NOTE 17: Taxes

Domestic income before taxes was $29,576,000 in 2013, $36,754,000 in 2012, and $24,836,000 in 2011. Foreign income before taxes was $58,310,000 in 2013, $49,876,000 in 2012, and $62,281,000 in 2011.

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


	Year Ended December 31,
	2013		2012		2011
Current:
Federal	$	8,720	$	11,284	$	6,711
State		721		789		806
Foreign		3,167		5,790		10,519

		12,608		17,863		18,036
Deferred:
Federal		1,580		428		(812	)
State		119		36		34
Foreign		6		205		(10	)

		1,705		669		(788	)

	$	14,313	$	18,532	$	17,248

A reconciliation of the United States federal statutory corporate tax rate to the Company’s effective tax rate was as follows:


	Year Ended December 31,
	2013			2012			2011
Income tax provision at federal statutory rate		35	%		35	%		35	%
State income taxes, net of federal benefit		1			1			1
Foreign tax rate differential		(17	)		(14	)		(15	)
Tax credit		(1	)		-			(1	)
Discrete tax events		(3	)		-			-
Other		1			(1	)		-

Income tax provision		16	%		21	%		20	%

The effective tax rate for 2013 included the impact of the following discrete events: (1) a decrease in tax expense of $1,790,000 from the expiration of statutes of limitations for certain reserves for income tax uncertainties, (2) an increase in tax expense of $267,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns, and (3) a decrease in tax expense of $555,000 from the retroactive application of the 2012 research and development credit. The American Taxpayer Relief Act of 2012 was passed by Congress and signed into law on January 1, 2013. The provisions under this law are to be applied retroactively to January 1, 2012. As a result of the law being signed on January 1, 2013, the financial impact of the retroactive provision was recorded as a discrete event in the first quarter of 2013. Interest and penalties included in these amounts was a decrease to tax expense of $854,000.

The effective tax rate for 2012 included the impact of the following discrete events: (1) a decrease in tax expense of $441,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties, (2) an increase in tax expense of $101,000 from the write-down of a non-current deferred tax asset based upon a change in the tax rate in Japan, and (3) an increase in tax expense of $84,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns. Interest and penalties included in these amounts was a decrease to tax expense of $58,000.

The effective tax rate for 2011 included the impact of the following discrete events: (1) a decrease in tax expense of $808,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties, (2) a decrease in tax expense of $155,000 from the finalization of the Advanced Pricing Agreement between Japan and Ireland, partially offset by, (3) an increase in tax expense of $574,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns, and (4) an increase in tax expense of $201,000 from the write-down of a noncurrent deferred tax asset based upon a change in the tax rate in Japan. Interest and penalties included in these amounts was a decrease to tax expense of $2,000.

The changes in the reserve for income taxes, excluding interest and penalties, were as follows (in thousands):


Balance of reserve for income taxes as of December 31, 2011	$	4,148
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods		43
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period		642
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities		(424	)
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations		(385	)

Balance of reserve for income taxes as of December 31, 2012		4,024
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods		438
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period		1,048
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities		-
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations		(1,102	)

Balance of reserve for income taxes as of December 31, 2013	$	4,408

The Company’s reserve for income taxes, including gross interest and penalties, was $4,765,000 and $5,216,000, as of December 31, 2013 and December 31, 2012, respectively, all of which was classified as non-current. The amount of gross interest and penalties included in these balances was $357,000 and $1,192,000 as of December 31, 2013 and December 31, 2012, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $450,000 to $550,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Japan, and within the United States, Massachusetts and California. Within the United States, the tax years 2010 through 2012 remain open to examination by various taxing authorities, while the tax years 2009 through 2012 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. The Internal Revenue Service is currently auditing the Company’s U.S. Federal tax returns for years 2010 and 2011. The Company believes it is adequately reserved for these years.

In 2010, the Company concluded its Competent Authority tax case with Japan. A settlement was finalized between Japan and Ireland as a transfer price adjustment and no finding of a permanent establishment against the Company in Japan was noted. This Competent Authority agreement closed the Company’s tax years 2002 through 2005 to future examination in Japan. In 2011, the Company finalized an Advanced Pricing Agreement (APA) with Japan that will cover tax years 2006 through 2011, with a requested extension to 2012. The Company believes it is adequately reserved for these open years.

Deferred tax assets consisted of the following (in thousands):


	December 31,
	2013			2012
Current deferred tax assets:
Inventory and revenue related	$	5,614		$	4,303
Bonuses, commissions, and other compensation		1,377			1,280
Other		1,292			1,093

Gross current deferred tax assets		8,283			6,676
Valuation allowance		(672	)		(307	)

Net current deferred tax assets	$	7,611		$	6,369

Noncurrent deferred tax assets:
Stock-based compensation expense	$	7,488		$	7,242
Federal and state tax credit carryforwards		5,418			9,747
Depreciation		1,831			1,819
Acquired completed technologies and other intangible assets		835			1,119
Unrealized investment gains and losses		601			1,075
Correlative tax relief and deferred interest related to reserves		252			520
Capital loss carryforward		-			373
Acquired in-process technology		-			90
Other		1,178			1,960

Gross noncurrent deferred tax assets		17,603			23,945
Noncurrent deferred tax liabilities:
Nondeductible intangible assets		(3,662	)		(4,945	)
Other		(548	)		(2,171	)

Gross noncurrent deferred tax liabilities		(4,210	)		(7,116	)
Valuation allowance		(1,086	)		(1,182	)

Net noncurrent deferred tax assets	$	12,307		$	15,647

In 2013, the Company recorded a valuation allowance of $642,000, which includes an allowance of $628,000 for current-year state research and experimentation tax credits that were not considered to be realizable. Partially offsetting this increase was a decrease to a valuation allowance of $373,000 against certain capital losses that are no longer realizable. The total net change in the valuation allowance in the current year is an increase of $269,000. The state research and development tax credits may be utilized in a future period, and the reserve associated with these credits will be reversed in the period when it is determined that the credits can be utilized to offset future federal and state income tax liabilities. In addition, the Company had $5,050,000 of state research and experimentation tax credit carryforwards, net of federal tax, as of December 31, 2013, which will begin to expire in 2016.

If certain of the Company’s tax liabilities were paid, the Company would receive correlative tax relief in other jurisdictions. Accordingly, the Company has recognized a deferred tax asset in the amount of $252,000 as of December 31, 2013, which represents this correlative tax relief and deferred interest.

The Company recorded certain intangible assets as a result of the acquisition of DVT Corporation in 2005. The amortization of these intangible assets is not deductible for U.S. tax purposes. A deferred tax liability was established to reflect the federal and state liability associated with not deducting the acquisition-related amortization expenses. The balance of this liability was $3,662,000 as of December 31, 2013.

While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pretax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to income in the period of determination.

The Company does not provide U.S. income taxes on its foreign subsidiaries’ undistributed earnings, as they are deemed to be permanently reinvested outside the United States. Non-U.S. income taxes are, however, provided on those foreign subsidiaries’ undistributed earnings. Upon repatriation, the Company would provide the appropriate U.S. income taxes on these earnings, net of applicable foreign tax credits. It is not practicable to determine the income tax liability that might be incurred if the earnings were to be distributed.

The Company recorded $354,000 and $141,000 of other income in the first quarters of 2013 and 2012, respectively, upon the expiration of the statutes of limitations relating to tax holidays, during which time the Company collected value-added taxes from customers that were not required to be remitted to the government authority.

Cash paid for income taxes totaled $8,831,000 in 2013, $13,551,000 in 2012, and $18,389,000 in 2011.