14. Income Taxes

Consolidated income before provision for income taxes consists of the following for the years ended December 31, 2010, 2011 and 2012 (U.S. dollars in thousands):

	2010		2011		2012

U.S.	$	141,069	$	142,929	$	259,309
Foreign		66,544		83,840		85,933
Total	$	207,613	$	226,769	$	345,242

The provision for current and deferred taxes for the years ended December 31, 2010, 2011 and 2012 consists of the following (U.S. dollars in thousands):

	2010			2011			2012
Current
Federal	$	45,761		$	14,723		$	70,727
State		3,825			2,245			2,425
Foreign		27,450			56,973			45,851
		77,036			73,941			119,003
Deferred
Federal		(2,558	)		17,756			12,918
State		212			582			656
Foreign		(3,128	)		(18,840	)		(8,980	)
		(5,474	)		(502	)		4,594
Provision for income taxes	$	71,562		$	73,439		$	123,597

The Company's foreign taxes paid are high relative to foreign operating income and the Company's U.S. taxes paid are low relative to U.S. operating income due largely to the flow of funds among the Company's Subsidiaries around the world. As payments for services, management fees, license arrangements and royalties are made from the Company's foreign affiliates to its U.S. corporate headquarters, these payments often incur withholding and other forms of tax that are generally creditable for U.S. tax purposes. Therefore, these payments lead to increased foreign effective tax rates and lower U.S. effective tax rates. Variations (or shifts) occur in the Company's foreign and U.S. effective tax rates from year to year depending on several factors. These factors include the impact of global transfer prices, the timing and level of remittances from foreign affiliates, profits and losses in various markets, in the valuation of deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles, or interpretations thereof.

NU SKIN ENTERPRISES, INC.

Notes to Consolidated Financial Statements

The principal components of deferred taxes are as follows (U.S. dollars in thousands):

	Year Ended December 31,
	2011			2012
Deferred tax assets:
Inventory differences	$	3,796		$	3,490
Foreign tax credit and other foreign benefits		25,149			42,128
Stock-based compensation		9,674			13,772
Accrued expenses not deductible until paid		37,992			49,258
Foreign currency exchange		16,927			10,947
Net operating losses		11,656			10,561
Capitalized research and development		14,746			10,535
Other		568			648
Gross deferred tax assets		120,508			141,339
Deferred tax liabilities:
Exchange gains and losses		3,300			7,504
Intangibles step-up		12,179			18,379
Amortization of intangibles		14,457			15,840
Foreign outside basis in controlled foreign corporation		16,081			32,592
Other		11,431			20,867
Gross deferred tax liabilities		57,448			95,182
Valuation allowance		(11,611	)		(10,522	)
Deferred taxes, net	$	51,449		$	35,635

At December 31, 2012, the Company had foreign operating loss carryforwards of approximately $46.2 million for tax purposes, which will be available to offset future taxable income. If not used, $11.6 million of carryforwards will expire between 2013 and 2022, while $34.7 million do not expire. A valuation allowance has been placed on foreign operating loss carryforwards of approximately $41.0 million.

The valuation allowance primarily represents amounts for foreign operating loss carryforwards for which it is more likely than not some portion or all of the deferred tax asset will not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary difference, projected future taxable income, tax planning strategies and recent financial operations. When the Company determines that there is sufficient taxable income to utilize the net operating losses, the valuation will be released which would reduce the provision for income taxes.

NU SKIN ENTERPRISES, INC.

Notes to Consolidated Financial Statements

The components of deferred taxes, net on a jurisdiction basis are as follows (U.S. dollars in thousands):

	Year Ended December 31,
	2011		2012

Net current deferred tax assets	$	32,867	$	40,475
Net noncurrent deferred tax assets		29,661		26,302
Total net deferred tax assets		62,528		66,777

Net current deferred tax liabilities		7		2
Net noncurrent deferred tax liabilities		11,072		31,140
Total net deferred tax liabilities		11,079		31,142
Deferred taxes, net	$	51,449	$	35,635

The Company is subject to regular audits by federal, state and foreign tax authorities. These audits may result in proposed assessments that may result in additional tax liabilities.

The actual tax rate for the years ended December 31, 2010, 2011 and 2012 compared to the statutory U.S. Federal tax rate is as follows:

	Year Ended December 31,
	2010			2011			2012

Income taxes at statutory rate		35.00	%		35.00	%		35.00	%
Non-deductible expenses		.10			.16			.12
Extraterritorial income tax credit		.00			(3.39	)		.00
Other		(.63	)		.62			.68
		34.47	%		32.39	%		35.80	%

The lower effective tax rate in 2011 compared to 2010 and 2012 was primarily attributable to a one-time discrete tax benefit of $7.7 million associated with the effective settlement of an IRS audit for tax years 2005 – 2008. In 2011, the Company entered into a closing agreement with the IRS on the Extraterritorial Income Exclusion for the exportation of products outside the United States.