Note 9 – Income taxes

The components of income before income taxes are as follows:



(In thousands)		Years Ended December 31,
		2014		2013		2012
Domestic	$	50,893	$	41,315	$	24,100
Foreign		93,108		55,853		90,737
	$	144,001	$	97,168	$	114,837

The provision for income taxes charged to operations is as follows:



(In thousands)		Years Ended December 31,
		2014		2013		2012
Current tax expense:
U.S. federal	$	11,292	$	27,161	$	24,538
State		1,302		813		1,217
Foreign		8,314		4,917		10,544
Total current	$	20,908	$	32,891	$	36,299
Deferred tax expense (benefit):
U.S. federal	$	(2,330)	$	(15,401)	$	(10,305)
State		(42)		(473)		53
Foreign		(868)		(362)		(1,347)
Total deferred	$	(3,240)	$	(16,236)	$	(11,599)
Change in valuation allowance		-		-		-
Total provision	$	17,668	$	16,655	$	24,700

Deferred tax liabilities (assets) at December 31, 2014 and 2013 as follows:



(In thousands)		December 31,
		2014		2013
Capitalized software	$	12,058	$	7,748
Depreciation and amortization		15,456		15,550
Intangible assets		15,945		18,843
Unrealized gain on derivative instruments		3,857		898
Undistributed earnings of foreign subsidiaries		8,694		8,565
Gross deferred tax liabilties		56,010		51,604
Operating loss carryforwards		(105,022)		(108,297)
Vacation and other accruals		(5,878)		(5,147)
Inventory valuation and warranty provisions		(15,657)		(12,813)
Doubtful accounts and sales provisions		(1,298)		(1,101)
Unrealized exchange loss		(282)		(2,192)
Deferred revenue		(7,927)		(7,809)
Accrued rent expenses		(505)		(453)
10% minority stock investment		(910)		(908)
Stock-based compensation		(5,451)		(6,069)
Research and development tax credit carryforward		(2,224)		(2,758)
Foreign tax credit carryforward		(335)		(4)
Other		(570)		(444)
Gross deferred tax assets		(146,059)		(147,995)
Valuation allowance		102,378		103,778
Net deferred tax liability	$	12,329	$	7,387

A reconciliation of income taxes at the U.S. federal statutory income tax rate to our effective tax rate follows:



	Years Ended December 31,
	2014		2013		2012
U.S. federal statutory rate	35	%	35	%	35	%
Foreign taxes greater (less) than federal statutory rate	(2)		2		(5)
Research and development tax credits	(2)		(7)		-
Enhanced deduction for certain research and development expenses	(8)		(13)		(15)
State income taxes, net of federal tax benefit	1		1		1
Employee share-based compensation	1		-		2
Intercompany profit	(1)		(2)		2
Nondeductible acquisition costs	-		-		2
Domestic production activities deduction	(1)		(1)		-
Decrease in unrecognized tax benefits	(10)		-		-
Other	(1)		2		-
Effective tax rate	12	%	17	%	22	%

As of December 31, 2014, we had a federal net operating loss carryforward of $1.6 million which expires in the year 2032, and federal tax credit carryforwards of $2.6 million which expire during the years 2021 to 2032. Certain of these carryforwards are subject to limitations following a change in ownership.

As of December 31, 2014, 11 of our subsidiaries had available, for income tax purposes, foreign net operating loss carryforwards of an aggregate of approximately $550 million, of which $900,000 expires during the years 2019 to 2024 and $549 million of which may be carried forward indefinitely. Our tax valuation allowance relates primarily to our ability to realize certain of these foreign net operating loss carryforwards.

Effective January 1, 2010, a new tax law in Hungary provided for an enhanced deduction for the qualified research and development expenses of NI Hungary Software and Hardware Manufacturing Kft. (“NI Hungary”). During the three months ended December 31, 2009, we obtained confirmation of the application of this new tax law for the qualified research and development expenses of NI Hungary. Based on the application of this new tax law to the qualified research and development expense of NI Hungary, we no longer expect to have sufficient future taxable income in Hungary to realize the benefits of these tax assets. As such, we recorded an income tax charge of $21.6 million during the three months ended December 31, 2009, $18.4 million of which was related to a valuation allowance on the previously recognized assets created by the restructuring and $3.2 million of which was related to tax benefits from other assets that we will no longer be able to realize as a result of this change. We do not expect to realize the tax benefit of the remaining assets created by the restructuring and therefore we had a full valuation allowance against those assets at December 31, 2014.

We have not provided for U.S. federal income and foreign withholding taxes on approximately $610 million of certain non-U.S. subsidiaries’ undistributed earnings as of December 31, 2014. These earnings would become subject to taxes of approximately $199 million, if they were actually or deemed to be remitted to the parent company as dividends or if we should sell our stock in these subsidiaries. We intend to permanently reinvest the undistributed earnings.

We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. We recognized a gross decrease in unrecognized tax benefits of $14 million for the year ended December 31, 2014 related to a settlement with the Internal Revenue Service of the examination of our U.S. income tax returns for 2010 and 2011. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:



(In thousands)		2014		2013
Balance at beginning of period	$	23,572	$	20,920
Additions based on tax positions related to the current year		1,330		3,290
Additions for tax positions of prior years		337		337
Reductions as a result of settlement with taxing authorities		(14,169)		(975)
Balance at end of period	$	11,070	$	23,572

All of our unrecognized tax benefits at December 31, 2014 would affect our effective income tax rate if recognized.

We recognize interest and penalties related to income tax matters in income tax expense. During each of the years ended December 31, 2014 and 2013, we recognized interest expense related to uncertain tax positions of approximately $337,000.

The tax years 2007 through 2014 remain open to examination by the major taxing jurisdictions to which we are subject. The Internal Revenue Service (“IRS”) concluded an examination of our U.S. income tax returns for 2010 and 2011 in the third quarter of 2014.

Earnings from our operations in Malaysia are free of tax under a tax holiday effective January 1, 2013. This tax holiday expires in 2027. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The tax holiday resulted in income tax benefits of $1.9 million for the year ended December 31, 2014.