utilize $7.5 million of the acquired Antenna federal NOLs under the applicable section 382 limitation, and these losses are scheduled to expire through 2031. A valuation allowance is recorded on the deferred tax assets in excess of the federal NOLs that are deemed recoverable under the limitation. With regard to the acquired foreign NOLs, a full valuation allowance has been recorded as of December 31, 2015 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions. As of December 31, 2015, the Company had approximately $38.9 million of acquired Antenna federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $6.6 million of the remaining NOLs by 2031.

As of December 31, 2015, the Company had approximately $108.2 million of acquired Chordiant federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $82.4 million of the remaining NOLs by 2029. In addition, the Company has $0.4 million of deferred tax assets related to state NOLs as of December 31, 2015.

As of December 31, 2015, the Company had available $7 million of state tax research and experimentation (“R&E”) credits expiring in the years 2016 through 2030 and $0.4 million of investment tax credits, which have an unlimited carryover.

The Company’s India subsidiary is a development center in an area designated as a Special Economic Zone (“SEZ”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and is scheduled to expire in 2022. For the years ended December 31, 2015, 2014, and 2013, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.9 million, $0.8 million, and $0.5 million, respectively. The benefit of the tax holiday on net income per share (diluted) was $0.01 for each of the years ended December 31, 2015, 2014, and 2013.

In 2015, the Company reduced its income tax payable by $5.3 million for the tax benefit realized from the exercise, sale or vesting of equity awards.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $27.9 million as of December 31, 2015. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. It is impractical to estimate the amount of tax the Company could have to pay upon repatriation due to the complexity of foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

Uncertain tax benefits and other considerations

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


(in thousands)	2015			2014			2013
Balance as of January 1,	$	43,396		$	40,929		$	26,317
Additions based on tax positions related to the current year		817			4,041			4,320
Additions for tax positions of prior years		183			285			350
(Reductions) Additions for acquired uncertain tax benefits		—			(716	)		10,268
Reductions for tax positions of prior years		(19,855	)		(853	)		(50	)
Reductions for a lapse of the applicable statute of limitations		(569	)		(290	)		(276	)

Balance as of December 31,	$	23,972		$	43,396		$	40,929

As of December 31, 2015, the Company had approximately $24 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized. The $19.9 million reduction for tax positions of prior years primarily relates to the release of limitations on acquired NOLs, which did not impact the Company’s effective tax rate in 2015. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.5 million, all of which relate to the expiration of applicable statute of limitations and would reduce the Company’s effective tax rate if recognized.

For the years ended December 31, 2015, 2014, and 2013, the reductions for tax positions of prior years were related to the lapse in the applicable statute of limitations, revision of purchase accounting estimates, settlements of audits, and the impact for foreign currency exchange rates.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For the year ended December 31, 2015, the Company recognized a reduction of interest expense of approximately $0.6 million. For each of the years ended December 31, 2014 and 2013, the Company recognized interest expense of approximately $0.3 million. For the years ended December 31, 2015, 2014, and 2013, the Company did not recognize any significant penalties. As of December 31, 2015, 2014 and 2013, the Company had accrued approximately $1.2 million, 1.5 million, and $1.1 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. Generally, the Company is no longer subject to U.S. federal, state, local, or foreign income tax examinations by tax authorities for years before 2014. The Company is generally not subject to U.S. federal, state, or local, or foreign income tax examinations by tax authorities for the years before 2012. With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2012 to the present.