Note 9 — Income Taxes

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

	2015		2014		2013
Current tax provision:
U.S. federal (benefit)	$	—	$	3	$	(121)
State		12		15		12
Foreign		443		570		721
Total current provision		455		588		612
Deferred tax provision (benefit):
U.S. federal and state		—		—		—
Foreign provision (benefit)		473		(841)		104
Total deferred provision (benefit)		473		(841)		104
Provision (benefit) for income taxes	$	928	$	(253)	$	716

As of January 1, 2016, the Company had federal net operating loss carryforwards of $131.1 million available to reduce future income taxes of its U.S. operations. The federal net operating loss carryforwards expire in varying amounts between 2020 and 2035. In California, the main state from which the Company conducts its domestic operations, the Company has state net operating losses of $45.7 million available to reduce future California income taxes. The California net operating loss carryforwards expire in varying amounts between 2016 and 2035 and, approximately $19.9 million of those net operating loss carryforwards, will expire over the next two years.

The Company had accrued net income taxes receivable of $380,000 and $217,000 at January 1, 2016 and January 2, 2015, respectively, primarily due to taxes from foreign jurisdictions.

The provision (benefit) for income before taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows (in thousands):

	2015					2014					2013
Computed provision (benefit) for taxes based on income at statutory rate		34.0	%	$	(1,905)		34.0	%	$	(2,939)		34.0	%	$	379
Increase (decrease) in taxes resulting from:
Permanent differences		(0.6)			33		(0.2)			20		3.2			35
Federal minimum taxes		—			—		(0.1)			3		—			—
State minimum taxes, net of federal income tax benefit		(0.1)			8		(0.1)			10		0.7			8
Stock options							—			—		—			—
State tax benefit		(6.6)			370		4.6			(394)		6.4			71
Tax rate difference due to foreign statutory rate		1.6			(90)		3.3			(288)		43.7			487
Expiration of state net operating tax carryforwards		(47.3)			2,650		—			—		—			—
Foreign earnings not permanently reinvested		(9.8)			547		0.1			(11)		(7.7)			(86)
Foreign dividend withholding		(3.8)			211		(1.5)			132		12.5			140
Expiration of charitable contribution carryover		(0.3)			15		(0.2)			18		0.2			2
Reserve		—			—		—			—		(10.9)			(121)
Other		2.5			(140)		1.0			(85)		6.4			71
Valuation allowance		13.8			(771)		(38.0)			3,281		(24.2)			(270)
Effective tax provision (benefit) rate		(16.6)	%	$	928		2.9	%	$	(253)		64.3	%	$	716

The Company recorded an income tax provision of $928,000 during the fiscal year 2015 due to profits generated in its foreign operations. The Company recorded income tax benefits of $0.3 million during fiscal year 2014 principally related to its Swiss operations. The tax benefits were recorded after finalizing ongoing discussions with the Swiss tax authorities, or the STA, in connection with the completion of the Company’s manufacturing consolidation project, which had been in progress since 2012 and completed in June 2014. The discussions included, among other things, the approval of a special Swiss tax ruling available to certain qualified companies doing business in Switzerland as a foreign operator, as defined by the STA. The discussions also included an agreement with the STA to consolidate the financial results of a foreign entity solely for Swiss income tax purposes, previously not taxable by the STA, to become subject to Swiss tax. The Company was advised by the STA during 2014 that it had met the special ruling qualifications for 2014.

Included in the state tax provision for 2015 is a decrease to the state deferred tax asset and corresponding decrease to the valuation allowance of $3,020,000 primarily related to the expiration of state net operating loss carryforwards. For 2014 there was an increase to the state deferred tax asset and corresponding increase to the valuation allowance of $394,000. For 2013 there was a decrease to the state deferred tax asset and corresponding decrease to the valuation allowance of $71,000. This results in a total state tax provision of $12,000 for 2015, $15,000 for 2014, and $12,000 for 2013.

Included in the deferred foreign tax benefit for 2015 is an increase in foreign deferred liabilities of $172,000. For 2014, there was a decrease in foreign deferred liabilities of $1,039,000. For 2013, there was a decrease to the foreign deferred tax assets of $630,000 and a corresponding decrease to the valuation allowance of $1,008,000.

All earnings from the Company’s subsidiaries are not considered to be permanently reinvested. Accordingly, the Company provides withholding and U.S. taxes on all unremitted foreign earnings. During 2015 and 2014 there were no withholding taxes paid to foreign jurisdictions and there were no earnings repatriated from foreign subsidiaries.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) as of January 1, 2016 and January 2, 2015 are as follows (in thousands):

	2015		2014
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and sales returns	$	90	$	127
Inventories		422		511
Accrued vacation		382		397
Accrued other expenses		176		119
Other		57		80
Valuation allowance		(1,058)		(939)
Total current deferred tax assets (liabilities)	$	69	$	295
Non-current deferred tax assets (liabilities):
Net operating loss carryforwards	$	51,005	$	53,747
Stock-based compensation		1,763		1,684
Business, foreign and AMT credit carryforwards		1,730		1,223
Capitalized R&D		134		423
Contributions		17		37
Pensions		583		489
Depreciation and amortization		695		870
Foreign tax withholding		(1,627)		(1,326)
Foreign earnings not permanently reinvested		(3,209)		(5,022)
Other		13		31
Valuation allowance		(52,275)		(53,165)
Total non-current deferred tax liabilities	$	(1,171)	$	(1,009)

As of January 1, 2016, the Company had net deferred tax liabilities in Switzerland of $1,686,000 (which included $1,627,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $584,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table. As of January 2, 2015, the Company had net deferred tax liabilities in Switzerland of $1,371,000 (which included $1,326,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $658,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table.

Valuation allowance

ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realizable.

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. In evaluating the Company’s ability to recover the deferred tax assets within a jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the successful implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating results. Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of all the available evidence, it is more likely than not that some portion or all of the deferred tax asset may not be realized.

U.S. Jurisdiction

Due to the Company’s history of losses in the U.S., the valuation allowance fully offsets the value of U.S. deferred tax assets on the Company’s balance sheet as of January 1, 2016. Further, pursuant to the provisions of Internal Revenue Code Section 382, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.

Foreign Jurisdictions

STAAR Surgical AG

Due to STAAR Surgical AG’s history of profits, the deferred tax assets are considered fully realizable. Included in deferred tax assets and liabilities of STAAR AG is noncurrent deferred tax assets of $312,000 and $256,000 as of January 1, 2016 and January 2, 2015, respectively.

STAAR Japan, Inc.

Since 2012, STAAR Japan functions as a limited-risk distributor with a guaranteed return from STAAR AG and accordingly, STAAR Japan’s deferred tax assets are considered fully realizable. Included in deferred tax assets and liabilities of STAAR Japan is net deferred tax assets of $584,000 (as translated using the Japanese Yen exchange rate on January 1, 2016) and $658,000 as of January 1, 2016 and January 2, 2015, respectively.

Other Income Tax Disclosures

The following tax years remain subject to examination:

Significant Jurisdictions		Open Years
U.S. Federal		2012 – 2014
California		2011 – 2014
Switzerland		2014
Japan		2012 – 2014

Income (loss) from continuing operations before provision (benefit) for income taxes is as follows (in thousands):

	2015		2014		2013
Domestic	$	(7,678)	$	(8,113)	$	(2,131)
Foreign		2,073		(532)		3,245
	$	(5,605)	$	(8,645)	$	1,114