Income Taxes

Income before provision for income taxes consisted of the following (in thousands):



	Year ended December 31,
	2014		2013		2012
Domestic	$	94,784	$	31,993	$	32,341
Foreign	95,585		61,146		51,955
Total Income before provision for income taxes	$	190,369	$	93,139	$	84,296

The provision for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2014		2013			2012
Federal
Current	$	1,569	$	26		$	—
Deferred	37,570		24,262			22,382
	39,139		24,288			22,382
State
Current	2,162		1,235			438
Deferred	971		1,158			1,486
	3,133		2,393			1,924
Foreign
Current	1,596		3,113			1,173
Deferred	669		(950		)	126
	2,265		2,163			1,299
Provision for income taxes	$	44,537	$	28,844		$	25,605

The differences between income taxes using the federal statutory income tax rate of 35% and our effective tax rate were as follows:



	Year Ended December 31,
	2014		2013		2012
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.6		2.5		2.4
Impact of differences in foreign tax rates	(16.4	)	(20.4	)	(20.0	)
Goodwill Impairment	—		15.3		15.2
Stock-based compensation	1.0		0.5		(1.2	)
Other items not individually material	2.2		(1.9	)	(1.0	)
	23.4	%	31.0	%	30.4	%

Other items not individually material for the year ended December 31, 2014 includes an out of period correction that resulted in an increase in the provision for income taxes of $1.8 million. We do not believe the out of period adjustment is material to the consolidated financial statements for the fiscal year ended December 31, 2014 or to any prior years' consolidated financial statements.

As of December 31, 2014, U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of foreign subsidiaries were not provided for on a cumulative total of $260.9 million. We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes and foreign withholding taxes, net of related foreign tax credits. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

In June 2009, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted a twelve year extension of certain tax incentives, which were previously granted in 2002. The incentive tax rates will expire in various years beginning in 2017. Under these incentives, all of the income in Costa Rica during these twelve year incentive periods is subject to reduced rates of Costa Rica income tax. In order to receive the benefit of the incentives, we must hire specified numbers of employees and maintain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2014. As a result of these incentives, income taxes were reduced by $32.5 million, $27.7 million, and $21.8 million in 2014, 2013, and 2012, respectively. The benefit of the tax holiday on diluted net income per share was $0.40, $0.34, and $0.26 in 2014, 2013 and 2012, respectively.

As of December 31, 2014 and 2013, the significant components of our deferred tax assets and liabilities were (in thousands):



	Year Ended December 31,
	2014			2013
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	33,202		$	39,978
Credit carryforwards	1,446			9,362
Reserves and accruals	32,888			26,729
Translation gains	637			48
Stock-based compensation	11,964			9,100
	80,137			85,217
Deferred tax liabilities:
Prepaid expenses	709			557
Depreciation and amortization	6,878			5,320
	7,587			5,877
Net deferred tax assets before valuation allowance	72,550			79,340
Valuation allowance	(32,498		)	(35,108		)
Net deferred tax assets	$	40,052		$	44,232

We assess the likelihood that we will be able to realize our deferred tax assets quarterly. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not that we do not expect to realize our deferred tax assets, we will increase our provision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable. As of December 31, 2014, we believed, except for the items noted in the subsequent paragraph, that it was more likely than not that the amount of deferred tax assets recorded on the balance sheet will be realized.

The $32.5 million total valuation allowance provided against our deferred tax assets at December 31, 2014, relates primarily to foreign net operating loss and capital loss carryforwards. At December 31, 2014, the valuation allowance decreased by a net $2.6 million, due to a $1.8 million decrease related to foreign net operating loss carryforwards, and a decrease of $0.8 million due to the release of valuation allowance related to Japan and China deferred tax assets.

At December 31, 2014, we had fully utilized net operating loss carryforwards for federal purposes and have net operating loss carryforwards of $37.3 million for California state tax purposes. If not utilized, these carryforwards will begin to expire in 2015 for California purposes. In addition, we had foreign net operating loss carryforwards of approximately $125.5 million, which, if not utilized will expire beginning in 2017.

Our net operating loss carryforwards associated with the exercise of employee stock options totaled $23.8 million as of December 31, 2014 for California state tax purposes, which was not included in our deferred tax assets. The reduction of income taxes payable by the tax benefits associated with the exercise of employee stock options during the fiscal year, and utilization of net operating loss carryover applicable to stock options were approximately $21.4 million, $27.1 million, and $17.2 million in 2014, 2013, and 2012, respectively. The benefits applicable to stock options were credited directly to stockholders’ equity when realized. We follow the tax law ordering method to determine when excess tax benefits have been realized and consider only the direct impacts of awards when calculating the amount of windfalls or shortfalls.

At December 31, 2014, we have California research credit carryforwards of approximately $3.8 million which can be carried forward indefinitely.

In the event of a change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for fiscal year ended December 31, 2014, 2013, and 2012, is as follows (in thousands):



Unrecognized tax benefit as of December 31, 2011	$	15,472
Tax positions related to current year:
Additions for uncertain tax positions	5,087
Tax positions related to prior year:
Additions for uncertain tax positions	80
Unrecognized tax benefit as of December 31, 2012	20,639
Tax positions related to current year:
Additions for uncertain tax positions	6,110
Tax positions related to prior year:
Decreases for uncertain tax positions	(81		)
Unrecognized tax benefit as of December 31, 2013	26,668
Tax positions related to current year:
Additions for uncertain tax positions	6,659
Tax positions related to prior year:
Decreases for uncertain tax positions	(260		)
Unrecognized tax benefit as of December 31, 2014	$	33,067

We account for uncertain tax positions pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. We first determine whether it is more likely than not that a tax position will be sustained upon audit based on its technical merits. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. We adjust our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, or refinement of estimates due to new information. To the extent the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statements of Operations in the period in which such determination is made.

During fiscal year 2014, the amount of gross unrecognized tax benefits increased by $6.4 million. The total amount of unrecognized tax benefits was $33.1 million as of December 31, 2014, all of which would impact our effective tax rate if recognized. We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The penalties and interest accrued as of December 31, 2014 and 2013 are immaterial. We do not expect any significant changes to the amount of unrecognized tax benefits within the next twelve months.

We file U.S. federal, U.S. state, and non-U.S. tax returns. Our major tax jurisdictions are U.S. federal and the State of California. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2000. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2007.