18. Income Taxes

The Company’s income tax expenses are composed of domestic and foreign income taxes depending on the relevant tax jurisdiction. “Domestic” refers to the income before taxes and current income taxes generated or incurred in the United States, where the parent company resides.

The components of income tax expense are as follows:


	Year Ended December 31,
	2013			2012 (As Restated)			2011 (As Restated)
Income (loss) before income taxes
Domestic	$	(6,127	)	$	(2,634	)	$	(2,021	)
Foreign		(54,106	)		125,519			(1,165	)

	$	(60,233	)	$	122,885		$	(3,186	)

Current income taxes expense (benefit)
Domestic	$	(2,258	)	$	6,170		$	54
Foreign		4,875			4,533			6,038
Uncertain tax position liability (domestic)		(87	)		14			41
Uncertain tax position liability (foreign)		7			175			507

		2,537			10,892			6,640

Deferred income taxes expense
Foreign		1,433			1,955			1,475

Total income tax expenses	$	3,970		$	12,847		$	8,115

Effective tax rate		—			10.5	%		—

The Company’s annual effective tax rate was 10.5% for the year ended December 31, 2012.

The differences between the annual effective tax rates and the U.S. federal statutory rate of 35.0% primarily result from the non-income based withholding tax levied on intercompany interest income in the Company’s Dutch subsidiary, application of lower tax rates associated with certain earnings from the Company’s operations outside the U.S., the parent Company’s interest income, which is non-taxable for US tax purposes and the change of valuation allowance of deferred tax assets.

The statutory income tax rate of the Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., applicable to the Company was approximately 24.2% in 2013, 2012 and 2011.

The provision for domestic and foreign income taxes incurred is different from the amount calculated by applying the statutory tax rate to the net income before income taxes. The significant items causing this difference are as follows:


	Year Ended December 31,
	2013			2012 (As Restated)			2011 (As Restated)
Provision computed at statutory rate	$	(21,082	)	$	43,010		$	(1,115	)
Change in statutory tax rate		—			—			(11,872	)
Difference in foreign tax rates		5,375			(12,544	)		3,946
Permanent differences
Derivative assets adjustment		1,469			3,364			(6,334	)
TPECs, hybrid and other interest		(3,151	)		(5,920	)		(6,513	)
Permanent impairment		—			(935	)		(5,120	)
Thin capitalization		—			97			3,422
Deemed dividend		—			7,609			—
Permanent foreign currency gain (loss)		3,351			(465	)		2,439
Customs penalty		—			742			—
Other permanent differences		(881	)		1,556			674
Withholding tax		3,918			4,242			5,861
Foreign exchange rate adjustment		(7,455	)		(4,127	)		3,867
Change in valuation allowance		24,062			(21,184	)		20,124
Tax credit		(1,818	)		(2,796	)		(1,823	)
Uncertain tax positions liability		(80	)		189			548
Others		262			9			11

Income tax expenses	$	3,970		$	12,847		$	8,115

A summary of the composition of net deferred income tax assets (liabilities) as of December 31, 2013, 2012 and 2011 are as follows:


	December 31,
	2013			2012 (As Restated)			2011 (As Restated)
Deferred tax assets
Accounts Receivables	$	28,628		$	8,799		$	5,333
Inventories		5,866			3,501			299
Derivative assets		—			—			2,361
Accrued expenses		8,758			2,812			2,243
Product warranties		292			306			556
Other reserves		684			1,072			518
Royalty income		1,364			3,118			3,452
Property, plant and equipment		13,667			12,945			13,704
Intangible assets		922			—			—
Accumulated severance benefits		27,769			23,465			18,507
Foreign currency translation loss		12,220			13,533			26,718
NOL carry-forwards		53,714			72,533			112,195
Tax credit		26,041			26,786			24,954
Other long-term payable		608			168			84
Others		2,887			1,438			3,705

Total deferred tax assets		183,420			170,476			214,629
Less: valuation allowance		(178,729	)		(162,968	)		(200,056	)

		4,691			7,508			14,573


Deferred tax liabilities
Derivative assets		1,189			124			—
Intangible assets		—			1,712			3,331
Foreign currency translation gain		19			1,003			4,146
Others		1,239			295			250

Total deferred tax liabilities		2,447			3,134			7,727

Net deferred tax assets	$	2,244		$	4,374		$	6,846

Reported as
Current deferred income tax assets	$	1,348		$	1,788		$	2,076
Long-term deferred income tax assets	$	896		$	2,586		$	4,770

The valuation allowances at December 31, 2013, 2012 and 2011 are primarily attributable to net deferred tax assets at the Company’s Korean subsidiary for which, due to expected losses related to the Company’s Korean subsidiary in future years, the Company has recorded a full valuation allowance against the deferred tax assets, net of its deferred tax liabilities, and against certain foreign subsidiary’s deferred tax assets pertaining to its related tax loss carry-forwards that are not anticipated to generate a tax benefit. Changes in valuation allowance for deferred tax assets for the years ended December 31, 2013, 2012 and 2011 are as follows:


	Year Ended December 31,
	2013			2012 (As Restated)			2011 (As Restated)
Beginning balance	$	162,968		$	200,056		$	207,774
Charged to expense (income)		24,062			(21,184	)		20,124
NOL and tax credit expiration		(10,150	)		(25,305	)		(25,965	)
Translation adjustment		1,849			9,401			(1,877	)

Ending balance	$	178,729		$	162,968		$	200,056

The amount presented as “Charged to expense (income)” primarily relates to the utilization of net operating loss and tax credit carry-forwards, or pre-tax losses for which there is no tax benefit.

The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate future taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in which the Company operates and the overall future industry outlook.

As of December 31, 2013, 2012 and 2011, the Company had net deferred tax assets of $2,244 thousand, $4,374 thousand and $6,846 thousand, respectively, related to the Company’s Japanese subsidiary. As of December 31, 2013, 2012 and 2011, the Company recorded a valuation allowance of $178,729 thousand, $162,968 thousand and $200,056 thousand on its deferred tax assets related to temporary differences, net operating loss carry-forwards and tax credit in domestic and foreign subsidiaries. The Company maintained to record these valuation allowances on deferred tax assets based on its assessment that the negative evidence of expected losses in early future years outweighed the positive evidence of historical income over a number of years.

As of December 31, 2013, the Company had approximately $195,421 thousand of net operating loss carry-forwards available to offset future taxable income. The majority of net operating loss is associated with the Company’s Korean subsidiary, which expires in 2019, and with the Company’s Luxembourg subsidiary with indefinite expiration. The Company utilized net operating loss of $69,159 thousand, $86,938 thousand and $32,749 thousand, for the years ended December 31, 2013, 2012 and 2011, respectively. The Company also has Korean and Dutch tax credit carry-forwards of approximately $9,252 thousand and $16,789 thousand, respectively, as of December 31, 2013. The Korean tax credits expire at various dates starting from 2014 to 2018, and the Dutch tax credits are carried forward to be used for an indefinite period of time.

Uncertainty in Income Taxes

The Company and the Company’s subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for all open tax years.

As of December 31, 2013, 2012 and 2011, the Company recorded $3,706 thousand, $3,820 thousand and $3,472 thousand of liabilities for unrecognized tax benefits, respectively. For the years ended December 31, 2013, 2012 and 2011, the Company recorded $106 thousand, $5 thousand and $5 thousand of income tax benefits by reversing liabilities due to the lapse of the applicable statute of limitations and incurred $7 thousand, $55 thousand and $474 thousand of income tax expenses for uncertain tax positions mainly resulting from withholding taxes related to intercompany balances.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $20 thousand, $139 thousand, $78 thousand of interest and penalties as income tax expense for the years ended December 31, 2013, 2012 and 2011, respectively. Total interest and penalties accrued as of December 31, 2013, 2012 and 2011 were $530 thousand, $544 thousand and $396 thousand, respectively.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of each period is as follows:


	Year Ended December 31,
	2013			2012 (As Restated)			2011 (As Restated)
Unrecognized tax benefits, balance at the beginning	$	11,196		$	10,297		$	10,790
Additions based on tax positions related to the current year		1,690			1,342			1,950
Additions for tax positions of prior years		—			41			—
Lapse of statute of limitations		(1,067	)		(942	)		(2,410	)
Translation adjustment		46			458			(33	)

Unrecognized tax benefits, balance at the ending	$	11,865		$	11,196		$	10,297