INCOME TAXES

The components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (in thousands):



	2016			2015
United States	$	(2,368	)	$	769
Foreign	1,413			7,430
	$	(955	)	$	8,199

The components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (in thousands):



Current provision (benefit):	2016			2015
Federal	$	(396	)	$	(336	)
State	59			21
Foreign	1,438			2,518
	1,101			2,203
Deferred provision (benefit):
Federal	(95		)	191
State	(25		)	72
Foreign	(1,350		)	(106		)
	(1,470		)	157
	$	(369	)	$	2,360

A reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for the years ended December 31:



	2016		2015
Federal statutory income taxes	35.0	%	35.0	%
State income taxes, net of federal benefit	(4.1	)	1.0
Difference in foreign and United States tax on foreign operations	9.5		(14.8	)
Effect of changes in valuation allowance	59.0		(8.7	)
Effect of change in uncertain tax positions (net)	12.8		(0.2	)
Federal Sub-Part F Income from foreign operations	(27.4	)	5.1
Foreign Exchange	(45.7	)	5.3
Other	(0.4	)	6.2
	38.7	%	28.9	%

For the years ended December 31, 2016 and 2015, the Company’s effective tax rate was 38.7% and 28.9%, respectively. For 2016, the Company had a tax benefit due to loss before income tax. Items decreasing the effective income tax rate included the favorable rate difference from foreign jurisdictions, return to provision adjustment, release of value allowances with respect to Switzerland and certain tax reserve items removed due to expiration of applicable statute of limitations. Items increasing the effective income tax rate included foreign exchange losses and “Subpart F income” resulting from controlled foreign corporation operations. For 2015, the effective tax rate was less than what would have been expected if the federal statutory rate was applied to income before taxes. Items decreasing the effective income tax rate included the lower statutory tax rates in foreign jurisdictions compared to the U.S. and the mix of foreign income and U.S. income. In addition, the rate decreased for an overall reduction in the valuation allowances associated with certain deferred tax assets.

Deferred income taxes reflect the net 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 the Company’s deferred tax assets and liabilities consisted of the following at December 31 (in thousands):



Deferred tax assets:	2016			2015
Deferred revenue	$	492		$	567
Inventory capitalization	258			209
Inventory reserves	82			376
Accrued expenses	799			1,213
Depreciation and amortization	2,181			1,788
Net operating loss⁽¹⁾	6,021			5,378
Deferred royalty	18			16
Non-cash accounting charges related to stock options and warrants	715			684
Foreign tax credit carryover	3,797			3,568
Other	932			825
Total deferred tax assets	$	15,295		$	14,624
Valuation allowance	(8,458		)	(9,028		)
Total deferred tax assets, net of valuation allowance	$	6,837		$	5,596
Deferred tax liabilities:
Prepaid expenses	$	380		$	406
Deferred commissions	742			846
Internally-developed software	205			266
Fixed Assets	178			1
Total deferred tax liabilities	$	1,505		$	1,519

⁽¹⁾ The Company’s net operating loss will expire as follows (dollar amounts in thousands):



Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Australia	$	114	$	34	Indefinite
Canada	$	12	$	3	2026
China⁽¹⁾	$	12	$	3	2021
Colombia	$	1,003	$	341	Indefinite
Cyprus	$	17	$	2	2021
Denmark	$	4	$	1	Indefinite
Hong Kong	$	49	$	8	Indefinite
Mexico	$	7,965	$	2,390	2020-2026
Norway	$	137	$	34	Indefinite
Russia⁽²⁾	$	21	$	4	Indefinite
Singapore	$	127	$	22	Indefinite
South Africa	$	132	$	37	Indefinite
Sweden	$	490	$	108	Indefinite
Switzerland	$	15,059	$	1,366	2017-2023
Taiwan	$	7,322	$	1,245	2017-2026
Ukraine⁽³⁾	$	581	$	105	Indefinite
United Kingdom	$	203	$	41	Indefinite
United States (states)	$	11,082	$	277	2017-2036


⁽¹⁾	On February 24, 2016, the Company established a legal entity in China.


⁽²⁾	On August 1, 2016, the Company established a legal entity in Russia.


⁽³⁾	On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity.

In addition to net operating loss attributes, the Company has recorded a foreign tax credit carryforward of $3.8 million, which will begin to expire in 2019 and a charitable contribution carryforward of $0.3 million, which will expire between years 2017 through 2021. The Company maintains a full valuation against both the foreign tax credits and the charitable contribution carryforward.

At December 31, 2016 and 2015, the Company’s valuation allowance was $8.5 million and $9.0 million, respectively. The provisions of ASC Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowances presented below (in millions) at December 31, 2016 and 2015, represented a reserve against the Company’s net deferred tax asset the Company believed the “more likely than not” criterion for recognition purposes could not be met. The U.S. valuation allowance increased due to the carryover of foreign tax credits that we do not anticipate to utilize in future years.



Country	2016		2015
Colombia	$	0.3	$	—
Mexico	2.4		2.5
Sweden	0.1		0.1
Switzerland	0.1		1.0
Taiwan	1.3		1.2
Ukraine	0.1		0.1
United States	4.1		4.0
Other Jurisdictions	0.1		0.1
Total	$	8.5	$	9.0

At December 31, 2016 and 2015, the Company did not record a provision for any United States or foreign withholding taxes on its undistributed earnings related to its foreign subsidiaries because it is the intention of the Company to reinvest its undistributed earnings indefinitely in its foreign operations. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. At December 31, 2016, it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

Deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31 as follows (in thousands):



	2016			2015
Current deferred tax assets	$	7		$	460
Noncurrent deferred tax assets	5,361			3,725
Current deferred tax liabilities	—			(84		)
Other long-term liabilities	(29		)	(24		)
Net deferred tax assets	$	5,339		$	4,077

On January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. Topic 740 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2016, the Company recorded $0.6 million in current liabilities and $0.2 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2016, the Company had gross tax-affected unrecognized tax benefits of $0.7 million that, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2016 and 2015 (in thousands):



	2016			2015
Balance as of January 1	$	715		$	803
Additions for tax positions related to the current year	90			—
Additions for tax positions of prior years	54			—
Reductions of tax positions of prior years	(126		)	(71		)
Settlements	—			(17		)
Balance as of December 31	$	733		$	715

The Company recognizes interest and/or penalties related to uncertain tax positions in current income tax expense. As of December 31, 2016 and December 31, 2015, the Company had accrued interest and penalties of $0.3 million and $0.2 million in the consolidated balance sheet, of which $42 thousand and $26 thousand were accrued in the consolidated statement of operations. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase or decrease within the next twelve months due to uncertainties regarding the timing of any examinations, the Company expects its unrecognized tax benefits to decrease by $0.5 million due to the lapse of statutes of limitations during the next twelve months.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2016, the tax years that remained subject to examination by a major tax jurisdiction for the Company’s most significant subsidiaries were as follows:



Jurisdiction	Open Years
Australia	2012-2016
Canada	2012-2016
Denmark	2013-2016
Japan	2013-2016
Mexico	2012-2016
Norway	2010-2016
Republic of Korea	2011-2016
Singapore	2012-2016
South Africa	2013-2016
Sweden	2011-2016
Switzerland	2011-2016
Taiwan	2011-2016
United Kingdom	2010-2016
United States	2013-2016