Note 18 Income Taxes

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


	Year Ended December 31,

	2013		2012		2011

United States	$	47,636	$	60,388	$	78,593
Outside United States		116,191		103,786		101,126

Total	$	163,827	$	164,174	$	179,719

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 $354,164,000 at December 31, 2013 and $256,000,000 at December 31, 2012.

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


	Year Ended December 31,

	2013		2012		2011

Current:
Federal	$	9,556	$	17,744	$	7,250
State		808		1,324		1,191
Foreign		11,638		14,258		28,175

Total current		22,002		33,326		36,616
Deferred:
Federal		7,118		8,656		12,477
State		289		375		405
Foreign		193		(80)		(122)

Total deferred		7,600		8,951		12,760

Total	$	29,602	$	42,277	$	49,376

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,

	2013		2012		2011
Provision computed at statutory rate	$	57,339	$	57,461	$	62,905
State income tax, net of Federal tax benefit		1,191		1,353		1,432
Asset impairment charge		0		3,190		0
Tax-exempt interest income		(174)		(230)		(334)
Acquisition related items		0		322		0
Domestic manufacturing deduction		(490)		(105)		(212)
Research and experimental credit		(970)		0		(508)
Foreign rate differential		(26,798)		(21,598)		(13,899)
Other		(496)		1,884		(8)

Provision for income taxes	$	29,602	$	42,277	$	49,376

The primary reasons for the difference is due to a combination of higher profits in lower rate international jurisdictions, decreasing foreign statutory rates, the Singapore tax holiday and the restructuring of the foreign operations. 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 $1,860,000 in 2013, $2,002,000 in 2012, and $2,030,000 in 2011.

In order to streamline the management, financing and capital structure of its foreign affiliates, in 2012, Zebra established a foreign holding company and restructured the ownership structure of its foreign affiliates. This new holding company structure allows Zebra to consolidate the ownership of its significant foreign affiliates under a single holding company. In addition, the structure introduced leverage which gives the Zebra the ability to facilitate cash pooling and improve the capital structure of its non-US operations. The new capital structure and global financing favorably impacts the Zebra’s effective tax rate, and facilitates the tax efficient movement of Zebra’s foreign cash to finance the ongoing operating and investment needs of the foreign subsidiaries. The restructuring was completed in the second quarter of 2012 and was in place for the full year in 2013.

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):


	As of December 31,
	2013		2012

Deferred tax assets:
Deferred rent	$	409	$	508
Accrued vacation		2,153		2,480
Accrued bonus		2,916		2,747
Deferred compensation		1,816		1,497
Inventory items		6,061		6,967
Allowance for doubtful accounts and other receivables		118		211
Other accruals		11,149		6,531
Equity based compensation expense		12,337		16,620
Unrealized gain on securities		558		438
Unrealized loss on other investments		410		419
Net operating loss carry-forwards		597		2,462
Valuation allowance		(267)		(267)

Total deferred tax assets		38,257		40,613

Deferred tax liabilities:
Unrealized loss on other investments		(1,450)		0
Depreciation and amortization		(42,489)		(24,527)

Total deferred tax liabilities		(43,939)		(24,527)

Net deferred tax assets (liabilities)	$	(5,682)	$	16,086

On January 1, 2007, Zebra 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, Zebra identified, evaluated, and measured the amount of income tax benefits to be recognized for all of its income tax positions. During 2008, Zebra recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition. During 2012 Zebra recognized an increase of $680,000 in one of its UK subsidiaries. This amount was reduced as a result of filing 2012 income tax returns in 2013.

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


Balance at January 1, 2013	$	4,680
Additions based on tax positions related to 2013		0
Reductions based on 2012 tax returns as filed in 2013		(680)

Balance at December 31, 2013	$	4,000

Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from Zebra’s acquisition of WhereNet Corp. As of December 31, 2013, Zebra had approximately $8,252,000 of net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2013, Zebra had approximately $26,980,000 of state net operating loss carryforwards which expire in 2013 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 amount of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. The company has reviewed the impact of ownership changes and believes that this will not have an impact on the realizability on the related Deferred Tax Asset recorded as of December 31, 2013.

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


	Year Ended December 31,
Valuation allowance	2013		2012		2011
Balance at the beginning of the year	$	267	$	267	$	267
Additions		0		0		0
Subtractions		0		0		0

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

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 California’s temporary suspension on the use of state net operating losses for tax years 2010 & 2011. Although the carryforward period for those temporarily suspended losses was increased, there is still some uncertainty as to the ability to use such losses even though carryforward periods were extended.

We are currently undergoing an audit of the 2011 and 2012 US federal income tax returns. The tax years 2009 through 2012 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2011.

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 through December 31, 2013, Zebra did not accrue any interest or penalties into income tax expense.