Income taxes

12 Months Ended

Dec. 31, 2013

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, 2013 are as follows (in thousands):

		2013		2012		2011
Current income tax expense:
Foreign	$	946	$	1,912	$	2,129
Federal		(24)		-		48
State and local		13		11		12
		935		1,923		2,189

Deferred income tax expense (benefit):
Foreign		(493)		(69)		-
Federal		4,530		(738)		(352)
State and local		479		34		(476)
		4,516		(773)		(828)

Provision for income taxes	$	5,451	$	1,150	$	1,361

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the three years ended December 31, 2013 is summarized as follows:

	2013		2012		2011

Federal statutory rate	(34.0)	%	34.0	%	34.0	%
Effect of:
State income taxes (net of federal tax benefit)	(2.1)		3.0		3.0
Taxes on foreign income at rates that differ from U.S. statutory rate	(0.6)		(21.8)		(18.3)
Change in valuation allowance on deferred tax assets	106.3		-		-
Increase in unrecognized tax benefits	1.6		1.4		9.0
Other	2.6		0.2		(1.9)
Effective tax rate	73.8	%	16.8	%	25.8	%

No tax benefits related to stock option exercises were recorded for each of the three years in the period ended December 31, 2013, 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, 2013 and 2012 are as follows (in thousands):

		2013		2012

Deferred income tax assets:
Allowances not currently deductible	$	388	$	367
Depreciation and amortization		106		414
Equity compensation not currently deductible		1,080		864
Impairment		1,912		-
Net operating loss carryforwards		4,479		2,622
Expenses not deductible until paid		974		1,305
Tax credit carryforwards		176		176
Derivatives		213		-
Other		113		204
Total gross deferred income tax assets before valuation allowance		9,441		5,952
Valuation allowance		(8,060)		-
Net deferred income tax assets		1,381		5,952

Deferred income tax liabilities:
Derivatives		-		(46)
Other		(247)		(193)
Totals		(247)		(239)

Net deferred tax assets	$	1,134	$	5,713

Net deferred income tax asset-current	$	45	$	1,104
Net deferred income tax asset-long term		1,336		4,848
Net deferred income tax liability-current		(57)		(57)
Net deferred income tax liability-long term		(190)		(182)

Net deferred income tax assets	$	1,134	$	5,713

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.

The Synodex subsidiary of the IADS segment has not achieved significant revenue to date and has incurred losses since inception. The Company's U.S. entity has incurred losses primarily on account of the losses of Synodex. In assessing the realization of deferred tax assets, management considered whether it is more likely than not that all or some portion of the U.S. deferred tax assets will not be realizable. As the expectation of future taxable income resulting from Synodex cannot be predicted with certainty, the Company created a $7.1 million valuation allowance against all the U.S. deferred tax assets. The Company also recorded a valuation allowance of $0.7 million on all deferred tax assets arising from unrealized losses on foreign currency forward contracts in the third quarter of 2013. The entire valuation allowance as of December 31, 2013 relates to U.S. deferred tax assets. As of December 31, 2012, 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 $32.4 million at December 31, 2013. 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, net of foreign tax credits. 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 provision for income taxes for each of the three years ended December 31, (in thousands) are as follows:

		2013		2012		2011

United States	$	(8,482)	$	(1,920)	$	(2,476)
Foreign		1,098		8,759		7,747
Totals	$	(7,384)	$	6,839	$	5,271

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 $0.1 million, $1.1 million and $0.1 million for each of the three years in the period ended December 31, 2013, respectively.

At December 31, 2013, the Company has available U.S. federal and New Jersey state net operating loss carryforwards of approximately $17.3 million and $18.9 million, respectively. These net operating loss carryforwards expire at various times through the year 2033. 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 2013 and 2012. Windfalls included in net operating losses but not reflected in deferred tax assets as of December 31, 2013 were approximately $4.7 million.

The Company had unrecognized tax benefits of $2.5 million and $2.4 million at December 31, 2013 and 2012, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.8 million and $0.7 million at December 31, 2013 and 2012, respectively. The unrecognized tax benefits as of December 31, 2013 and 2012, 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,
		2013		2012

Balance at beginning of year	$	2,350	$	2,278
Increases for tax position in prior years		300		-
Decrease for tax position in prior years		-		(60)
Interest accrual		57		132
Foreign currency revaluation		(254)		-
Balance at end of year	$	2,453	$	2,350

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 tax authorities for years prior to 2006 and by New Jersey tax authorities for years prior to 2012. Various foreign subsidiaries currently have open tax years from 2003 through 2012. Various foreign subsidiaries currently have open tax years ranging from 2004 through 2012.

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 $263,000, including interest, through December 31, 2013, 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 the 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 $285,000 and $290,000, including interest through December 31, 2013, 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 and is contesting them vigorously. In January 2012, the Indian subsidiary received a final tax assessment of approximately $1.0 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 it. Due to this assessment, the Company recorded a tax provision amounting to $453,000 including interest through December 31, 2013. Based on recent experience and the current regulatory environment, management believes that the tax provision of $453,000 including interest is adequate. 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, 2009. The ultimate outcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2009. 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 continuously assesses the likelihood of an unfavorable assessment for all fiscal years for which the Company has not been audited, and as of December 31, 2013, the Company recorded a tax provision amounting to $1,162,000 including interest.

In January 2013, one of the Company’s Philippine subsidiaries received an informal tax assessment from the Internal Revenue Service of the Philippines for an amount totaling $3.8 million for the year ended December 31, 2009. The Company disagreed with the basis of the informal tax assessment and contested it vigorously. The ultimate outcome was favorable, and accordingly, the Company did not record any tax provision.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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