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Income taxes
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]
3. Income taxes

 

The significant components of the provision for (benefit from) income taxes for each of the three years in the period ended December 31, 2012 are as follows (in thousands):

 

    2012     2011     2010  
Current income tax expense:                        
Foreign   $ 1,912     $ 2,129     $ 1,134  
Federal     -       48       -  
State and local     11       12       7  
      1,923       2,189       1,141  
Deferred income tax benefit:                        
Foreign     (69 )     -       (234 )
Federal     (738 )     (352 )     (1,180 )
State and local     34       (476 )     (195 )
      (773 )     (828 )     (1,609 )
                         
Provision for (benefit from) income taxes   $ 1,150     $ 1,361     $ (468 )

 

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the three years ended December 31, 2012 is summarized as follows:

 

    2012     2011     2010  
                   
Federal statutory rate     34.0 %     34.0 %     (34.0 )%
Effect of:                        
State income taxes (net of federal tax benefit)     3.0       3.0       (3.0 )
Taxes on foreign income at rates that differ from U.S. statutory rate     (21.8 )     (18.3 )     (29.0 )
Change in valuation allowance on deferred tax assets     -       -       (19.2 )
Increase in unrecognized tax benefits     1.4       9.0       45.7  
Other     0.2       (1.9 )     1.0  
Effective tax rate     16.8 %     25.8 %     (38.5 )%

 

No tax benefits related to stock option exercises were recorded for each of the three years in the period ended December 31, 2012, due to net operating loss carryforwards.

 

Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows (in thousands):

 

    2012     2011  
             
Deferred income tax assets:                
Allowances not currently deductible   $ 367     $ 449  
Depreciation and amortization     414       376  
Equity compensation not currently deductible     864       548  
Net operating loss carryforwards     2,622       2,546  
Expenses not deductible until paid     1,305       1,055  
Tax credit carryforwards     176       176  
Derivatives     -       659  
Other     204       11  
Totals     5,952       5,820  
Deferred income tax liabilities:                
Derivatives     (46 )     -  
Other     (193 )     (162 )
Totals     (239 )     (162 )
                 
Net deferred tax assets   $ 5,713     $ 5,658  
                 
Net deferred income tax asset-current   $ 1,104     $ 1,934  
Net deferred income tax asset-long term     4,848       3,886  
Net deferred income tax liability-current     (57 )     (9 )
Net deferred income tax liability-non-current     (182 )     (153 )
                 
Net deferred income tax assets   $ 5,713     $ 5,658  

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are available. At December 31, 2012 and 2011, the Company had no valuation allowance on its deferred tax assets.

 

The Company indefinitely reinvests the foreign earnings in its foreign subsidiaries. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States. Undistributed earnings of foreign subsidiaries amount to approximately $31.7 million at December 31, 2012. These earnings are considered to be indefinitely reinvested, and accordingly, no provision for U.S. federal or state income taxes has been made. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxes associated with such earnings. Determination at this point in time, of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

 

United States and foreign components of income (loss) before income taxes for each of the three years ended December 31, (in thousands) are as follows:

 

    2012     2011     2010  
                   
United States   $ (1,920 )   $ (2,476 )   $ (3,852 )
Foreign     8,759       7,747       2,637  
Total   $ 6,839     $ 5,271     $ (1,215 )

  

Certain of the Company’s foreign subsidiaries are subject to preferential tax rates. In addition, one of the foreign subsidiaries enjoys a tax holiday. Due to the tax holiday and the preferential tax rates, the income tax rate for the Company was substantially reduced, the tax benefit from which was approximately $1.5 million, $1.1 million and $0.1 million for each of the three years in the period ended December 31, 2012, respectively.

 

At December 31, 2012, the Company has available U.S. federal and New Jersey state net operating loss carryforwards of approximately $11.4 million and $13.1 million, respectively. These net operating loss carryforwards expire at various times through the year 2032. Stock option exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these benefits were reflected in the net operating losses, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit did not reduce the current taxes payable due to net operating losses, these windfall tax benefits were not reflected in the deferred tax assets for 2012 and 2011. Windfalls included in net operating losses but not reflected in deferred tax assets as of December 31, 2012 were approximately $4.2 million.

 

The Company had unrecognized tax benefits of $2.4 million and $2.3 million at December 31, 2012 and 2011, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.7 million and $0.6 million at December 31, 2012 and 2011, respectively. The unrecognized tax benefits as of December31, 2012 and 2011, if recognized, would have an impact on the Company’s effective tax rate.

 

The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest for the years ended (amounts in thousands):

 

    December 31,  
    2012     2011  
             
Balance at beginning of year   $ 2,278     $ 1,827  
Increases for tax position in prior years     -       317  
Decrease for tax position in prior years     (60 )     -  
Interest accrual     132       134  
Balance at end of year   $ 2,350     $ 2,278  

 

The Company is subject to U.S. federal income tax as well as income tax in various states and foreign jurisdictions. The Company is no longer subject to examination by federal and New Jersey taxing authorities for years prior to 2006. Various foreign subsidiaries currently have open tax years ranging from 2004 through 2011.

 

Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, one of the Company’s Indian subsidiaries received a tax assessment approximating $339,000, including interest, through December 31, 2012, for the fiscal tax year ended March 31, 2003. Management disagreed with the basis of the tax assessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with a judgment in the Company’s favor. Under the Indian Income Tax Act, however, the income tax assessing officer has a right to appeal against the judgment passed by the Appeal Officer. In December 2010, the income tax assessing officer exercised this right, against which the Company has filed an application to defend the case, and the Company intends to contest it vigorously. The Indian Bureau of Taxation has also completed an audit of the Company’s Indian subsidiary’s income tax return for the fiscal tax year ended March 31, 2004. The ultimate outcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2004. In 2008 and 2009, the Indian subsidiary received a final tax assessment for the fiscal years ended March 31, 2005 and 2006 from the Indian Bureau of Taxation. The tax assessment amounted to $340,000 and $345,000, including interest through December 31, 2012, for the fiscal years ended March 31, 2005 and 2006, respectively. Management disagrees with the basis of these tax assessments, has filed an appeal against the assessments, which it is contesting vigorously. In January 2012, the Indian subsidiary received a final tax assessment approximately $1.1 million, including interest, for the fiscal year ended March 31, 2008 from the Indian Bureau of Taxation. Management disagrees with the basis of this tax assessment, and has filed an appeal against the assessment. Due to this assessment, the Company recorded a tax provision amounting to $323,000 including interest through December 31, 2012. Based on recent experience and the current development, management believes that the tax provision of $323,000 including interest is adequate. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for the fiscal year ended March 31, 2010. The ultimate outcome cannot be determined at this time. As the Company is continually subject to tax audits by the Indian Bureau of Taxation, the Company assessed the likelihood of an unfavorable assessment for all fiscal years where the Company is not subject to a final tax assessment as of December 31, 2012, and recorded an additional tax provision amounting to approximately $1.0 million including interest through December 31, 2012.

 

In January 2013, one of the Company’s Philippine subsidiaries received an informal tax assessment for an amount totaling $3.8 million for the year ended December 31, 2009. Although, the Company has not yet received formal notice of this assessment, the Company has had a discussion with the tax examiner. Based on this discussion, management believes that it is reasonably likely that it will be successful in contesting the assessment. Accordingly, the Company recorded no tax provision on said informal tax assessment. In addition, the Company will continuously monitor the outcome and will record an appropriate tax provision in the event there is any change in circumstances.