16. Income Taxes

During the fiscal year ended March 31, 2016, we recorded out-of-period adjustments that increased the income tax provision by a net amount of $1.4 million. We recorded a reversal of a deferred tax asset that was overstated in the amount of $2.3 million in the financial statements for the fiscal year ended March 31, 2012, as well as the balance sheets for the fiscal years thereafter and the interim periods within those years and through September 30, 2015. This adjustment was partially offset by a reduction of $893,000 of tax expense relating to an overstatement in income tax reserves for the financial statements for the fiscal year ended March 31, 2015 and in the balance sheets of the interim periods in the current year through September 30, 2015. The out-of-period adjustments did not have any impact on our cash flow statements in any of the reporting periods. We believe that these out-of-period adjustments are not material to our financial statements for the relevant years, including our current fiscal year.

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

	Year Ended March 31,
	2016		2015		2014
Domestic	$	9,030	$	3,390	$	7,104
International		14,459		27,040		6,355
	$	23,489	$	30,430	$	13,459

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

	Year Ended March 31,
Current:	2016		2015		2014
Federal	$	1,418	$	201	$	4,804
State		126		83		73
Foreign		3,436		5,066		3,087
		4,980		5,350		7,964

Deferred:
Federal		3,554		945		183
State		189		20		86
Foreign		25		375		(820	)
		3,768		1,340		(551	)
Total income tax provision	$	8,748	$	6,690	$	7,413

The reconciliation of our effective tax rate to the U.S. statutory federal income tax rate is as follows:

	Year Ended March 31,
	2016			2015			2014
		(%)			(%)			(%)
Statutory federal income tax rate		35			35			35
State taxes, net of federal tax benefit		1			1			1
Expense (benefit) of lower-tax foreign jurisdictions		(10	)		(15	)		-
Research and development tax credits		(3	)		(1	)		(1	)
Valuation allowance		3			-			2
Permanent items		(5	)		-			3
Tax reserves		-			-			2
Tax asset write off		10			-			-
Tax assessment		-			-			1
Foreign income		6			2			12
Effective tax provision rate		37			22			55

The significant components of net deferred income tax assets are as follows (in thousands):

	March 31,
	2016			2015
Deferred tax assets:
Reserves and allowances	$	6,018		$	5,612
Other liabilities and accruals		6,176			5,929
Depreciable assets		83			2,951
Net operating loss carryforward		11,675			13,993
Share-based compensation		5,098			4,971
Credits carryforward		2,440			2,403
Total deferred tax assets		31,490			35,859
Less: Valuation allowance and other reserves		(3,466	)		(3,902	)
Net deferred tax asset	$	28,024		$	31,957

The authoritative guidance provided by FASB requires deferred tax assets and liabilities to be recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, computed at the expected tax rates for the periods in which the assets or liabilities will be realized, as well as for the expected tax benefit of net operating loss and tax credit carryforwards. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. Our management evaluates the recoverability of these net deferred tax assets in accordance with the authoritative guidance provided by FASB. Our ability to utilize the deferred tax assets and the continuing need for a related valuation allowance are being monitored on an ongoing basis. During fiscal 2016, we recorded certain adjustments on valuation allowances, tax contingency reserves and other temporary items. The impact of these adjustments is discussed further in this note.

Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards and tax credit carryforwards may be impaired or limited in certain circumstances. Events that may restrict utilization of net operating loss and credit carryforwards include, but are not limited to, certain ownership change limitations and continuity of business requirements, as defined in Internal Revenue Code Section 382 and similar state provisions. Current utilization of carryforwards is restricted by an annual limitation, which results in the expiration of net operating loss carryforwards and credit carryforwards before they can be utilized.

In aggregate, the valuation allowance in fiscal 2016 decreased by $436,000 as compared to fiscal 2015, while it increased by $32,000 in fiscal 2015 when compared to fiscal 2014. The decrease in fiscal 2016 was primarily related to net operating losses that expired.

At March 31, 2016, we had U.S. net operating loss carryforwards of approximately $27.8 million, all of which are subject to the limitations under Section 382 of the U.S. tax code resulting from a change in ownership. These carryforwards will expire, if not utilized, from fiscal 2017 to 2023 for U.S. tax purposes. None of the U.S. net operating loss carryforwards include stock option deductions arising from our stock option plan.equity incentive plans.

As of March 31, 2016 we had net operating loss carryforwards for foreign income tax purposes of approximately $17.1 million with a corresponding valuation allowance of $13.2 million.

At the end of fiscal 2016, we had $6.9

million of gross unrecognized tax benefits, all of which would affect our effective tax rate if recognized. The $6.9 million has been classified under “Other long term liabilities” on our consolidated balance sheet. Our liability for unrecognized tax benefits decreased by $6,000 from the prior year, principally due to release of $772,000 in reserves due to the lapse of statutes of limitation. This was partially offset by an increase in current year adjustments of $766,000. We do not anticipate any unrecognized tax benefits in the next 12 months that would result in a material change to our financial position.

We include interest and penalties in the financial statements as a component of income tax expense. We had $1.5 million of accrued interest and penalties at March 31, 2016, which included $488

,000 of interest and penalties accrued for the year ended March 31, 2016.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):


Balance as of March 31, 2013	$	6,736
Lapse of statute of limitations		(941	)
Increases in balances related to tax positions taken during prior periods		499
Increases in balances related to tax positions taken during the current period		684
Balance as of March 31, 2014		6,978
Lapse of statute of limitations		(3,070	)
Increases in balances related to tax positions taken during prior periods		213
Increases in balances related to tax positions taken during the current period		2,831
Balance as of March 31, 2015		6,952
Lapse of statute of limitations		(772	)
Increases in balances related to tax positions taken during prior periods		129
Increases in balances related to tax positions taken during the current period		637
Balance as of March 31, 2016	$	6,946

In addition to the above uncertain tax positions, we also had uncertain tax positions related to the realizability of net operating losses at certain foreign jurisdictions aggregating to $4.1

million at March 31, 2016 and at March 31, 2015.

As of March 31, 2016, U.S. income taxes were not provided for on a cumulative total of approximately $124.9

million of undistributed earnings for certain foreign subsidiaries. We intend to reinvest these earnings indefinitely in operations outside of the U.S. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

We conduct business globally and, as a result, we file income tax returns in various jurisdictions throughout the world including the U.S. federal and various U.S. state jurisdictions as well as with various foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. We remain subject to U.S. federal examination for years from 2005 and forward by virtue of the tax attributes carrying forward from those years. We also remain subject to examination in most jurisdictions for all years since 2010.

The Protecting Americans from Tax Hikes Act of 2015, or the Act was signed into law on December 18, 2015. The Act contains a number of provisions including, most notably, a permanent extension of the U.S. federal research tax credit. The Company’s tax provision for fiscal 2016 reflects the benefit of the U.S. federal research credit.