13. Income Taxes

The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.

The Company recorded income tax expense of $7,565 and $1,002 for the three months ended September 30, 2015 and 2014, respectively. Income tax expense for the nine months ended September 30, 2015 and 2014 was $19,309 and $4,523, respectively.

The effective tax rate increased from 14.2% during the three months ended September 30, 2014 to 33.3% during the three months ended September 30, 2015. The increase in effective tax rate is primarily due to higher income in the U.S. due to reimbursement of disentanglement costs to Travelers during the three months ended September 30, 2014 and due to expiration of a tax holiday in some of our operating centers in India. Further, the effective tax rate increased due to a tax expense related to the taxability of certain foreign income in prior years during the three months ended September 30, 2015.

The effective rate of taxes increased from 15.3% during the nine months ended September 30, 2014 to 34.4% during the nine months ended September 30, 2015. The increase in effective tax rate was primarily due to immaterial errors related to prior years (individually as well as when aggregated) which were recorded during the nine months ended September 30, 2015, and resulted in an increase in income tax expense of approximately $2,400 (including approximately $1,900 related to the taxability of certain foreign income in prior years for which the Company recorded a reserve for an unrecognized tax benefit). The effective tax rate further increased during the nine months ended September 30, 2015 due to reversal of an unrecognized tax benefit of $2,173 and higher income in the U.S. due to reimbursement of disentanglement costs to Travelers during the nine months ended September 30, 2014 and the expiration of a tax holiday in some of the Company’s operating centers in the Philippines and India.

In accordance with ASC Topic 250, Accounting Changes and Error Corrections, the Company evaluated the effects of the errors on its financial statements for those prior years and the expected full year financial results for the year ending December 31, 2015 and concluded that the results of operations for these periods are not materially misstated. In reaching its conclusion, the Company considered qualitative and quantitative factors.

The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2015 through September 30, 2015:


Balance as of January 1, 2015	$	2,761
Increases related to prior year tax positions		1,818
Decreases related to prior year tax positions		—
Increases related to current year tax positions		—
Decreases related to current year tax positions		—
Effect of exchange rate changes		(68	)

Balance as of September 30, 2015	$	4,511

The unrecognized tax benefits as of September 30, 2015 of $4,511, if recognized, would impact the effective tax rate.

During the three months ended September 30, 2015 and 2014, the Company has recognized interest of $74 and $54 respectively, which are included in the income tax expense in the unaudited consolidated statements of income. As of September 30, 2015 and December 31, 2014, the Company has accrued approximately $1,300 and $1,117, respectively in interest relating to unrecognized tax benefits.

The unrecognized tax benefits may increase or decrease in the next twelve months depending on the Company’s tax position.