Note 19 Income Taxes

The geographical sources of income before income taxes were as follows (in thousands):


	Year Ended December 31,

	2014			2013		2012

United States	$	(122,766	)	$	47,636	$	60,388
Outside United States		139,395			116,191		103,786

Total	$	16,629		$	163,827	$	164,174

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


	Year Ended December 31,

	2014		2013		2012

Current:
Federal	$	5,752	$	9,556	$	17,744
State		3,442		808		1,324
Foreign		19,346		11,638		14,258

Total current		28,540		22,002		33,326
Deferred:
Federal		(37,772)		7,118		8,656
State		(5,657)		289		375
Foreign		(911)		193		(80)

Total deferred		(44,340)		7,600		8,951

Total	$	(15,800)	$	29,602	$	42,277

The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35% to income before income taxes. A reconciliation of the provision for income taxes is below (in thousands):


	Year Ended December 31,


	2014		2013		2012
Provision computed at statutory rate	$	5,820	$	57,339	$	57,461
State income tax, net of Federal tax benefit		(844)		1,191		1,353
Asset impairment charge		0		0		3,190
Acquisition related items		6,499		0		322
Tax credits		(3,263)		(970)		0
Foreign rate differential		(32,970)		(26,798)		(21,598)
Change in valuation allowance		2,987		0		0
Section 162(m) limitation		740		111		0
Change in contingent income tax reserves		3,105		0		0
Other		2,126		(1,271)		1,549

Provision for income taxes	$	(15,800)	$	29,602	$	42,277

The primary reason for the difference between the US statutory rate of 35% and Zebra’s effective tax rate is due to a combination of higher profits in lower rate international jurisdictions, the Singapore tax holiday, the research & experimental credit, which is offset by changes in the valuation allowance, uncertain tax positions, the non-deductible portion of the acquisition expenses and other items. In conjunction with the opening of Zebra’s Singapore distribution center and the establishment of Singapore as a regional headquarter location in 2009, Zebra negotiated a 10% income tax rate with the Singapore Economic Development Board. The negotiated rate is a reduction from the then current statutory rate of 17%. This agreement reduced Zebra’s consolidated income taxes by approximately $2.0 million, $1.9 million and $2.0 million in 2014, 2013 and 2012, respectively. Due to Zebra’s increased business operations in Malaysia, it is unclear whether Zebra’s Singapore headquarters will meet the additional requirements necessary to qualify for the 10% rate in 2015 and 2016.

Tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):


	As of December 31,
	2014		2013

Deferred tax assets:
Deferred rent	$	752	$	409
Accrued vacation		5,318		2,153
Accrued bonus		11,642		2,916
Deferred compensation		2,208		1,816
Inventory items		1,493		6,061
Allowance for doubtful accounts and other receivables		5,361		118
Other accruals		50,491		5,680
Deferred revenue		78,351		5,469
Equity based compensation expense		14,189		12,337
Unrealized gain on securities		4,621		558
Unrealized loss on other investments		4,075		410
Net operating loss carry-forwards		27,016		597
Tax credits		62,040		0
Valuation allowance		(56,712)		(267)

Total deferred tax assets		210,845		38,257

Deferred tax liabilities:
Unrealized loss on other investments		(1,332)		(1,450)
Depreciation and amortization		(283,847)		(42,489)
Undistributed Earnings		(2,747)		0

Total deferred tax liabilities		(287,926)		(43,939)

Net deferred tax liabilities	$	(77,081)	$	(5,682)

Zebra earns a significant amount of our operating income outside the U.S. With the exception of the acquired unrepatriated earnings related to the Enterprise acquisition, it is the company’s policy to consider foreign earnings and profits to be permanently reinvested in foreign jurisdictions. As part of Enterprise, the acquired earnings & profits and previously taxed income (“PTI”), including excess cash balances pursuant to the Master Acquisition Agreement (“MAA”) of the newly acquired MSI foreign subsidiaries will not be permanently reinvested. As a result, Zebra has established a deferred tax liability in purchase accounting in the amount of $2.7 million. Zebra has not recognized deferred tax liabilities for unremitted earnings of approximately $466.4 million and $354.2 million as of December 31, 2014 and 2013, respectively. It is not practicable to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.

Included in deferred tax assets are amounts related to federal and state net operating losses (“NOL”) that resulted from Zebra’s acquisition of WhereNet Corp and Enterprise. As of December 31, 2014, Zebra has approximately $156.3 million of net operating loss carry-forwards, of which $8.8 million is limited by Section 382, available to offset future taxable income that begin to expire in 2022. As of December 31, 2014, Zebra had approximately $26.8 million of state net operating loss carry-forwards that begin to expire in 2017. Zebra has approximately $30.1 million of research & experimental credits that begin to expire in 2025 and approximately $1.7 million of foreign tax credits that begin to expire in 2017. Lastly, Zebra has approximately $3.9 million of alternative minimum tax credits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at January 1, 2014	$	4,000
Additions for tax positions related to the current year		700
Additions for tax positions related to prior years		2,400
Additions related to 2014 acquisition		11,800
Reductions for tax positions of prior years		0

Balance at December 31, 2014	$	18,900

The total impact of unrecognized tax benefits, if recognized, that would impact the effective tax rate is $0.7 million. Zebra believes it is reasonably possible that the recorded amount of gross unrecognized tax benefit may decrease by $2.8 million within the next twelve months as a result of tax planning.

The Singapore tax authorities have issued an assessment resulting in additional withholding tax and penalties relating to royalty payments made from 2009 to 2013. These royalty payments relate to commercial rights not covered by the current royalty exemption in place resulting in a withholding tax of approximately $3.2 million and penalties of approximately $0.6 million. The withholding tax will be offset as a foreign tax credit in the U.S. resulting in no impact to the effective tax rate.

Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. Zebra has accrued $3.1 million and $0 of interest and penalties in the consolidated balance sheet as of December 31, 2014 and 2013, respectively.

Zebra is currently undergoing an audit of the 2013 US federal income tax returns. The tax years 2010 through 2014 remain open to examination by multiple state taxing jurisdictions. Below is a summary of open tax years by major jurisdiction outside of the United States.


China		2002 - 2014
France		2010 - 2014
Germany		2008 - 2014
India		1997 - 2014
Japan		2011 - 2014
United Kingdom		2008 - 2014