NOTE 15: INCOME TAXES

Income (loss) before income tax provision consists of the following (in thousands):


	Year ended December 31,
	2012			2011			2010
United States	$	(19,319	)	$	(4,925	)	$	66,036
International		10,234			16,558			(60,597	)

Income (loss) before provision for income taxes	$	(9,085	)	$	11,633		$	5,439

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


	Year ended December 31,
	2012			2011			2010
Current:
Federal	$	3,994		$	3,184		$	7,940
State		433			755			1,820
International		1,193			1,222			755
Deferred:
Federal		(2,053	)		(3,618	)		2,267
State		(1,362	)		(392	)		(1,768	)
International		(353	)		1,703			(1,240	)

Total provision for income taxes	$	1,852		$	2,854		$	9,774

The differences between the provision for income taxes computed at the U.S. federal statutory rate and the Company’s actual provision for income taxes are as follows (in thousands):


	Year ended December 31,
	2012			2011			2010
Provision for income taxes at U.S. Federal statutory rate	$	(3,180	)	$	4,071		$	1,904
State taxes		(604	)		1,053			(469	)
Differential in rates on foreign earnings		(5,181	)		(9,924	)		(1,842	)
Losses for which no benefit is taken		7,279			9,185			6,880
Change in valuation allowance		(1,104	)		—			(450	)
Change in liabilities for uncertain tax positions		1,708			(1,540	)		1,261
Non-deductible stock-based compensation		1,996			1,882			1,940
Research credits		—			(2,138	)		(1,404	)
Non-deductible acquisition related expenses		—			—			1,289
Non-deductible meals and entertainment		232			237			165
Adjustments related to tax positions taken during prior years		619			(255	)		—
Foreign income inclusion		317			—			403
Adjustment related to property and equipment		—			—			182
Tax-exempt investment income		(248	)		(71	)		(180	)
Other		18			354			95

Total provision for income taxes	$	1,852		$	2,854		$	9,774

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):


	December 31,
	2012			2011			2010
Deferred tax assets:
Reserves and accruals	$	31,999		$	31,208		$	33,741
Net operating loss carryovers		27,522			24,852			27,431
Research and development credit carryovers		13,704			13,500			12,136
Deferred stock-based compensation		7,684			6,643			6,063
Other tax credits		2,207			2,764			2,813

Total deferred tax assets		83,116			78,967			82,184
Valuation allowance		(34,347	)		(28,354	)		(26,557	)

Net deferred tax assets		48,769			50,613			55,627
Deferred tax liabilities:
Depreciation and amortization		(5,485	)		(5,434	)		(3,320	)
Intangibles		(11,656	)		(17,668	)		(26,172	)
Other		(483	)		(135	)		(1,066	)

Net deferred tax liabilities	$	(17,624	)	$	(23,237	)	$	(30,558	)

The following table summarizes the activity related to the Company’s valuation allowance (in thousands):


	Year ended December 31,
	2012		2011		2010
Balance at beginning of period	$	28,354	$	26,557	$	18,025
Additions		5,993		1,797		8,532
Deductions		—		—		—

Balance at end of period	$	34,347	$	28,354	$	26,557

Pursuant to applicable accounting guidance on accounting for income taxes, the Company is required to periodically review the Company’s deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary. The Company evaluates the need for a valuation allowance based on the weight of positive and negative evidence, including expectations of future taxable income. As of December 31, 2012, the Company had a valuation allowance of $34.3 million, which primarily relates to foreign net operating losses and a portion of its California tax credits.

As of December 31, 2012, the Company had $87.2 million of state net operating loss carryforwards available to reduce future taxable income that will begin to expire in 2014 for state tax purposes. As of December 31, 2012 the Company had foreign net operating loss carryforwards of $101.6 million that do not expire. As of December 31, 2012, the portion of state net operating loss carryforwards which relate to stock option deductions is approximately $8.8 million. The Company is tracking the portion of the Company’s deferred tax assets attributable to stock option benefits in a separate memo account pursuant to applicable accounting guidance. Therefore, these amounts are not included in the Company’s gross or net deferred tax assets. Pursuant to applicable accounting guidance, the stock option benefits will only be recorded to equity when they reduce cash taxes payable.

As of December 31, 2012, the Company had federal and state tax credit carryovers of approximately $1.0 million and $26.6 million available to offset future taxable income. The federal credits expire beginning in 2031, while the state credits will not expire. As of December 31, 2012, the Company had federal AMT credit carryover of approximately $2.2 million, which will not expire.

Utilization of the Company’s net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credits before utilization.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions):


	Year ended December 31,
	2012			2011			2010
Balance at beginning of period	$	52.5		$	48.4		$	47.0
Increases in balances related to tax positions taken during current year		0.6			6.6			7.8
Expiration of the statute of limitations for the assessment of taxes		(0.9	)		(2.1	)		(5.3	)
Decreases in balances related to tax positions taken during prior years		(0.1	)		(0.4	)		(1.1	)

Balance at end of period	$	52.1		$	52.5		$	48.4

The total amount of unrecognized tax benefits that would impact the effective tax rate is approximately $52.1 million at December 31, 2012. The Company accrued interest of $2.7 million related to these unrecognized tax benefits during 2012. As of December 31, 2012, the Company had recorded liabilities for potential penalties and interest of $0.3 million and $6.8 million, respectively. In 2012, the Company reversed $1.0 million of liability primarily due to the expiration of the related statutes of limitations. During the years ended December 31, 2011 and 2010, the Company accrued potential interest of $2.0 million and $1.9 million, respectively, and reversed previously recorded income tax liability of $2.5 million and $2.3 million, respectively, due to the expiration of the related statutes of limitations. The Company anticipates a decrease of $1.6 million in unrecognized tax benefits due to expiration of the related statutes of limitations within the next 12 months.

The Company anticipates the unrecognized tax benefits may increase during 2013 for items that arise in the ordinary course of business. Such amounts will be reflected as an increase in the amount of unrecognized tax benefits and an increase to the current period tax expense. These increases will be considered in the determination of the Company’s annual effective tax rate. The amount of the unrecognized tax benefit classified as a long-term tax payable, if recognized, would reduce the annual income provision.

The Company files U.S., 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 2008 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2006 through 2012 tax years generally remain subject to examination by their respective tax authorities. The Company is under audit by the US Internal Revenue Service for the 2008, 2009 and 2010 tax years. In addition, the statute of limitations on our 2008 and 2009 U.S. corporate income tax return has been extended to 2013. A subsidiary of the Company is under an audit, which commenced in the first quarter of 2012, by the Israel tax authority for the years 2007 through 2010. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the U.S. or Israel is for an amount in excess of the tax provision we have recorded in the applicable period, our overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

As of December 31, 2012, U.S. income taxes were not provided on approximately $34.6 million of cumulative undistributed earnings for certain non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company has not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2012, because the Company intends to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings.

The Company benefits from a tax ruling concluded in Switzerland. This ruling provides for a lower rate of taxation on certain classes of income and requires various thresholds of investment and employment in Switzerland. This ruling resulted in a tax savings of $1.1 million, $0.7 million and $0.9 million in 2012, 2011 and 2010, respectively, increasing diluted earnings per share by approximately $0.009, $0.006 and $0.009 in 2012, 2011 and 2010, respectively. Our agreement with Switzerland is in effect through the end of 2013 and, subject to the Company meeting investment and employment requirements within Switzerland, is renewable for an additional five years.