INCOME TAXES

Income before income taxes from domestic and international jurisdictions is comprised of the following:



Year Ended December 31,	2016		2015		2014
(Dollars in thousands)
Income before income taxes:
Domestic	$	18,499	$	25,069	$	8,328
Foreign	36,222		10,214		7,374
	$	54,721	$	35,283	$	15,702

The provision for income taxes is comprised of the following:



Year Ended December 31,	2016			2015			2014
(Dollars in thousands)
Current taxes
Federal	$	(5,017	)	$	(10,900	)	$	(2,976	)
State	450			481			(453		)
Foreign	(10,639		)	(2,099		)	(8,660		)
Total current taxes	(15,206		)	(12,518		)	(12,089		)
Deferred taxes
Federal	(1,199		)	(961		)	657
State	(332		)	(576		)	(109		)
Foreign	3,397			2,716			4,642
Total deferred taxes	1,866			1,179			5,190

Income tax provision	$	(13,340	)	$	(11,339	)	$	(6,899	)

The following is a reconciliation of the U.S. federal tax rate to our effective income tax rate:



Year Ended December 31,	2016		2015		2014
Statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State tax provisions, net of federal income tax benefit	(6.3	)	3.8		(0.5	)
Permanent differences	(0.8	)	(1.5	)	(5.3	)
Tax credits	0.6		0.9		2.8
Foreign income taxes at rates other than the statutory rate	11.7		2.3		(0.5	)
Valuation allowance and other	5.1		(5.6	)	(8.4	)
Changes in tax liabilities, net	0.5		6.4		4.2
Share based compensation	(1.2	)	(4.4	)	—
Other	1.0		1.0		(1.2	)
Effective income tax rate	(24.4	)%	(32.1	)%	(43.9	)%

Our effective income tax rate for 2016 was 24.4 percent. The effective tax rate was lower than the U.S. federal statutory rate primarily as a result of income in jurisdictions where the statutory rate is lower than the U.S. rate and tax benefits due to the release of tax liabilities related to uncertain tax positions.

Our effective income tax rate for 2015 was 32.1 percent. The effective tax rate was lower than the U.S. federal statutory rate primarily as a result of net decreases in the liability for uncertain tax positions partially offset by the reversal of deferred tax assets related to share-based compensation shortfalls.

Our effective income tax rate for 2014 was 43.9 percent. The effective tax rate was higher than the U.S. federal statutory rate primarily as a result of valuation allowances established for foreign deferred tax assets and various permanent differences including non-deductible expenses related to recent tax law changes in Mexico.

Tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred liabilities are as follows:



December 31,	2016			2015
(Dollars in thousands)
Deferred income tax assets:
Accrued liabilities	$	6,120		$	3,981
Hedging and foreign currency losses	9,475			8,469
Deferred compensation	11,723			11,833
Inventory reserves	3,563			3,079
Net loss carryforwards and credits	3,123			5,891
Competent authority deferred tax assets and other foreign timing differences	5,135			4,836
Other	462			(683		)
Total before valuation allowance	39,601			37,406
Valuation allowance	(3,123		)	(5,891		)
Net deferred income tax assets	36,478			31,515
Deferred income tax liabilities:
Property, plant and equipment	(11,268		)	(14,011		)
Deferred income tax liabilities	(11,268		)	(14,011		)
Net deferred income tax assets	$	25,210		$	17,504

The classification of our net deferred tax asset is shown below:



December 31,	2016			2015
(Dollars in thousands)

Long-term deferred income tax assets	$	28,838		$	25,598
Long-term deferred income tax liabilities	(3,628		)	(8,094		)
Net deferred tax asset	$	25,210		$	17,504

Realization of any of our deferred tax assets at December 31, 2016 is dependent on the company generating sufficient taxable income in the future. The determination of whether or not to record a full or partial valuation allowance on our deferred tax assets is a critical accounting estimate requiring a significant amount of judgment on the part of management. In determining when to release the valuation allowance established against our deferred income tax assets, we consider all available evidence, both positive and negative. We perform our analysis on a jurisdiction by jurisdiction basis at the end of each reporting period. The decrease in the valuation allowance of $2.8 million relates to the reduction of State net operating loss carryforwards the company is not more likely than not to utilize prior to expiration.

As of December 31, 2016 we have cumulative state NOL carryforwards of $49.1 million that expire in the years 2017 to 2032. Also, we have $0.3 million of state tax credit carryforwards which expire in the years 2021 to 2024.

In general, it is our practice and intention to reinvest the earnings of the operations of our non-U.S. subsidiaries. As of December 25, 2016, we have not made a provision for U.S. or additional foreign withholding taxes. The basis difference in our non-U.S. subsidiaries that result from undistributed earnings of approximately $168.9 million as these earnings are considered indefinitely reinvested in the non-U.S. subsidiaries. Determination of the deferred income tax liability on the basis differences is not practicable.

We account for our uncertain tax positions in accordance with U.S. GAAP. A reconciliation of the beginning and ending amounts of these tax benefits is as follows:



Year Ended December 31,	2016			2015			2014
(Dollars in thousands)
Beginning balance	$	7,318		$	7,193		$	9,462
Increases (decreases) due to foreign currency translations	—			—			(244		)
Increases (decreases) as a result of positions taken during:
Prior periods	(3,872		)	1,238			(2,553		)
Current period	—			1,798			956
Settlements with taxing authorities	—			—			—
Expiration of applicable statutes of limitation	—			(2,911		)	(428		)
Ending balance ⁽¹⁾	$	3,446		$	7,318		$	7,193

⁽¹⁾Excludes $1.8 million, $2.1 million and $6.4 million of potential interest and penalties associated with uncertain tax positions in 2016, 2015 and 2014, respectively.

Our policy regarding interest and penalties related to uncertain tax positions is to record interest and penalties as an element of income tax expense. The balance sheets at December 31, 2016 and 2015 include the liability for uncertain tax positions, cumulative interest and penalties accrued on the liabilities totaling $5.3 million and $7.2 million, respectively. During 2016, we reversed certain liabilities related to various jurisdictions in the amount of $3.9 million and a net benefit for penalties and interest of $0.3 million. Included in the unrecognized tax benefits of $5.3 million is $1.7 million that, if recognized, would affect our annual effective tax rate. Within the next twelve-month period we expect a decrease in unrecognized tax benefits of $0.1 million.

We conduct business internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities throughout the world, including, but not limited to Mexico, the Netherlands, Costa Rica, India, Cyprus and the U.S. We are no longer under examination by the taxing authority regarding any U.S. federal income tax returns for years before 2013 while the years open for examination under various state and local jurisdictions vary. In 2014, the Internal Revenue Service ("IRS") completed its audit of the 2011 tax year of Superior Industries International and subsidiaries.

Total income tax payments net of refunds were $21.9 million in 2016, $12.6 million in 2015 and $9.9 million in 2014.