INCOME TAXES

In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands):

	Year Ended October 31,
	2017		2016		2015
Current:
U.S. taxes	$	308	$	1,362	$	4,600
Foreign taxes		4,185		4,456		3,752
		4,493		5,818		8,352
Deferred:
U.S. taxes		1,236		(176)		(896)
Foreign taxes		(128)		(49)		(117)
		1,108		(225)		(1,013)
	$	5,601	$	5,593	$	7,339

A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows (dollars in thousands):

	Year Ended October 31,
	2017			2016			2015
Income before income taxes:
Domestic	$	5,477		$	2,703		$	10,806
Foreign		15,239			16,182			12,747
Earnings (Loss) before taxes on income	$	20,716		$	18,885		$	23,553
Tax rates:
U.S. statutory rate		34	%		34	%		35	%
Effect of tax rate of international jurisdictions different than U.S. statutory rates		(5	%)		(7	%)		(5	%)
Valuation allowance.		1	%		3	%		1	%
State taxes		0	%		0	%		1	%
Tax Credits		(3	%)		(2	%)		(1	%)
Effect of Tax Rate Changes		0	%		4	%		0	%
Other		0	%		(2	%)		0	%
Effective tax rate		27	%		30	%		31	%

We have not made any provision for U.S. income taxes on the undistributed earnings of our wholly-owned foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2017 were approximately $92.9 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

As of October 31, 2017, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.7 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research and development tax credits of $0.5 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2017 and 2016, the balance of this valuation allowance was $2.3 million and $2.1 million, respectively.

Significant components of our deferred tax assets and liabilities at October 31, 2017 and 2016 were as follows (in thousands):

	October 31,
	2017		2016
Deferred Tax Assets:
Accrued inventory reserves	$	1,965	$	1,824
Accrued warranty expenses		438		312
Compensation related expenses		2,952		2,664
Net derivative instruments		417		—
Unrealized exchange gain/loss		—		370
Other accrued expenses		187		194
Net operating loss carryforwards		1,722		1,616
Other credit carryforwards		517		474
Other		404		331
		8,602		7,785
Less: Valuation allowance - net operating loss and other credit carryforwards		(2,282)		(2,067)
Deferred tax assets		6,320		5,718

Deferred Tax Liabilities:
Net derivative instruments		—		(701)
Property and equipment and capitalized software development costs		(3,241)		(2,717)
Unrealized exchange gain/loss		(116)		—
Other		(624)		(456)

Net deferred tax assets	$	2,339	$	1,844

As of October 31, 2017, we had net operating losses carryforwards for international and U.S. income tax purposes of $8.1 million, of which $6.7 million will expire within 5 years beginning in 2018 and $1.4 million will expire between 5 and 20 years. We also had tax credits of $784,000 which will expire between year

2022 and 2027.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

	2017		2016		2015
Balance, beginning of year	$	1,102	$	1,034	$	1,196
Additions based on tax positions related to the current year		37		52		17
Additions (reductions) related to prior year tax positions		(20)		19		(51)
Reductions due to statute expiration		(74)		—		—
Other		56		(3)		(128)

Balance, end of year	$	1,101	$	1,102	$	1,034

The entire balance of the unrecognized tax benefits and related interest at October 31, 2017, if recognized, would affect the effective tax rate in future periods. This balance will be reduced by $1.0 million during the next fiscal year due to statute of limitations expiration.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2017, the amount of interest accrued, reported in other liabilities, was approximately $65,000, which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between July 2018 and July 2020.

We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions.

A summary of open tax years by major jurisdiction is presented below:

United States federal	Fiscal 2014 through the current period
Germany¹	Fiscal 2013 through the current period
Taiwan	Fiscal 2014 through the current period

¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable.