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INCOME TAXES | 12 Months Ended
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Dec. 31, 2013
INCOME TAXES [ABSTRACT] |
INCOME TAXES | (11) INCOME TAXES The sources of pre-tax operating income are as follows (amounts in thousands):
|  |  | Year Ended December 31,
|  | 2013 |  | 2012 |  | 2011
Domestic | $ | 10,816 |  | $ | (8,336) |  | $ | 3,225
Foreign |  | 81,253 |  |  | 82,198 |  |  | 88,329
| Total | $ | 92,069 |  | $ | 73,862 |  | $ | 91,554
The components of the Company's Provision for (b enefit from) income taxes are as follows (amounts in thousands):
|  |  |  | Year Ended December 31,
|  |  | 2013 |  | 2012 |  | 2011
Current provision for (benefit from) |  |  |  |  |  |  |  |
| Federal | $ | (320) |  | $ | (2,211) |  | $ | (10,371)
| State |  | 150 |  |  | (1,013) |  |  | 297
| Foreign |  | 13,876 |  |  | 809 |  |  | 21,695
|  | Total current provision for (benefit from) |  | 13,706 |  |  | (2,415) |  |  | 11,621
Deferred provision for (benefit from) |  |  |  |  |  |  |  |
| Federal |  | 4,674 |  |  | 1,215 |  |  | (838)
| State |  | 195 |  |  | 64 |  |  | (44)
| Foreign |  | 2,023 |  |  | 1,075 |  |  | 2,540
|  | Total deferred provision for (benefit from) |  | 6,892 |  |  | 2,354 |  |  | 1,658
|  | Total provision for (benefit from) income taxes | $ | 20,598 |  | $ | (61) |  | $ | 13,279
The following reconciles the Company's effective tax rate to the federal statutory rate (amounts in thousands):
|  |  |  | Year Ended December 31,
|  |  | 2013 |  | 2012 |  | 2011
Income tax per U.S. federal statutory rate (35%) | $ | 32,224 |  | $ | 25,852 |  | $ | 32,044
| State income taxes, net of federal deduction |  | 210 |  |  | (345) |  |  | 875
| Change in valuation allowances |  | 3,266 |  |  | (315) |  |  | (79)
| Foreign income taxes at different rates than the U.S. |  | (20,529) |  |  | (24,507) |  |  | (18,136)
| Foreign withholding taxes |  | 2,504 |  |  | 2,876 |  |  | 2,177
| Losses in international markets without tax benefits |  | 779 |  |  | 4,329 |  |  | 1,094
| Nondeductible compensation under Section 162(m) |  | 1,847 |  |  | 1,451 |  |  | 2,408
| Liabilities for uncertain tax positions |  | 77 |  |  | (2,988) |  |  | 1,875
| Permanent difference related to foreign exchange gains |  | (122) |  |  | (13) |  |  | (45)
| (Income) losses of foreign branch operations |  | 1,447 |  |  | (4,263) |  |  | 70
| Non-taxable earnings of minority interest |  | (1,172) |  |  | (213) |  |  | 390
| Foreign dividend less foreign tax credits |  | (2,587) |  |  | (2,935) |  |  | (5,294)
| Increase in deferred tax liability - branch losses in UK |  | (954) |  |  | (1,012) |  |  | 18
| Decrease (increase) to deferred tax asset - change in tax rate | (68) |  |  | 946 |  |  | -
| IRS settlement on prior year refund claims |  | - |  |  | - |  |  | (11,700)
| Canada CRA tax decision |  | - |  |  | - |  |  | 8,680
| State income tax credits and net operating losses |  | 615 |  |  | 709 |  |  | -
| Foreign earnings taxed currently in U.S. |  | 2,907 |  |  | - |  |  | -
| Other |  | 154 |  |  | 367 |  |  | (1,098)
Income tax per effective tax rate | $ | 20,598 |  | $ | (61) |  | $ | 13,279
The Company's deferred income tax assets and liabilities are summarized as follows (amounts in thousands):
|  |  |  | Year Ended December 31,
|  |  |  | 2013 |  | 2012
Deferred tax assets, gross |  |  |  |  |  |
| Accrued workers compensation, deferred compensation |  |  |  |  |  |
|  | and employee benefits |  | $ | 7,866 |  | $ | 5,467
| Allowance for doubtful accounts, insurance and other accruals |  |  | 4,037 |  |  | 5,829
| Depreciation and amortization |  |  | - |  |  | 4,366
| Amortization of deferred rent liabilities |  |  | 1,903 |  |  | 1,586
| Net operating losses |  |  | 11,023 |  |  | 21,637
| Equity compensation |  |  | 6,566 |  |  | 6,174
| Customer acquisition and deferred revenue accruals |  |  | 15,228 |  |  | 16,387
| Federal and state tax credits, net |  |  | 15,886 |  |  | 17,545
| Unrealized losses on derivatives |  |  | 4,446 |  |  | -
| Other |  |  | 9,467 |  |  | 13,423
|  | Total deferred tax assets, gross |  |  | 76,422 |  |  | 92,414
| Valuation allowances |  |  | (10,792) |  |  | (20,909)
|  | Total deferred tax assets, net |  |  | 65,630 |  |  | 71,505
Deferred tax liabilities |  |  |  |  |  |
| Long-term lease obligations |  |  | (12) |  |  | 10
| Depreciation and amortization |  |  | 1,067 |  |  | -
| Unrealized gains on derivatives |  |  | - |  |  | (7,464)
| Contract acquisition costs |  |  | (11,653) |  |  | (9,946)
| Future losses in UK |  |  | (2,606) |  |  | (3,559)
| Other |  |  | (600) |  |  | (3,423)
|  | Total deferred tax liabilities |  |  | (13,804) |  |  | (24,382)
|  | Net deferred tax assets |  | $ | 51,826 |  | $ | 47,123
Quarterly, t he Company assesses the likelihood by jurisdiction that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized. As of December 31, 2013 the Company had approximately $32.6 million of net deferred tax assets in the U.S. and $19.2 million of net deferred tax assets related to certain international locations whose recoverability is dependent upon their future profitability. As of December 31, 2013 the deferred tax valuation allowance was $10.8 million and related primarily to tax losses in foreign jurisdictions and U.S. federal and state tax credits which do not meet the “more-likely-than-not” standard under current accounting guidance. The utilization of these federal and state tax credits are subject to numerous factors including various expiration dates, generation of future taxable income over extended periods of time and state income tax apportionment factors which are subject to change. When there is a change in judgment concerning the recovery of deferred tax assets in future periods, a valuation allowance is recorded into earnings during the quarter in which the change in judgment occurred. In 2013, the Company made adjustments to its deferred tax assets and corresponding valuation allowances. The net reduction to the valuation allowance of $10.1 million was due to a $1.3 million decrease in certain state credits and NOLs that do not meet the “more-likely-than-not” standard, a $1.5 million increase in valuation allowance in Argentina for deferred tax assets that do not meet the “more-likely-than-not” standard, a $2.1 million increase in valuation allowance in the Philippines for deferred tax assets that do not meet the “more-likely-than-not” standard, a $0.6 million increase in valuation allowance in various other jurisdictions for deferred tax assets that do not meet the “more-likely-than-not” standard, a $0.1 million de crease in the valuation allowance related to certain federal tax credits, an $11.6 million write-off of the deferred tax assets associated with Korea and Spain against their recorded valuation allowance as these assets will not be realized, and a $1.3 million reduction in the valuation al lowance in certain other jurisdictions. Activity in the Company's valuation allowance accounts consists of the following (amounts in thousands):
|  |  | Year Ended December 31,
|  | 2013 |  | 2012 |  | 2011
Beginning balance | $ | 20,909 |  | $ | 16,555 |  | $ | 22,636
Additions of deferred income tax expense |  | 4,218 |  |  | 5,560 |  |  | 1,402
Reductions of deferred income tax expense |  | (14,335) |  |  | (1,206) |  |  | (7,483)
| Ending balance | $ | 10,792 |  | $ | 20,909 |  | $ | 16,555
On February 20, 2011, the Company received notice of an adverse decision by the Canadian Revenue Agency (“CRA”) in regards to the Company's attempt to recover taxes paid to Canada with respect to the years 2001 and 2002. In 2005, through the Competent Authority process, the Company sought relief under the United States-Canada Income Tax Convention for avoidance of double taxation arising from adjustments to the taxable income originally reported to these jurisdictions. Consistent with accounting for tax positions that no longer meet the recognition criteria, the Company derecognized income tax positions totaling $8.6 million through income tax expense in the first quarter of 2011. Believing in the merits of the case, on May 9, 2011, the Company filed for Judicial Review in the Federal Court of Canada seeking a writ of mandamus to compel the CRA to accept the Company's application for Competent Authority consideration. On May 29, 2013, the Company learned of the Court's finding in favor of Canada Revenue Agency in denying the Company's request. After considering its alternatives, the time and cost involved with beginning a new legal action as well as the likelihood that any new action would meet with success the Company made the decision to not pursue this issue further. There was no financial statement impact in 2012 or 2013 as a result of these actions as all tax positions related to our Competent Authority efforts were derecognized in 2011. As of December 31, 2013, after consideration of all tax loss and tax credit carry back opportunities, the Company had net tax loss carry forwards worldwide expiring as follows (amounts in thousands):
2014 |  | $ | 45
2015 |  |  | 1,358
2016 |  |  | 1,751
2017 |  |  | 333
After 2017 |  |  | 2,697
No expiration |  |  | 5,175
| Total |  | $ | 11,359
As of December 31, 2013, domestically, the Company had federal tax credit carry forwards in the amount of $3.4 million that if unused will expire in 2020, $3.7 million that if unused will expire in 2021, and $2.2 million that if unused will expire in 2022 and $2.4 million that if unused will expire in 2023. The Company also had state tax credit carry-forwards of $2.7 million that if unused will expire between 201 3 and 2023. As of December 31, 2013 the cumulative amount of foreign earnings considered permanently invested outside the U.S. was $375.9 million. Those earnings do not include earnings from certain subsidiaries which the Company intends to repatriate to the U.S. or are otherwise considered available for distribution to the U.S. Accordingly, no provision for U.S. federal or state income taxes or foreign withholding taxes has been provided on these undistributed earnings. If these earnings become taxable in the U.S, the Company would be subject to incremental tax expense, after any applicable foreign tax credit, and foreign withholding tax expense. It is not practicable to estimate the additional taxes that may become payable upon the eventual remittance of these foreign earnings. The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the governments of the Philippines and Costa Rica. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted 1 7 separate agreements with an initial period of four years and additional periods for varying years, expiring at various times between 2011 and 201 7. The aggregate effect on income tax expense for the years ended December 31, 2013, 2012 and 2011 was approximately $14.6 million, $20.1 million and $14.0 million, respectively, which had a favorable impact on diluted net income per share of $0.28, $0.36 and $0.25, respectively. Accounting for Uncertainty in Income Taxes In accordance with ASC 740, the Company has recorded a reserve for uncertain tax positions. The total amount of interest and penalties recognized in the accompanying Consolidated Statements of Comprehensive Income as of December 31, 2013, 2012 and 2011 was approximately $77 thousand, $40 thousand and $0.1 million, respectively, and the total amount of interest and penalties recognized in the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012 was approximately $77 thousand and $40 thousand, respectively. The Company ha d a reserve for uncertain tax benefits, on a net basis, of $0.5 million and $0.4 million for the years ended December 31, 2013 and 2012, respectively. The liability for uncertain tax positions was not changed in 2013 for tax position s that w ere resolved favorably or expired. The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the year ended December 31, 2013 is presented below (amounts in thousands):
Balance as of December 31, 2010 |  | $ | 9,035
| Additions for current year tax positions |  |  | 2,202
| Reductions in prior year tax positions |  |  | (8,502)
Balance as of December 31, 2011 |  |  | 2,735
| Additions for current year tax positions |  |  | 369
| Reductions in prior year tax positions |  |  | (2,746)
Balance as of December 31, 2012 |  |  | 358
| Additions for current year tax positions |  |  | -
| Reductions in prior year tax positions |  |  | -
Balance as of December 31, 2013 |  | $ | 358
At December 31, 2013, the amount of uncertain tax benefits that, if recognized, would reduce tax expense was $0.5 million. Within the next 12 months, it is not expected that unrecognized tax benefits will change as the result of the expiration of various statutes of limitation. The Company and its domestic and foreign subsidiaries (including Percepta LLC and its domestic and foreign subsidiaries) file income tax returns as required in the U.S. federal jurisdiction and various state and foreign jurisdictions. The following table presents the major tax jurisdictions and tax years that are open as of December 31, 2013 and subject to examination by the respective tax authorities:
Tax Jurisdiction | Tax Year Ended
United States | 2009 to present
Argentina | 2008 to present
Australia | 2009 to present
Brazil | 2008 to present
Canada | 2006 to present
Mexico | 2008 to present
Philippines | 2011 to present
Spain | 2009 to present
The Company's U.S. income tax returns filed for the tax years ending December 31, 200 9 to present, remain open tax years. The Company has been notified of the intent to audit, or is currently under audit of income taxes in the U.S. for tax years 2009, 2011 and 2012, Canada for tax years 2009 and 2010 and the Netherlands for tax year 2010. Although the outcome of examinations by taxing authorities are always uncertain, it is the opinion of management that the resolution of these audits will not have a material effect on the Company's Consolidated Financial Statements.

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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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