Taxes

A reconciliation of the United States federal statutory corporate tax rate to the Company’s effective tax rate, or income tax provision, was as follows:



	Three-months Ended				Nine-months Ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013
Income tax provision at federal statutory rate	35	%	35	%	35	%	35	%
State income taxes, net of federal benefit	1	%	1	%	1	%	1	%
Foreign tax rate differential	(17	)%	(17	)%	(17	)%	(17	)%
Tax credit	—	%	—	%	—	%	—	%
Discrete tax events	(1	)%	(6	)%	(1	)%	(3	)%
Income tax provision	18	%	13	%	18	%	16	%

The effective tax rate for the nine-month period ended September 28, 2014 included the impact of the following discrete tax events: (1) a decrease in tax expense of $674,000 recorded in the third quarter from the final true-up of the prior year's tax accrual upon filing the actual tax returns, (2) a decrease in tax expense of $217,000 recorded in the third quarter from the expiration of the statutes of limitations for certain reserves for income tax uncertainties, and (3) a decrease to tax expense of $553,000 (which includes $296,000 for the release of certain tax reserves related to the audit period and a change in risk assessment based on the audit results) recorded in the second quarter related to the closing of the Internal Revenue Service (IRS) audit of the Company for tax years 2010 and 2011. These discrete events decreased the effective tax rate from a provision of 19% to a provision of 18% for the three-month and nine-month periods ended September 28, 2014.

The effective tax rate for the nine-month period ended September 29, 2013 included the impact of the following discrete tax events: (1) a decrease in tax expense of $1,790,000 recorded in the third quarter from the expiration of statutes of limitations for certain reserves for income tax uncertainties, (2) an increase in tax expense of $267,000 recorded in the third quarter from the final true-up of the prior year's tax accrual upon filing the actual tax returns, and (3) a decrease in tax expense of $555,000, net of related reserves for income taxes, recorded in the first quarter from the retroactive application of the 2012 research and development credit passed by Congress under the American Taxpayer Relief Act of 2012 and signed into law on January 1, 2013. Although the provisions under this law were made retroactive to January 1, 2012, the law was signed on January 1, 2013, and therefore, the financial impact of the retroactive provision was recorded as a discrete event in the first quarter of 2013. These discrete tax events decreased the effective tax rates from a provision of 19% to a provision of 13% and 16% for the three-month and nine-month periods ended September 29, 2013, respectively.

During the nine-month period ended September 28, 2014, the Company recorded a $47,000 increase in reserves for income taxes, net of deferred tax benefit, for uncertain tax positions that were recorded as income tax expense. Included in this net increase are reductions to the reserve balance of $217,000 recorded in the third quarter of 2014 and $296,000 recorded in the second quarter of 2014. Estimated interest and penalties included in these amounts totaled $74,000 for the nine-month period ended September 28, 2014, of which $13,000 related to the three-month period ended September 28, 2014.

In the first quarter of 2014, management adopted Accounting Standards Update (ASU) 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU requires companies to present an unrecognized tax benefit, or a portion thereof, as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward or a similar tax loss or tax credit carryforward. In the first quarter of 2014, the Company reclassified a reserve for income taxes of $1,028,000 as a reduction to noncurrent deferred tax assets in compliance with this new guidance. Retroactive application was not required under this ASU, and therefore, prior periods were not restated.

The Company’s reserve for income taxes, including gross interest and penalties, was $4,970,000 as of September 28, 2014, which included $3,942,000 classified as a noncurrent liability and $1,028,000 recorded as a reduction to noncurrent deferred tax assets. The amount of gross interest and penalties included in these balances was $468,000. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period, less $557,000 that would be recorded through additional paid-in capital. As a result of the expiration of certain statutes of limitations and the conclusion of the IRS examination, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $300,000 to $400,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Japan, and within the United States, Massachusetts and California. Within the United States, the tax years 2012 through 2013 remain open to examination by the Internal Revenue Service, while the tax years 2011 through 2013 remain open to various state taxing authorities, and the tax years 2010 through 2013 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.