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NU SKIN ENTERPRISES, INC.

Notes to Consolidated Financial Statements

13. Income Taxes

Consolidated income before provision for income taxes consists of the following for the years ended December 31, 2011, 2012 and 2013 (U.S. dollars in thousands):

	2011		2012		2013

U.S.	$	142,929	$	259,309	$	307,994
Foreign		83,840		85,933		248,946
Total	$	226,769	$	345,242	$	556,940

The provision for current and deferred taxes for the years ended December 31, 2011, 2012 and 2013 consists of the following (U.S. dollars in thousands):

	2011			2012			2013
Current
Federal	$	14,723		$	70,727		$	84,394
State		2,245			2,425			361
Foreign		56,973			45,851			148,310
		73,941			119,003			233,065
Deferred
Federal		17,756			12,918			(5,354	)
State		582			656			551
Foreign		(18,840	)		(8,980	)		(36,210	)
		(502	)		4,594			(41,013	)
Provision for income taxes	$	73,439		$	123,597		$	192,052

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 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, the valuation of deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles, or interpretations thereof.

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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,
	2012			2013
Deferred tax assets:
Inventory differences	$	3,490		$	2,927
Foreign tax credit and other foreign benefits		42,128			120,534
Stock-based compensation		13,772			18,132
Accrued expenses not deductible until paid		45,003			88,465
Foreign currency exchange		10,947			13,734
Net operating losses		10,561			10,808
Capitalized research and development		10,535			6,202
Other		648			739
Gross deferred tax assets		137,084			261,541
Deferred tax liabilities:
Exchange gains and losses		7,504			9,924
Intangibles step-up		18,379			16,375
Amortization of intangibles		15,840			17,360
Foreign outside basis in controlled foreign corporation		32,592			76,470
Other		20,867			63,409
Gross deferred tax liabilities		95,182			183,538
Valuation allowance		(10,522	)		(10,803	)
Deferred taxes, net	$	31,380		$	67,200

At December 31, 2013, the Company had foreign operating loss carryforwards of approximately $49.4 million for tax purposes, which will be available to offset future taxable income. If not used, $12.6 million of carryforwards will expire between 2014 and 2023, while $36.8 million do not expire. A valuation allowance has been placed on foreign operating loss carryforwards of approximately $41.6 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.

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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,
	2012		2013

Net current deferred tax assets	$	25,420	$	75,979
Net noncurrent deferred tax assets		9,002		5,174
Total net deferred tax assets		34,422		81,153

Net current deferred tax liabilities		2		1
Net noncurrent deferred tax liabilities		3,040		13,952
Total net deferred tax liabilities		3,042		13,953
Deferred taxes, net	$	31,380	$	67,200

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, 2011, 2012 and 2013 compared to the statutory U.S. Federal tax rate is as follows:

	Year Ended December 31,
	2011	2012	2013

Income taxes at statutory rate	35.00%	35.00%	35.00%
Indefinitely invested earnings of non-U.S. subsidiaries	–	–	(.76)
Non-deductible expenses	.16	.12	.12
Extraterritorial income tax credit	(3.39)	–	–
Other	.62	.68	.12
	32.39%	35.80%	34.48%

The lower effective tax rate in 2013 compared to 2012 was primarily attributable to indefinitely invested earnings of non-U.S. Subsidiaries.

The cumulative amount of undistributed earnings of the Company's non-U.S. Subsidiaries held for indefinite reinvestment is approximately $50.0 million at December 31, 2013. In the event that all non-U.S. undistributed earnings were remitted to the United States, the amount of incremental taxes would be approximately $5.5 million.