NOTE 8: 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):

	2015		2014
United States	$	769	$	2,044
Foreign		7,430		7,777
	$	8,199	$	9,821

The components of the Company’s income tax provision for the years ended December 31 are as follows (in thousands):

Current provision (benefit):	2015			2014
Federal	$	(336	)	$	2,433
State		21			43
Foreign		2,518			2,547
		2,203			5,023
Deferred provision (benefit):
Federal		191			(1,792	)
State		72			349
Foreign		(106	)		(255	)
		157			(1,698	)
	$	2,360		$	3,325

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:

	2015			2014
Federal statutory income taxes		35.0	%		35.0	%
State income taxes, net of federal benefit		1.0			3.5
Difference in foreign and United States tax on foreign operations		(14.8	)		(16.1	)
Effect of changes in valuation allowance for net operating loss carryforwards		(8.7	)		14.3
Effect of change in uncertain tax positions (net)		(0.2	)		0.5
Federal Sub-Part F Income from foreign operations		5.1			2.9
Foreign exchange		5.3			(0.3	)
Other		6.2			(5.9	)
		28.9	%		33.9	%

For the years ended December 31, 2015 and 2014, the Company’s effective tax rate was 28.9% and 33.9% respectively. 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 a larger mix of foreign income over U.S. income than in prior years. In addition, the rate decreased for an overall reduction in the valuation allowances associated with certain deferred tax assets. For 2014, the effective tax rate was close to what would have been expected if the federal statutory rate was applied to income before taxes. Items increasing the effective income tax rate included the change in the valuation allowances associated with certain deferred tax assets, U.S. federal tax on deemed foreign dividend distribution, and “subpart F income” resulting from controlled foreign corporation operations. Items decreasing the effective income tax rate included the foreign tax credits.

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:	2015			2014
Current:
Deferred revenue	$	567		$	453
Inventory capitalization		209			171
Inventory reserves		376			762
Accrued expenses		974			697
Other		205			127
Total current deferred tax assets		2,331			2,210
Noncurrent:
Depreciation and amortization		1,788			1,867
Net operating loss⁽¹⁾		5,378			5,842
Deferred royalty		16			28
Non-cash accounting charges related to stock options and warrants		684			628
Accrued expenses		239			350
Foreign tax credit carryover		3,568			3,855
Other		620			506
Total noncurrent deferred tax assets		12,293			13,076
Total deferred tax assets		14,624			15,286
Valuation allowance		(9,028	)		(9,745	)
Total deferred tax assets, net of valuation allowance	$	5,596		$	5,541
Deferred tax liabilities:
Current:
Prepaid expenses	$	406		$	413
Deferred commissions		846			769
Other		—			10
Total current deferred tax liabilities		1,252			1,192
Noncurrent:
Internally-developed software		266			11
Depreciation and amortization		1			2
Sub-Part F income deferred		—			—
Other		—			24
Total noncurrent deferred tax liabilities		267			37
Total deferred tax liabilities	$	1,519		$	1,229

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

Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Colombia	$	64	$	22		2019
Mexico		8,482		2,545		2020-2024
Norway		249		67		Indefinite
Singapore		131		22		Indefinite
Sweden		513		113		Indefinite
Switzerland		11,371		1,028		2016-2020
Taiwan		7,133		1,213		2016-2024
Ukraine⁽¹⁾		581		105		Indefinite
United States (states)		11,079		277		2016-2032

⁽¹⁾ On March 21, 2014, the Company suspended operations in the Ukraine.

In addition to net operating loss attributes, the Company has recorded a foreign tax credit carryforward of $3.1 million, which will begin to expire in 2019 and a charitable contribution carryforward of $0.5 million which will expire between years 2016 through 2020. The Company maintains a full valuation against both the foreign tax credits and the charitable contribution carryforward.

At December 31, 2015 and 2014, the Company’s valuation allowance was $9.0 million and $9.7 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, 2015 and 2014, 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 decreased due to the usage of foreign tax credits.

Country	2015		2014
Mexico	$	2.5	$	2.7
Norway		—		0.1
Sweden		0.1		0.1
Switzerland		1.0		1.2
Taiwan		1.2		1.2
Ukraine⁽¹⁾		0.1		0.1
United States		4.0		4.3
Other Jurisdictions		0.1		—
Total	$	9.0	$	9.7

⁽¹⁾ On March 21, 2014, the Company suspended operations in the Ukraine.

At December 31, 2015 and 2014, 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, 2015, 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):

	2015			2014
Current deferred tax assets	$	460		$	1,141
Noncurrent deferred tax assets		3,725			3,320
Current deferred tax liabilities		(84	)		(123	)
Other long-term liabilities		(24	)		(26	)
Net deferred tax assets	$	4,077		$	4,312

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, 2015, the Company recorded $0.1 million in current liabilities and $0.7 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2015, the Company had gross tax-affected unrecognized tax benefits of $0.6 million that, if recognized, would impact the effective tax rate. The Company recognizes penalties and interest charges related to unrecognized tax benefits in current tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2015 and 2014 (in thousands):

	2015			2014
Balance as of January 1	$	803		$	738
Additions for tax positions related to the current year		—			1
Additions for tax positions of prior years		—			111
Reductions of tax positions of prior years		(71	)		(47	)
Settlements		(17	)		—
Balance as of December 31	$	715		$	803

The Company recognizes interest and/or penalties related to uncertain tax positions in current income tax expense. As of December 31, 2015 and December 31, 2014, the Company had accrued interest and penalties of $0.2 million and $0.1 million in the consolidated balance sheet, of which $26 thousand and $56 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 $0.1 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, 2015, 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		2011-2015
Canada		2011-2015
Denmark		2012-2015
Japan		2012-2015
Mexico		2011-2015
Norway		2009-2015
Republic of Korea		2010-2015
Singapore		2011-2015
South Africa		2012-2015
Sweden		2010-2015
Switzerland		2010-2015
Taiwan		2010-2015
United Kingdom		2009-2015
United States		2012-2015