INCOME TAXES

Domestic and foreign income (loss) before income taxes for the three years ended June 30 were as follows:



(in thousands)	2012		2011			2010
Domestic	$	18,347	$	(18,712	)	$	(65	)
Foreign	61,359		77,346			63,240
	$	79,706	$	58,634		$	63,175

Provisions for income taxes for the three years ended June 30 were as follows:



(in thousands)	2012			2011			2010
Current:
Federal	$	8,054		$	3,618		$	(5,284	)
State	1,010			(702		)	1,336
Foreign	9,608			26,072			31,539
	18,672			28,988			27,591
Deferred:
Federal	2,447			(17,307		)	4,605
State	(869		)	(128		)	(383		)
Foreign	(3,702		)	(1,705		)	(10,180		)
	(2,124		)	(19,140		)	(5,958		)
	$	16,548		$	9,848		$	21,633

Our consolidated effective income tax rate differed from the U.S. federal statutory income tax rate as set forth below:



(in thousands)	2012			%		2011			%		2010			%
Income tax expense computed at the federal statutory rate	$	27,897		35.0	%	$	20,522		35.0	%	$	22,111		35.0	%
State income taxes, net of federal benefit	(232		)	(0.3	)%	61			0.1	%	311			0.5	%
Foreign rate differential	(6,539		)	(8.2	)%	(3,151		)	(5.4	)%	(2,008		)	(3.2	)%
Change in valuation allowances	1,630			2.0	%	(8,174		)	(13.9	)%	(479		)	(0.8	)%
Change in reserves	(7,655		)	(9.6	)%	47			0.1	%	(1,467		)	(2.3	)%
Research and development	(2,734		)	(3.4	)%	(2,196		)	(3.7	)%	(2,705		)	(4.3	)%
Non-deductible losses	678			0.9	%	—			—	%	1,828			2.9	%
Other non-deductible expenses	393			0.5	%	1,004			1.7	%	3,715			5.9	%
Adjustment of net operating losses	2,243			2.8	%	—			—		—			—
Statutory tax rate changes	(1,047		)	(1.3	)%	436			0.7	%	143			0.2	%
Other, net	1,914			2.4	%	1,299			2.2	%	184			0.3	%
	$	16,548		20.8	%	$	9,848		16.8	%	$	21,633		34.2	%

Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries as those earnings are indefinitely reinvested. Undistributed earnings of foreign subsidiaries that are indefinitely reinvested are approximately $327 million and $288 million at June 30, 2012 and June 30, 2011, respectively. It is not practical to estimate the amount of income taxes payable on the earnings that are indefinitely reinvested in foreign operations.

Significant components of our net deferred tax assets (liabilities) as of June 30, 2012 and June 30, 2011 were as follows:



(in thousands)	2012			2011
Deferred tax assets:
U.S. loss carryforwards	$	3,431		$	3,631
Foreign loss carryforwards	6,885			4,775
Accrued expenses	26,528			18,012
Tax credit carryforwards	20,394			25,403
Provision for losses on receivables	1,239			2,390
Deferred compensation	9,120			8,566
Deferred revenue	11,666			9,067
Intercompany loans	2,774			3,399
Other	663			1,549
Gross deferred tax assets	82,700			76,792
Deferred tax asset valuation allowance	(11,392		)	(14,436		)
Total deferred tax assets	71,308			62,356
Deferred tax liabilities:
Property and equipment	(2,328		)	(515		)
Revenue recognition	(24,660		)	(25,302		)
Intangible assets	(30,817		)	(34,248		)
Other	(2,135		)	(1,243		)
Total deferred tax liabilities	(59,940		)	(61,308		)
Net deferred tax assets	$	11,368		$	1,048

The net deferred tax assets and liabilities included in the consolidated balance sheets as of June 30, 2012 and June 30, 2011 were as follows:



(in thousands)	2012			2011
Current deferred tax assets	$	26,773		$	17,817
Non-current deferred tax assets	24,271			31,434
Current deferred tax liabilities	(14,998		)	(17,216		)
Non-current deferred tax liabilities	(24,678		)	(30,987		)
	$	11,368		$	1,048

At June 30, 2012, state and foreign loss carryforwards of $77.7 million and $36.4 million, respectively, were available to offset future liabilities for income taxes. Included in the state loss carryforwards is $43.1 million attributable to deductions from the exercise of equity awards. The benefit from these deductions will be recorded as a credit to additional paid-in capital if and when realized through a reduction of taxes paid in cash. Use of these loss carryforwards is limited based on the future income of certain subsidiaries. The state net operating losses expire in the years 2013 through 2032. Of the non-U.S. loss carryforwards, $10.8 million will expire between 2015 and 2022; the remainder does not expire. We also have U.S. foreign tax credit carryforwards of $31.5 million which expire in the years 2017 through 2022. Included in the U.S. foreign tax credit carryforwards is $11.2 million attributable to deductions from the exercise of equity awards. The benefit from these credits will be recorded as a credit to additional paid-in capital if and when realized through a reduction of taxes paid in cash.

A valuation allowance has been established for certain future income tax benefits related to loss carryforwards and temporary tax adjustments based on an assessment that it is more likely than not that these benefits will not be realized. The decrease in the valuation allowance in Fiscal Year 2012 was principally due to changes in non-U.S. loss carryforwards.

As of June 30, 2012, we had $53.8 million of gross unrecognized tax benefits of which $10.0 million would impact the effective tax rate if recognized. As of June 30, 2011, we had $62.2 million of gross unrecognized tax benefits of which $16.6 million would impact the effective tax rate if recognized. This reserve primarily relates to exposures for income tax matters such as changes in the jurisdiction in which income is taxable and taxation of certain investments. The change in gross unrecognized tax benefits resulted primarily from a $6.8 million decrease related to settlements with tax authorities and the expiration of statutes of limitation in Europe, a $3.7 million decrease due to changes in foreign currency exchange rates, a $0.8 million reduction associated with prior year tax positions in Europe and a $2.7 million increase related to prior year tax positions in the United States.

Unrecognized tax benefits represent favorable positions we have taken, or expect to take, on tax returns. These positions have reduced, or are expected to reduce, our income tax liability on our tax returns and financial statements. As a result of the uncertainty associated with these positions, we have established a liability that effectively reverses the previous recognition of the tax benefits, making them “unrecognized.” Our unrecognized income tax benefits, excluding accrued interest and penalties, are as follows:



(in thousands)	2012			2011			2010
Balance at beginning of year	$	62,211		$	56,345		$	58,310
Additions related to tax positions in prior years	4,389			6,917			7,557
Additions related to tax positions in the current year	—			—			5
Reductions related to tax positions in prior years	(2,250		)	(127		)	(4,488		)
Reductions related to settlements with tax authorities	(547		)	(23		)	(1,299		)
Reductions related to the expiration of statutes	(9,990		)	(901		)	(3,740		)
Balance at end of year	$	53,813		$	62,211		$	56,345

As of June 30, 2012, we anticipate that the liability for unrecognized tax benefits for uncertain tax positions could change by up to $5.3 million in the next twelve months as a result of the expiration of statutes, settlements with tax authorities and a change in tax accounting method. This change is composed primarily of reserves associated with the period or jurisdiction in which income is taxable.

We recognize interest and penalties related to income tax matters in income tax expense. As of June 30, 2012 and June 30, 2011, interest and penalties of $6.1 million and $9.1 million, respectively, were included in our liability for unrecognized tax benefits. Interest and penalties included in income tax expense for Fiscal Years 2012, 2011 and 2010 amounted to a benefit of $2.1 million, a benefit of $0.8 million, and an expense of $0.6 million, respectively.

PAREXEL is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. All material state and local income tax matters through 2002 have been concluded. All material federal income tax matters have been concluded through 2004. Substantially all material foreign income tax matters have been concluded for all years through 2000.