INCOME TAXES

The Company reported the following operating results for the periods presented (in thousands):



	Three months ended						Nine months ended
	October 2, 2015			September 26, 2014			October 2, 2015			September 26, 2014
Loss before income taxes	$	(6,079	)	$	(3,752	)	$	(9,289	)	$	(19,594	)
(Benefit from) provision for income taxes	(1,268		)	(4,830		)	(827		)	21,800
Effective income tax rate	20.9		%	128.7		%	8.9		%	(111.3		)%

The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in, or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets, as well as recognition of uncertain tax benefits, the effects of the statute of limitations, or settlement with tax authorities.

The Company’s effective income tax rate of 8.9% for the nine months ended October 2, 2015 was lower than the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates and the Company’s U.S. losses generated in the nine months ended October 2, 2015 receiving no tax benefit as a result of a full valuation allowance against all of its U.S. deferred tax assets as well as adjustments relating to its 2014 U.S. federal tax return filed in September 2015 and the reversal of uncertain tax positions resulting from the expiration of the statute of limitations. The impairment of the VJU investment (see Note 4, "Investments in Other Equity Securities") received no tax benefit.

The Company’s effective income tax rate of (111.3)% for the nine months ended September 26, 2014 differed from the U.S. federal statutory rate of 35%, primarily due to a $28.7 million increase in the valuation allowance against U.S. federal, California, and other state deferred tax assets. The increased valuation allowance was a result of a history of operating losses in recent years that has led to uncertainty with respect to the Company’s ability to realize certain of its net deferred tax assets, of which $4.2 million and $24.5 million were recorded in the third and second quarter of 2014, respectively. This unfavorable impact was offset in part by net tax benefits of $8.5 million associated with the release of tax reserves for uncertain tax positions as a result of the expiration of statute of limitations, which were released in the third quarter of 2014.

The Company files U.S. federal and state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2011 through 2014 tax years generally remain subject to examination by most state tax authorities in the United States. The Company’s income tax return for 2012 is currently under examination by the U.S. Internal Revenue Service, which commenced in August 2015, and the 2013 through 2014 tax years remain subject to examination by the U.S. federal tax authority. In August 2015, the Company was notified by the County of Santa Clara, California, of a new property tax audit for the 2012 through 2015 tax years. The Company is in the process of appealing a $1.6 million assessment for underpayment of property tax and associated interest relating to a previous audit cycle which commenced in 2013, for the 2007 through 2011 tax years. In connection with the previous audit cycle, the Company has made several advance payments to the Santa Clara County aggregating $1.8 million, of which $0.6 million was recorded in operating expenses in prior years and the remainder $1.2 million was included in “Prepaid and other current assets” on our Condensed Consolidated Balance Sheet as of October 2, 2015, as we expect a tax refund for this amount. The Company expects to settle the appeal in early 2016. In significant foreign jurisdictions, the 2006 through 2014 tax years generally remain subject to examination by their respective tax authorities. A subsidiary of the Company is under audit for the 2012 and 2013 tax years, which commenced in the first quarter of 2015, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.

As of October 2, 2015, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $15.9 million, of which $4.3 million would affect the Company’s effective tax rate if the benefits are eventually recognized. The remaining gross unrecognized tax benefit does not affect the Company’s effective tax rate as it relates to positions that would be settled with tax attributes such as net operating loss carryforward or tax credits previously subject to a valuation allowance. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $0.6 million of gross interest and penalties accrued as of October 2, 2015. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of October 2, 2015, the Company anticipates that the balance of gross unrecognized tax benefits will decrease up to approximately $1.4 million due to expiration of the applicable statues of limitations over the next 12 months.