INCOME TAXES

The components of income before (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013 were as follows:



	Year Ended January 31,
(in thousands)	2015			2014			2013
Domestic	$	(53,877	)	$	(37,987	)	$	(11,292	)
Foreign	75,280			101,302			79,056
Total income before (benefit) provision for income taxes	$	21,403		$	63,315		$	67,764

The (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013 consisted of the following:



	Year Ended January 31,
(in thousands)	2015			2014			2013
Current provision (benefit) for income taxes:
Federal	$	342		$	(12,966	)	$	15
State	1,575			664			523
Foreign	30,415			14,288			8,094
Total current provision for income taxes	32,332			1,986			8,632
Deferred (benefit) provision for income taxes:
Federal	(40,007		)	2,187			3,880
State	(2,610		)	493			226
Foreign	(4,714		)	(127		)	(3,778		)
Total deferred (benefit) provision for income taxes	(47,331		)	2,553			328
Total (benefit) provision for income taxes	$	(14,999	)	$	4,539		$	8,960

The reconciliation of the U.S. federal statutory rate to our effective tax rate on income before (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013 was as follows:



	Year Ended January 31,
(in thousands)	2015			2014			2013
U.S. federal statutory income tax rate	35.0		%	35.0		%	35.0		%

Income tax provision at the U.S. federal statutory rate	$	7,489		$	22,160		$	23,717
State tax (benefit) provision	(1,739		)	982			1,055
Foreign tax rate differential	(9,650		)	(15,756		)	(12,471		)
Tax incentives	(14,865		)	(14,390		)	(29,171		)
Valuation allowances	(10,922		)	10,597			4,844
Stock-based and other compensation	4,222			3,163			1,833
Non-deductible expenses	2,156			4,969			1,329
Tax credits	(2,461		)	(2,277		)	(4,170		)
Tax contingencies	9,891			(5,102		)	17,546
U.S. tax effects of foreign operations	1,451			1,197			3,854
Other, net	(571		)	(1,004		)	594
Total (benefit) provision for income taxes	$	(14,999	)	$	4,539		$	8,960
Effective income tax rate	(70.1		)%	7.2		%	13.2		%

Our operations in Israel have been granted "Approved Enterprise" status by the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the program, income attributable to an approved enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five to eight years (generally 10-25%, depending on the percentage of foreign investment in the company). These tax incentives decreased our effective tax rates by 64.0%, 22.7%, and 43.0% for the years ended January 31, 2015, 2014, and 2013, respectively.

Deferred tax assets and liabilities consisted of the following at January 31, 2015 and 2014:



	Year Ended January 31,
(in thousands)	2015			2014
Deferred tax assets:
Accrued expenses	$	5,876		$	6,800
Deferred revenue	10,058			12,387
Loss carryforwards	153,351			137,565
Tax credits	9,290			8,795
Stock-based and other compensation	16,609			15,060
Capitalized research and development expenses	4,883			3,914
Other, net	1,745			910
Total deferred tax assets	201,812			185,431
Deferred tax liabilities:
Goodwill and other intangible assets	(62,815		)	(32,134		)
Unremitted earnings of foreign subsidiaries	(15,817		)	—
Other, net	(2,089		)	(1,484		)
Total deferred tax liabilities	(80,721		)	(33,618		)
Valuation allowance	(131,909		)	(146,860		)
Net deferred tax (liabilities) assets	$	(10,818	)	$	4,953

Recorded as:
Current deferred tax assets	$	11,176		$	9,002
Long-term deferred tax assets	10,778			9,783
Current deferred tax liabilities	(2,108		)	(474		)
Long-term deferred tax liabilities	(30,664		)	(13,358		)
Net deferred tax (liabilities) assets	$	(10,818	)	$	4,953

At January 31, 2015 and 2014, we had U.S. federal net operating loss ("NOL") carryforwards of approximately $656.5 million and $631.2 million, respectively. These loss carryforwards expire in various years ending from January 31, 2018 to 2034. We had state NOL carryforwards of approximately $247.5 million and $211.3 million in the same respective years, expiring in years ending from January 31, 2015 to 2034. We had foreign NOL carryforwards of approximately $61.8 million and $51.9 million in the same respective years. At January 31, 2015, all but $5.3 million of these foreign loss carryforwards had indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. The NOL carryforwards for tax return purposes are different from the NOL carryforwards for financial statement purposes, primarily due to the reduction of NOL carryforwards for financial statement purposes under the authoritative guidance on accounting for uncertainty in income taxes. We had U.S. federal, state and foreign tax credit carryforwards of approximately $18.1 million and $14.4 million at January 31, 2015 and 2014, respectively, the utilization of which is subject to limitation. At January 31, 2015, approximately $2.7 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $15.4 million expires in various years ending from January 31, 2016 to 2034.

As of January 31, 2015, we have not provided for deferred taxes on the excess of financial reporting over the tax basis of investments in certain foreign subsidiaries in the amount of $398.7 million because we plan to reinvest such earnings indefinitely outside the United States. If these earnings were repatriated in the future, additional income and withholding tax expense would be incurred. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income taxes that would have to be provided on such earnings.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We have recorded valuation allowances in the amounts of $131.9 million and $146.9 million at January 31, 2015 and 2014, respectively. The $15.0 million decrease in the valuation allowance between January 31, 2014 and January 31, 2015 arose primarily as a result of the KANA acquisition. In connection with the acquisition of KANA on February 3, 2014, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as a discrete income tax benefit and not as a component of the KANA acquisition accounting. The decrease in the valuation allowance caused by the KANA acquisition was offset by increases in net deferred tax assets primarily related to amortization of acquired intangibles, loss carryforwards, and equity compensation.

Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2015 and 2014:



	Year Ended January 31,
(in thousands)	2015			2014
Valuation allowance, beginning of year	$	(146,860	)	$	(104,757	)
(Benefit) provision for income taxes	10,922			(10,597		)
Additional paid-in capital	6,913			75
Acquisitions	(3,473		)	(30,268		)
Cumulative translation adjustment	589			(1,313		)
Valuation allowance, end of year	$	(131,909	)	$	(146,860	)

In accordance with the authoritative guidance for accounting for stock-based compensation, we use a "with-and-without" approach to applying the intra-period allocation rules in accordance with accounting for income taxes. Under this approach, the windfall tax benefit is calculated based on the incremental tax benefit received from deductions related to stock-based compensation. The amount is measured by calculating the tax benefit both "with" and "without" the excess tax deduction; the resulting difference between the two calculations is considered the windfall. We did not recognize windfall benefits in our U.S. federal income tax (benefit) provisions for the years ended January 31, 2015, 2014, and 2013.

In accordance with the authoritative guidance on accounting for uncertainty in income taxes, differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, determined by applying the prescribed methodologies of accounting for uncertainty in income taxes, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.

For the years ended January 31, 2015, 2014, and 2013, the aggregate changes in the balance of gross unrecognized tax benefits were as follows:



	Year Ended January 31,
(in thousands)	2015			2014			2013
Gross unrecognized tax benefits, beginning of year	$	145,408		$	55,412		$	36,377
Increases related to tax positions taken during the current year	15,522			11,013			8,909
Increases as a result of acquisitions	4,744			83,523			—
Increases related to tax positions taken during prior years	1,927			—			15,575
Increases (decreases) related to foreign currency exchange rate	(3,900		)	1,255			(375		)
Reductions for tax positions of prior years	(3,440		)	(4,491		)	(3,602		)
Lapses of statutes of limitations	(613		)	(1,304		)	(1,472		)
Gross unrecognized tax benefits, end of year	$	159,648		$	145,408		$	55,412

As of January 31, 2015, we had $159.6 million of unrecognized tax benefits, of which $153.1 million represents the amount that, if recognized, would impact the effective income tax rate in future periods. We recorded $1.9 million of expense, a $10.5 million benefit, and $0.6 million of expense for interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2015, 2014, and 2013, respectively. Accrued liabilities for interest and penalties were $10.9 million and $8.7 million at January 31, 2015 and 2014, respectively. Interest and penalties (expense and/or benefit) are recorded as a component of the (benefit) provision for income taxes in the consolidated financial statements.

Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In the United States, with the exception of years in which are currently under examination, we are no longer subject to federal income tax examination for years prior to January 31, 2012. In Israel, we are no longer subject to income tax examination for years prior to January 31, 2007. In the United Kingdom, with the exception of years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31, 2014.

As of January 31, 2015, income tax returns are under examination in the following significant tax jurisdictions:



Jurisdiction		Tax Years
Canada		January 31, 2011 - January 31, 2012
United Kingdom		December 31, 2006; January 31, 2008
India		March 31, 2006 - March 31, 2008; March 31, 2010 - March 31, 2013
United States		December 31, 2011, December 31, 2012

We regularly assess the adequacy of our provisions for income tax contingencies. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of expiration. We believe that it is reasonably possible that the total amount of unrecognized tax benefits at January 31, 2015 could decrease by approximately $4.7 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the need for additional valuation allowances and the recognition of tax benefits.