INCOME TAXES

International pre-tax income was $2.2 billion, $1.7 billion and $1.2 billion for the years ended December 31, 2013, 2012 and 2011, respectively. Domestic pre-tax income was $48.5 million, $95.0 million, and $144.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.

The income tax expense (benefit) for the year ended December 31, 2013 is as follows (in thousands):



	Current		Deferred			Total
International	$	396,162	$	(16,314	)	$	379,848
Federal	5,250		11,454			16,704
State	13,431		(6,244		)	7,187
Total	$	414,843	$	(11,104	)	$	403,739

The income tax expense (benefit) for the year ended December 31, 2012 is as follows (in thousands):



	Current		Deferred			Total
International	$	302,352	$	(13,792	)	$	288,560
Federal	3,681		37,956			41,637
State	12,203		(4,568		)	7,635
Total	$	318,236	$	19,596		$	337,832

The income tax expense (benefit) for the year ended December 31, 2011 is as follows (in thousands):



	Current		Deferred			Total
International	$	251,542	$	(7,411	)	$	244,131
Federal	2,699		53,547			56,246
State	9,675		(1,389		)	8,286
Total	$	263,916	$	44,747		$	308,663

The Company has significant deferred tax assets, resulting principally from U.S. net operating loss carryforwards ("NOLs"). The amount of NOLs available for the Company's use is limited by Section 382 of the Internal Revenue Code ("IRC Section 382"). IRC Section 382 imposes limitations on the availability of a company's NOLs after a more than 50% ownership change occurs. It was determined that ownership changes, as defined in IRC Section 382, occurred in 2000 and 2002. The amount of the Company's NOLs incurred prior to each ownership change is limited based on the value of the Company on the respective dates of ownership change. Future ownership changes, if any, could give rise to further limitation under IRC Section 382.

At December 31, 2013, after considering the impact of IRC Section 382, the Company had approximately $1.4 billion of available NOL's for U.S. federal income tax purposes, comprised of $0.3 billion of NOLs generated from operating losses and approximately $1.1 billion of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants. The NOLs mainly expire from December 31, 2019 to December 31, 2021. The utilization of these NOLs is dependent upon the Company's ability to generate sufficient future taxable income in the United States. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available for tax reporting purposes, and other relevant factors.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows (in thousands):



	2013			2012
Deferred tax assets/(liabilities):
Net operating loss carryforward — U.S.	263,994			244,016
Net operating loss carryforward — Foreign	21,660			19,638
Fixed assets	818			38
Investments	—			5,139
Accrued expenses	22,708			20,488
Stock-based compensation and other stock based payments	40,346			12,326
Other	33,530			15,881
Subtotal	383,056			317,526

Discount on convertible notes	(97,550		)	(68,594		)
Intangible assets and other	(356,669		)	(47,053		)
Less valuation allowance on deferred tax assets	(173,558		)	(175,594		)
Net deferred tax assets (liabilities)⁽¹⁾	$	(244,721	)	$	26,285

(1) Includes current deferred tax liabilities of $38 thousand and $0.8 million as of December 31, 2013 and 2012, respectively, which are reported in "Accrued expenses and other current liabilities" on the Consolidated Balance Sheets.

The valuation allowance on deferred tax assets of $173.6 million at December 31, 2013 includes $150.1 million related to U.S. federal net operating loss carryforwards derived from equity transactions and $21.7 million related to international operations. Additionally, since January 1, 2006, the Company has generated additional federal tax benefits of $235.5 million related to equity transactions that are not included in the deferred tax asset table above. Pursuant to accounting guidance, these tax benefits related to equity deductions will be recognized by crediting paid in capital, if and when they are realized by reducing the Company's current income tax liability.

It is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Thus at December 31, 2013, no provision had been made for U.S. taxes on approximately $4.9 billion of international earnings because such earnings are intended to be indefinitely reinvested outside of the United States. Estimating the tax liability that would arise if these earnings were repatriated is not practicable at this time.

At December 31, 2013, the Company has approximately $576.0 million of state net operating loss carryforwards that expire mainly between December 31, 2020 and December 31,2033, $130.0 million of foreign net operating loss carryforwards, of which $41.5 million expire between December 31, 2019 and December 31, 2020 and $3.7 million which expire between December 31, 2028 and December 31, 2030, and $1.8 million of foreign capital allowance carryforwards that do not expire. At December 31, 2013, the Company also had approximately $17.4 million of U.S. research credit carryforwards that mainly expire by December 31, 2033 and are also subject to annual limitation.

A significant portion of the Company's taxable earnings are derived from the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. Booking.com obtained a ruling from the Dutch tax authorities in February 2011 confirming that a portion of its earnings ("qualifying earnings") is eligible for Innovation Box Tax treatment. The ruling from the Dutch tax authorities is valid until December 31, 2017.

The effective income tax rate of the Company is different from the amount computed using the expected U.S. statutory federal rate of 35% as a result of the following items (in thousands):



	2013			2012			2011
Income tax expense at federal statutory rate	$	803,788		$	616,654		$	478,728
Adjustment due to:
Foreign rate differential	(226,894		)	(175,932		)	(125,824		)
Innovation Box Tax benefit	(177,195		)	(118,916		)	(48,101		)
Other	4,040			16,026			3,860
Income tax expense	$	403,739		$	337,832		$	308,663

The Company accounts for uncertain tax positions based on a two step approach of recognition and measurement. The first step involves assessing whether the tax position is more likely than not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to recognize. Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority.

The following is a reconciliation of the total amount of unrecognized tax benefits (in thousands):



	2013			2012			2011
Unrecognized tax benefit — January 1	$	7,343		$	3,192		$	13,386
Gross increases — tax positions in current period	8,597			4,423			1,455
Gross increases — tax positions in prior period	3,507			343			876
Increase acquired in business combination	7,089			—			—
Gross decreases — tax positions in prior period	(495		)	(615		)	(12,525		)
Reduction due to lapse in statute of limitations	(3,937		)	—			—
Unrecognized tax benefit — December 31	$	22,104		$	7,343		$	3,192

The unrecognized tax benefits are included in "Other long-term liabilities" on the Consolidated Balance Sheets for the years ended December 31, 2013 and 2012. Following the conclusion of an audit, the Company reversed approximately $12.5 million in the three months ended June 30, 2011 for unrecognized tax benefits attributable to tax positions taken in 2010. The Company does not expect further significant changes in the amount of unrecognized tax benefits during the next twelve months.

The Company's Netherlands, U.S. federal and Connecticut, Singapore, and U.K. income tax returns, constituting the returns of the major taxing jurisdictions, are subject to examination by the taxing authorities as prescribed by applicable statute. The statute of limitations remains open for the Company's Netherlands returns from 2007 and forward; for the Singapore returns 2010 and forward; for the U.S. Federal and Connecticut returns from 2010 and forward, and for the U.K., the tax years 2008, 2012, and 2013 are open. No income tax waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute in the major taxing jurisdictions in which the company is a taxpayer.