Note 9. Income Taxes

The Company’s income (loss) before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands):



	Years Ended December 31,
	2015		2014		2013
United States	$	6,864	$	6,981	$	(28,622	)
Foreign	13,199		14,658		15,300
	$	20,063	$	21,639	$	(13,322	)

The expense (benefit) for income taxes is comprised of (in thousands):



	Years Ended December 31,
	2015			2014			2013
Current tax provision (benefit):
Federal	$	271		$	496		$	195
State	431			612			382
Foreign	4,393			4,930			6,487
	5,095			6,038			7,064
Deferred tax expense (benefit):
Federal	(41		)	(1,549		)	1,100
State	113			70			(817		)
Foreign	328			1,072			(1,748		)
	400			(407		)	(1,465		)
Income tax provision	$	5,495		$	5,631		$	5,599

On November 20, 2015, the FASB issued ASU No 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The new accounting guidance is effective for annual reporting periods beginning after December 31, 2016 and interim periods therein. Early adoption is permitted as of the beginning of interim or annual reporting periods. The Company has adopted the standard prospectively as of December 31, 2015 and no adjustment was made to prior periods.

Deferred tax assets and liabilities of prior periods are classified as current or noncurrent according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2015 and 2014 are as follows (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Reserves and allowances not currently deductible for tax purposes	$	14,292		$	15,861
Basis difference related to fixed assets	10,170			10,943
Compensation and benefits	8,964			8,147
Basis difference for inventory valuation	1,764			1,526
Compensatory stock options and rights	3,659			4,334
Deferred revenue and other	169			201
Operating loss carryforwards	96,067			100,227
Tax credit carryforwards	19,787			15,987
Basis difference related to intangible assets with a definite life	16,617			15,557
Other	(162		)	435
Total deferred tax assets	171,327			173,218
Valuation allowance for deferred tax assets	(164,616		)	(165,427		)
Deferred tax assets, net of valuation allowance	$	6,711		$	7,791
Deferred tax liabilities:
Prepaid expenses	(868		)	(1,368		)
Basis difference related to intangible assets with an indefinite life	(33,974		)	(34,065		)
Total deferred tax liabilities	(34,842		)	(35,433		)
Net deferred tax liabilities	$	(28,131	)	$	(27,642	)
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows:
Current deferred tax assets	$	—		$	5,081
Non-current deferred tax assets	6,962			2,346
Current deferred tax liabilities	—			(26		)
Non-current deferred tax liabilities	(35,093		)	(35,043		)
Net deferred tax liabilities	$	(28,131	)	$	(27,642	)

The change in net deferred taxes in 2015 of $489,000 is comprised of a net deferred expense of $26,000 related to the change in the basis difference of intangible assets with an indefinite life, a net deferred expense of $121,000 related to foreign and separate state jurisdictions for which no valuation allowance has been provided, and an expense of $342,000 related to foreign currency translation adjustments.

Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including the loss and credit carry forwards listed above, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.

In 2011, the Company established a valuation allowance against its U.S. deferred tax assets and discontinued recognizing income tax benefits related to its U.S. net operating losses. At December 31, 2015 and 2014, the valuation allowance against the Company’s U.S. deferred tax assets was $164,616,000 and $165,427,000, respectively. If sufficient positive evidence arises in the future, such as a sustained return to profitability, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense and creating a significant one-time non-cash tax benefit in the period that such conclusion is reached. Prospectively, the Company would then report an effective U.S. income tax rate that is closer to its statutory rates.

The Company's valuation allowance does not preclude the Company from using net operating loss carry forwards or other deferred tax assets in the future, except as described below. Until the Company re-establishes a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.

The Company has concluded that with respect to non-U.S. entities, there is sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and no significant allowances have been established.

At December 31, 2015, the Company had federal and state income tax credit carryforwards of $15,136,000 and $11,994,000, respectively, which will expire at various dates beginning in 2020. Such credit carryforwards expire as follows (in thousands):



U.S. foreign tax credit	$	8,983	2020 - 2025
U.S. research tax credit	$	6,135	2030 - 2035
U.S. business tax credits	$	18	2030 - 2035
State investment tax credits	$	795	Do not expire
State research tax credits	$	11,199	Do not expire

The Company has recorded a deferred tax asset reflecting the benefit of operating loss carryforwards. The net operating losses expire as follows (in thousands):



U.S. loss carryforwards	$	244,923	2031 - 2035
State loss carryforwards	$	172,259	2015 - 2035

Although the Company has set up a valuation allowance against the majority of its U.S. federal and state deferred tax assets, which include net operating loss carry forwards, other losses and credit carryforwards, such allowance does not preclude the Company from using the deferred tax assets in the future. However, the Company’s ability to utilize the losses and credits to offset future taxable income may be deferred or limited significantly if the Company were to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that no ownership change has occurred for purposes of Section 382 for the period ended December 31, 2015.

A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:



	Years Ended December 31,
	2015		2014		2013
Statutory U.S. tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of U.S. tax benefit	3.5	%	1.9	%	0.9	%
Federal and State tax credits, net of U.S. tax benefit	(11.5	)%	(9.8	)%	22.6	%
Foreign income taxed at other than U.S. statutory rate	(2.4	)%	(13.4	)%	(5.1	)%
Effect of foreign rate changes	0.9	%	1.3	%	(4.2	)%
Foreign tax credit	(12.0	)%	(13.5	)%	9.4	%
Basis differences of intangibles with an indefinite life	0.1	%	0.1	%	(4.1	)%
Change in deferred tax valuation allowance	0.3	%	35.3	%	(76.8	)%
Accrual for interest and income taxes related to uncertain tax positions	(0.3	)%	(7.3	)%	(0.1	)%
Income (loss) from flowthrough entities	(2.0	)%	(1.9	)%	1.3	%
Meals and entertainment	3.4	%	3.3	%	(7.2	)%
Group loss relief	(3.7	)%	(2.6	)%	4.9	%
Stock option compensation	(1.9	)%	2.3	%	(6.9	)%
Foreign dividends and earnings inclusion	7.1	%	(0.9	)%	(6.8	)%
Foreign tax withholding	1.4	%	2.4	%	(1.5	)%
Executive compensation limitation	4.3	%	—	%	—	%
Other	5.2	%	(6.2	)%	(3.4	)%
Effective tax rate	27.4	%	26.0	%	(42.0	)%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2015			2014			2013
Balance at January 1	$	6,559		$	11,851		$	7,064
Additions based on tax positions related to the current year	1,120			638			4,853
Additions for tax positions of prior years	132			121			545
Reductions for tax positions of prior years	(255		)	(3,691		)	(538		)
Settlement of tax audits	—			(258		)	—
Reductions due to lapsed statute of limitations	(466		)	(2,102		)	(73		)
Balance at December 31	$	7,090		$	6,559		$	11,851

As of December 31, 2015, the gross liability for income taxes associated with uncertain tax benefits was $7,090,000. This liability could be reduced by $1,368,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $4,674,000 of deferred taxes. The net amount of $1,048,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does expect changes to the unrecognized tax benefits in the next 12 months; however, the Company does not expect the changes to have a material impact on its results of operations or its financial position.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company recognized tax benefits of approximately $2,000 and $101,000 for the years ended December 31, 2015 and 2014, respectively, and a tax expense of approximately $229,000 for the year ended December 31, 2013, related to interest and penalties in the provision for income taxes. As of December 31, 2015 and 2014, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $1,060,000 and $1,062,000, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:



Major Tax Jurisdiction	Years No Longer Subject to Audit
U.S. federal	2010 and prior
California (U.S.)	2008 and prior
Canada	2009 and prior
Japan	2008 and prior
South Korea	2009 and prior
United Kingdom	2011 and prior

As of December 31, 2015, the Company did not provide for United States income taxes or foreign withholding taxes on a cumulative total of $111,953,000 of undistributed earnings from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. Upon remittance, certain foreign countries impose withholding taxes, subject to certain limitations, for use as credits against the Company’s U.S. tax liability, if any. If the foreign earnings were remitted, the Company does not anticipate a material impact to the Company's federal or state income taxes due to the Company's available net operating losses and credits. The Company estimates that it would have withholding taxes of $1,125,000 upon remittance.

In 2015 and 2014, the Company ceased its business operations in Thailand and Malaysia, respectively, and accordingly, the Company no longer maintains a permanent reinvestment assertion with respect to these two entities. The Company intends to repatriate the undistributed earnings from these two entities to the United States at the time that the winding-down process has been completed. As of December 31, 2015, the Company has accrued for the estimated incremental U.S. income taxes related to reversing its permanent indefinite reinvestment assertion. However, these incremental U.S. income taxes are expected to be offset by the utilization of the Company's cumulative U.S. net operating losses incurred through December 31, 2015.