Note 18 Income Taxes

The geographical sources of income (loss) before income taxes were as follows (in thousands):


	Year Ended December 31,

	2011		2010		2009

United States	$	78,593		$72,298	$	43,486
Outside United States		101,126		77,309		28,833

Total	$	179,719		$149,607	$	72,319

Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense. Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approximately $175,000,000 at December 31, 2011 and $90,000,000 at December 31, 2010.

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


	Year Ended December 31,

	2011			2010			2009

Current:
Federal	$	7,250		$	25,795		$	3,404
State		1,191			3,108			1,569
Foreign		28,175			17,157			6,066

Total current		36,616			46,060			11,039
Deferred:
Federal		12,477			(3,591	)		10,504
State		405			2,524			509
Foreign		(122	)		0			1,776

Total deferred		12,760			(1,067)			12,789

Total	$	49,376		$	44,993		$	23,828

The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35% to income before income taxes. The reconciliation of statutory and effective income taxes is presented below (in thousands):


	Year Ended December 31,

	2011		2010		2009

Provision computed at statutory rate	$	62,905	$	51,714	$	25,017
State income tax, net of Federal tax benefit		1,432		1,884		1,275
Tax-exempt interest income		(334)		(554)		(1,048)
Acquisition related items		0		(315)		0
Domestic manufacturing deduction		(212)		(70)		(700)
Research and experimental credit		(508)		(713)		(445)
Foreign rate differential		(13,899)		(8,134)		(2,971)
Other		(8)		1,181		2,700

Provision for income taxes	$	49,376	$	44,993	$	23,828

In conjunction with the opening of Zebra's Singapore distribution center and the establishment of Singapore as a regional headquarter location in 2009, Zebra negotiated a 10% income tax rate with the Singapore Economic Development Board. The negotiated rate is a reduction from the then current statutory rate of 17%. The 10% rate expires at the end of 2014 unless Zebra meets agreed commitments for employees and business expenditures in Singapore. If these requirements are met, the 10% rate extends through 2018. This agreement reduced Zebra's consolidated income taxes by $2,030,000 in 2011, $1,247,000 in 2010, and $87,000 in 2009.

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Based on management's assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings.

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

		$00000000			$00000000
	As of December 31,
	2011			2010

Deferred tax assets:
Deferred rent	$	623		$	804
Accrued vacation		1,926			1,492
Accrued bonus		4,342			5,601
Deferred compensation		1,451			1,459
Inventory items		7,072			4,962
Allowance for doubtful accounts and other receivables		355			241
Other accruals		7,355			6,796
Equity based compensation expense		16,124			16,463
Unrealized gain on securities		288			76
Unrealized loss on other investments		0			570
Net operating loss carry-forwards		4,511			8,065
Valuation allowance		(267	)		(267)

Total deferred tax assets		43,780			46,262

Deferred tax liabilities:
Unrealized loss on other investments		(931	)		0
Unrealized loss on securities		0			(42)
Depreciation and amortization		(17,052	)		(9,296)

Total deferred tax liabilities		(17,983	)		(9,338)

Net deferred tax assets	$	25,797		$	36,924

On January 1, 2007, we adopted ASC 740 (formerly FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). According to ASC 740, we identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. During 2008, we recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition.

Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. As of December 31, 2011, we had approximately $8,436,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2011, we also had approximately $27,134,000 of state net operating loss carryforwards which expire in 2012 through 2020. Zebra's intention is to utilize these net operating loss carryforwards to offset future income tax expense. Under the United States Tax Reform Act of 1986, the amounts of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests.

Deferred tax asset valuation allowances included in the temporary differences above are as follows (in thousands):

		$0000000000		$0000000000		$0000000000
	Year Ended December 31,
Valuation allowance	2011		2010		2009
Balance at the beginning of the year	$	267	$	0	$	0
Additions		0		267		0
Subtractions		0		0		0

Balance at the end of the period	$	267	$	267	$	0

Zebra's deferred tax valuation allowance is the result of uncertainties regarding the future realization of recorded tax benefits on state income tax loss carry-forwards. The addition in 2010 is primarily related to state income tax law changes in 2011 for that year and tax years going forward.

U.S. federal tax returns for years 2008 through 2010 are currently under audit. The tax years 2008 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2006.

Zebra's continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the years ended December 31, 2011, 2010 and 2009, we did not accrue any interest or penalties into income tax expense.