16.

Income Taxes

In fiscal

2017,

the provision for income taxes had an effective tax rate of

26%

as compared to

37%

in fiscal

2016

and

22%

in fiscal

2015.

The fiscal

2017

and

2015

tax rates reflected higher income generated in certain foreign jurisdictions with lower taxes rates. The higher tax rate in fiscal

2016

was caused by an out-of-period adjustment of

of pretax income and the recording of valuation allowances for net operating losses generated in foreign jurisdictions.

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

	Year Ended March 31,
	2017		2016		2015
Domestic	$	7,997	$	9,030	$	3,390
International		20,903		14,459		27,040
Total	$	28,900	$	23,489	$	30,430

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

	Year Ended March 31,
	2017			2016		2015
Current:
Federal	$	406		$	1,418	$	201
State		(560	)		126		83
Foreign		4,532			3,436		5,066
Total current		4,378			4,980		5,350

Deferred:
Federal		1,867			3,554		945
State		1,256			189		20
Foreign		51			25		375
Total deferred		3,174			3,768		1,340
Total provision for income tax	$	7,552		$	8,748	$	6,690

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

	Year Ended March 31,
	2017			2016			2015
	(%)			(%)			(%)
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		(17	)		(10	)		(15	)
Tax credits		(2	)		(3	)		(1	)
Valuation allowances		4			3			-
Permanent items		-			(5	)		-
Tax reserves		1			-			-
Tax asset write-off		2			10			-
Foreign income		2			6			2
Effective tax provision rate		26			37			22

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

	March 31,
	2017			2016
Deferred tax assets:
Reserves and allowances	$	5,504		$	6,018
Other liabilities and accruals		6,297			6,176
Depreciable assets		404			83
Net operating loss carryforwards		10,236			11,675
Share-based compensation		4,721			5,098
Credits carryforward		2,188			2,440
Total deferred tax assets		29,350			31,490
Less: Valuation allowances and other reserves		(4,611	)		(3,466	)
Net deferred tax assets	$	24,739		$	28,024

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 allowances 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

2017,

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 allowances in fiscal

2017

increased by

$1.1

million as compared to fiscal

2016,

while it decreased by

$436,000

in fiscal

2016

when compared to fiscal

2015.

The increase in valuation allowances in fiscal

2017

primarily related to recoverability of certain research and development tax credits as well as an increase in net operating loss in a foreign jurisdiction.

March 31, 2017,

we had U.S. net operating loss carryforwards of approximately

$23.4

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

2018

2023

for U.S. tax purposes.

None

of the U.S. net operating loss carryforwards include stock option deductions arising from our equity incentive plans. As of

March 31, 2017

we had net operating loss carryforwards for foreign income tax purposes of approximately

$18.6

million offset by a corresponding valuation allowance of

$16.4

million.

At the end of fiscal

2017,

we had

$6.4

million of gross unrecognizable tax benefits, all of which would affect our effective tax rate if recognized. The

$6.4

million has been classified under “Other long term liabilities” on our consolidated balance sheet. Our liability decreased by

$503,000

from the prior year, primarily due to the expiration of statutes of limitation. We do

not

anticipate any unrecognizable tax benefits in the next

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

$952,000

of accrued interest and penalties at

March

31,

2017,

which included

$94,000

of interest and penalties reversed for the year ended

March 31, 2017,

net of

$438,000

of interest and penalties accrued and

$532,000

of interest and penalties reversed.

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

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
Lapse of statute of limitations		(1,461	)
Decreases in balances related to tax positions taken during prior periods		(63	)
Increases in balances related to tax positions taken during the current period		1,021
Balance as of March 31, 2017	$	6,443

In addition to the above, our valuation allowances included uncertain tax positions relating to the realizability of net operating losses at certain foreign jurisdictions and certain domestic state tax credits aggregating to

$3.0

million at

March 31, 2017.

March 31, 2016

our valuation allowances included uncertain tax positions relating to the realizability of net operating losses at certain foreign jurisdictions of

$4.1

million.

As of

March 31, 2017,

U.S. income taxes were

not

provided for on a cumulative total of approximately

$150.5

million of undistributed earnings for certain foreign subsidiaries. The cash and cash equivalents balance of our foreign subsidiaries at

March 31, 2017

was approximately

$74.0

million. 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 unrecognizable 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

2002

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

2017

reflects the benefit of the U.S. federal research credit.