12. Income Taxes

Income (loss) before provision for income taxes for fiscal 2013, 2012, and 2011 consisted of the following (in thousands):


	2013		2012		2011
United States	$	44,005	$	3,602	$	(915	)
Foreign		57,728		64,948		74,386

Income before provision for income taxes	$	101,733	$	68,550	$	73,471

The provision for income taxes for fiscal 2013, 2012, and 2011 consisted of the following (in thousands):


	2013			2012			2011
Current tax expense (benefit)
Federal	$	(9,232	)	$	5,524		$	2,573
State		4			36			152
Foreign		10,521			9,587			10,616

		1,293			15,147			13,341

Deferred tax expense (benefit)
Federal		1,876			(814	)		(3,579	)
State		—			—			—
Foreign		(369	)		73			(87	)

		1,507			(741	)		(3,666	)

Provision for income taxes	$	2,800		$	14,406		$	9,675

The provision for income taxes differs from the federal statutory rate for fiscal 2013, 2012, and 2011 as follows (in thousands):


	2013			2012			2011
Provision at U.S. federal statutory rate	$	35,606		$	23,992		$	25,715
State income taxes		3			139			390
Qualified stock options		2,071			2,280			2,129
Business credits		(3,722	)		(1,278	)		(2,910	)
Foreign tax differential		(16,589	)		(10,933	)		(15,818	)
Remeasurement of unrecognized tax benefits		(15,569	)		—			—
Change in valuation allowance		(154	)		(27	)		(21	)
Nondeductible amortization		578			—			—
Other differences		576			233			190

Provision for income taxes	$	2,800		$	14,406		$	9,675

Net deferred tax assets as of the end of fiscal 2013 and 2012 consisted of the following (in thousands):


	2013		2012
Current deferred tax assets	$	2,837	$	1,596
Non-current deferred tax assets		13,374		13,725

Net deferred tax assets	$	16,211	$	15,321

Current deferred tax assets and non-current deferred tax assets are included in prepaid expenses and other current assets, and other assets, respectively, in the accompanying consolidated balance sheets.

Significant components of our deferred tax assets (liabilities) as of the end of fiscal 2013 and 2012 consisted of the following (in thousands):


	2013			2012
Deferred tax assets:
Investment writedowns	$	6,769		$	6,871
Capital loss carryforward		1,352			1,984
Inventory writedowns		268			259
Property and equipment		86			605
Accrued compensation		2,027			1,443
Share-based compensation		15,436			15,913
Business credit carryforward		13,332			14,372
Net operating loss carryforward		1,166			1,403
Other accruals		437			612

		40,873			43,462
Valuation allowance		(15,556	)		(14,715	)

		25,317			28,747

Deferred tax liabilities:
Acquisition intangibles		(834	)		(4,583	)
Interest deduction		(8,272	)		(8,843	)

		(9,106	)		(13,426	)

Net deferred tax assets	$	16,211		$	15,321

Realization of deferred tax assets depends on our generating sufficient U.S. and certain foreign taxable income in future years to obtain benefit from the utilization of those deferred tax assets on our tax returns. Accordingly, the amount of deferred tax assets considered realizable may increase or decrease when we reevaluate the underlying basis for our estimates of future U.S. and foreign taxable income. As of the end of fiscal 2013, a valuation allowance of $15.6 million had been established to reduce deferred tax assets to levels that we believe are more likely than not to be realized through future taxable income. The net change in the valuation allowance during fiscal 2013 was $841,000.

Undistributed operating earnings of our foreign subsidiaries were approximately $384.6 million as of the end of fiscal 2013 and are considered to be indefinitely reinvested overseas, and no U.S. income taxes have been provided for on these earnings. The potential deferred tax liability associated with undistributed operating earnings of our foreign subsidiaries was approximately $95.1 million.

As of the end of fiscal 2013, we had California net operating loss carryforwards of approximately $26.1 million. The California net operating loss carryforwards were attributable to share-based award deductions. The benefit of these net operating losses will be recorded directly to additional paid-in capital when realized. The California net operating loss will begin to expire in fiscal 2021, if not utilized. The federal and state capital losses will begin to expire in fiscal 2014, if not utilized. In addition, we had $4.0 million of federal and Idaho operating losses in connection with the acquisition of Pacinian. Under current tax law, net operating loss and tax credit carryforwards available to offset future income or income taxes may be limited by statute or upon the occurrence of certain events, including significant changes in ownership.

We had $5.7 million and $10.8 million of federal and state research tax credit carryforwards, respectively, as of the end of fiscal 2013. The federal research tax credit carryforward will begin to expire in 2027 and the state research tax credit can be carried forward indefinitely. We also had $1.3 million of federal alternative minimum tax credit carryforward available to offset future federal tax liabilities with no expiration.

The total liability for gross unrecognized tax benefits, included in other liabilities in our consolidated balance sheets, decreased $14.9 million to $8.2 million in fiscal 2013 from $23.1 million in fiscal 2012. All of this amount would affect the effective tax rate on income from continuing operations, if recognized. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits for fiscal 2013, 2012, and 2011 consisted of the following (in millions):


	2013			2012		2011
Beginning balance	$	23.1		$	20.2	$	19.0
Increase in unrecognized tax benefits related to current year tax positions		1.8			2.6		2.8
Increase in unrecognized tax benefits related to prior year tax positions		—			0.3		—
Remeasurement for results of income tax examination		(15.0	)		—		—
Decrease due to statute expiration		(1.7	)		—		(1.6	)

Ending Balance	$	8.2		$	23.1	$	20.2

Accrued interest and penalties decreased by $1.5 million, representing income tax benefit, in fiscal 2013, and increased $749,000 and $438,000, representing income tax expense, in fiscal 2012 and 2011, respectively. Our policy is to classify interest and penalties, if any, as components of income tax expense.

In May 2011, we were notified by the Internal Revenue Service (Service) that our fiscal 2003 through 2006 and fiscal 2008 through 2010 would be subject to examination. The early periods were being audited in connection with a mandatory review of tax refunds in excess of $2.0 million when we carried back our fiscal 2008 net operating loss. In March 2013, we received the Revenue Agent’s Report resolving our examination with the Service and paid an assessment that had no material impact to our condensed consolidated financial statements. Our case is under review by the Joint Committee of Taxation, which we anticipate will be complete in fiscal 2014. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2013 (The Act). The Act extends the federal research credit for two years retroactively from January 1, 2012 through December 31, 2013. As such, we recognized approximately a $3.5 million tax benefit in fiscal year 2013, the period that includes the enactment date.

It is reasonably possible that the amount of the liability for unrecognized tax benefits may change within the next 12 months and an estimate of the range of possible changes is an increase of up to $2.0 million.

Our major tax jurisdictions are the United States, California, and Hong Kong SAR, and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.