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Income Taxes | 12 Months Ended
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Dec. 31, 2014
Income Taxes | 12. INCOME TAXES The components of income tax expense are as follows:
|  | Year Ended December 31 |
|  | 2012 |  |  | 2013 |  |  | 2014 |
|  | US$ |  |  | US$ |  |  | US$ |
Current |  |  | 5,534 |  |  |  | 8,591 |  |  |  | 15,630 |
Deferred |  |  | 1,582 |  |  |  | 1,181 |  |  |  | 471 |
Income tax expense |  |  | 7,116 |  |  |  | 9,772 |  |  |  | 16,101 |
The income (loss) before income taxes for domestic and foreign entities is as follows:
|  | Year Ended December 31 |
|  | 2012 |  |  | 2013 |  |  | 2014 |
|  | US$ |  |  | US$ |  |  | US$ |
Domestic |  |  | (11,039 | ) |  |  | (8,080 | ) |  |  | (12,761 | )
Foreign |  |  | 65,373 |  |  |  | 45,228 |  |  |  | 73,329 |
|  |  | 54,334 |  |  |  | 37,148 |  |  |  | 60,568 |
Since the Company is based in the Cayman Islands, a tax-free country, domestic tax on pretax income is calculated at the Cayman Islands statutory rate of zero for each year. The Company and its subsidiaries file separate income tax returns. A reconciliation of income tax expense on pretax income at statutory rate and income tax expense is shown below:
|  | Year Ended December 31 |
|  | 2012 |  |  | 2013 |  |  | 2014 |
|  | US$ |  |  | US$ |  |  | US$ |
Cayman statutory rate |  |  | — |  |  |  | — |  |  |  | — |
Tax on pretax income at statutory rate |  |  | 8,142 |  |  |  | 6,788 |  |  |  | 15,727 |
Tax-exempt income |  |  | (5,149 | ) |  |  | (4,325 | ) |  |  | (2,573 | )
Permanent differences |  |  | 861 |  |  |  | 1,730 |  |  |  | (396 | )
Temporary differences |  |  | (2,290 | ) |  |  | 1,732 |  |  |  | (344 | )
Alternative minimum tax |  |  | 4,340 |  |  |  | 2,203 |  |  |  | 1,170 |
Income tax (10%) on undistributed earnings |  |  | 2,631 |  |  |  | 3,396 |  |  |  | 2,491 |
Net changes in income tax credit |  |  | 5,518 |  |  |  | 708 |  |  |  | (899 | )
Net changes in valuation allowance of deferred income tax assets |  |  | (3,879 | ) |  |  | (2,364 | ) |  |  | 733 |
Net operating loss carryforwards |  |  | 604 |  |  |  | (189 | ) |  |  | (1,298 | )
Liabilities related to unrealized tax benefits |  |  | 832 |  |  |  | (39 | ) |  |  | 91 |
Adjustment of prior years’ taxes and others |  |  | (4,494 | ) |  |  | 132 |  |  |  | 1,399 |
Income tax expense |  |  | 7,116 |  |  |  | 9,772 |  |  |  | 16,101 |
Deferred income tax assets (liabilities) are as follows:
|  | December 31 |
|  | 2013 |  |  | 2014 |
|  | US$ |  |  | US$ |
Current: |  |  |  |  |  |  |  |
Notes and accounts receivable |  |  | 142 |  |  |  | 141 |
Stock-based compensation |  |  | 679 |  |  |  | 615 |
Allowance for sales return |  |  | 123 |  |  |  | 105 |
Inventory reserve |  |  | 544 |  |  |  | 48 |
Foreign currency translation |  |  | 312 |  |  |  | (1,273 | )
Others |  |  | 561 |  |  |  | 504 |
Valuation allowance |  |  | (1,083 | ) |  |  | (528 | )
|  |  | 1,278 |  |  |  | (388 | )
Non-current: |  |  |  |  |  |  |  |
Inventory reserve |  |  | 590 |  |  |  | 766 |
Property and equipment |  |  | 651 |  |  |  | 452 |
Investment tax credits |  |  | 7,011 |  |  |  | 7,823 |
Net operating loss carryforwards |  |  | 8,540 |  |  |  | 9,621 |
Others |  |  | (885 | ) |  |  | (490 | )
Valuation allowance |  |  | (15,193 | ) |  |  | (16,263 | )
|  |  | 714 |  |  |  | 1,909 |
The valuation allowance shown in the table above relates to net operating loss carryforwards, tax credits and temporary differences for which the Company believes that realization is uncertain. The change in the valuation allowance was a decrease of US$3,271 thousand, an increase of US$1,075 thousand, and an increase of US$515 thousand for the years ended December 31, 2012, 2013, and 2014, respectively. The decrease in the valuation allowance in 2012 was primarily due to the utilization of net operating loss carryforwards in 2012 which had been previously fully provided. The increase in valuation allowance in 2013 and 2014 are primarily due to the uncertainty in generating sufficient taxable income in the future and utilization of operating loss carryforwards and research and development credits before they expire. In addition, profits generated from certain products of SMI Taiwan are exempted from income tax for five years beginning January 1, 2010 and January 1, 2012. As of December 31, 2014, FCI had unused research and development tax credits of approximately US$3,754 thousand which will expire in 2015 to 2019. As of December 31, 2014, the Company’s United States federal net operating loss carryforwards for federal income tax purposes were approximately US$7,794 thousand. If not utilized, the federal net operating loss carryforwards will expire in 2024. As of December 31, 2014, the Company’s United States federal and state research and development tax credit carryforwards for federal and state income tax purposes were approximately US$2,391 thousand and US$1,678 thousand, respectively. If not utilized, the federal tax credit carryforwards will expire starting in 2023 while the state tax credit carryforward has no expiration date. Current United States federal and California state laws include substantial restrictions on the utilization of net operating losses and credits in the event of an “ownership change” of a corporation. Accordingly, the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such “ownership change”. Such a limitation could result in the expiration of carryforwards before they are utilized. Unrecognized Tax Benefit A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
|  | Year Ended December 31 |
|  | 2012 |  |  | 2013 |  |  | 2014 |
|  | US $ |  |  | US $ |  |  | US$ |
Balance, beginning of year |  |  | 2,657 |  |  |  | 3,520 |  |  |  | 5,815 |
Increases in tax positions taken in current year |  |  | 917 |  |  |  | 2,947 |  |  |  | 446 |
Decrease in tax position taken in prior year primarily related to the resolution of tax audit |  |  | (54 | ) |  |  | (652 | ) |  |  | (1,606 | )
Balance, end of year |  |  | 3,520 |  |  |  | 5,815 |  |  |  | 4,655 |
At December 31, 2014, the Company had US$4,655 thousand of unrecognized tax benefits that if recognized would affect the effective tax rate. For the years ended December 31, 2012, 2013 and 2014, the total amount of interest expense and penalties related to uncertain tax positions recorded in the provision for income tax expense was approximately US$499 thousand, US$627 thousand and US$343 thousand, respectively. The total amount of accrued interest and penalties recognized as of December 31, 2013 and 2014 was US$1,412 thousand and US$1,674 thousand, respectively. The Company does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. The Company files income tax returns in United States and foreign jurisdictions. The following table summarizes the Company’s major jurisdictions and tax year that remain subject to examination by tax authorities as of December 31, 2014:
Tax Jurisdiction |  | Tax Years
SMI Taiwan |  | 2009 and onward
FCI |  | 2009 and onward
SMI USA |  | 2007 onward

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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