(10)INCOME TAXES

The sources of pre-tax operating income are as follows (in thousands):


	Year Ended December 31,
	2016		2015		2014
Domestic	$	(6,216)	$	25,402	$	20,569
Foreign		56,514		60,487		79,890
Total	$	50,298	$	85,889	$	100,459

The components of the Company’s Provision for (benefit from) income taxes are as follows (in thousands):


	Year Ended December 31,
	2016		2015		2014
Current provision for (benefit from)
Federal	$	(373)	$	4,094	$	(699)
State		372		1,829		270
Foreign		14,447		4,764		13,957
Total current provision for (benefit from)		14,446		10,687		13,528
Deferred provision for (benefit from)
Federal		(2,390)		(1,895)		10,148
State		103		1,085		423
Foreign		704		10,127		(1,057)
Total deferred provision for (benefit from)		(1,583)		9,317		9,514
Total provision for (benefit from) income taxes	$	12,863	$	20,004	$	23,042

The following reconciles the Company’s effective tax rate to the federal statutory rate (in thousands):


	Year Ended December 31,
	2016		2015		2014
Income tax per U.S. federal statutory rate (35%)	$	17,605	$	30,062	$	35,161
State income taxes, net of federal deduction		(158)		1,603		1,525
Change in valuation allowances		(129)		3,923		256
Foreign income taxes at different rates than the U.S.		(10,206)		(14,490)		(17,824)
Foreign withholding taxes		590		958		257
Losses in international markets without tax benefits		2,474		1,999		1,649
Nondeductible compensation under Section 162(m)		104		512		817
Liabilities for uncertain tax positions		(133)		1,756		1,435
Permanent difference related to foreign exchange gains		388		162		(11)
(Income) losses of foreign branch operations		(635)		(517)		225
Non-taxable earnings of noncontrolling interest		(1,128)		(1,349)		(1,141)
Foreign dividend less foreign tax credits		(4,646)		(4,425)		(1,428)
Increase in deferred tax liability - branch losses in UK		—		(2,530)		(75)
Decrease (increase) to deferred tax asset - change in tax rate		443		(526)		(443)
State income tax credits		100		(1,477)		(142)
Foreign earnings taxed currently in U.S.		3,673		2,839		2,696
Taxes related to prior year filings		2,554		344		—
Other		1,967		1,160		85
Income tax per effective tax rate	$	12,863	$	20,004	$	23,042

The Company’s deferred income tax assets and liabilities are summarized as follows (in thousands):


	Year Ended December 31,
	2016		2015
Deferred tax assets, gross
Accrued workers compensation, deferred compensation and employee benefits	$	11,212	$	10,509
Allowance for doubtful accounts, insurance and other accruals		3,348		4,860
Amortization of deferred rent liabilities		3,362		2,500
Net operating losses		20,253		19,522
Equity compensation		2,489		3,505
Customer acquisition and deferred revenue accruals		11,739		16,610
Federal and state tax credits, net		7,439		10,057
Depreciation and amortization		4,671		6,265
Unrealized losses on derivatives		13,815		16,644
Contract acquisition costs		1,044		—
Other		2,331		2,655
Total deferred tax assets, gross		81,703		93,127
Valuation allowances		(9,949)		(10,139)
Total deferred tax assets, net		71,754		82,988
Deferred tax liabilities
Contract acquisition costs		—		(25,667)
Intangible assets		(17,971)		(6,082)
Other		(357)		(2,490)
Total deferred tax liabilities		(18,328)		(34,239)
Net deferred tax assets	$	53,426	$	48,749

Quarterly, the 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, 2016 the Company had approximately $45.0 million of net deferred tax assets in the U.S. and $8.4 million of net deferred tax assets related to certain international locations whose recoverability is dependent upon their future profitability. As of December 31, 2016 the deferred tax valuation allowance was $9.9 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 2016, the Company made adjustments to its deferred tax assets and corresponding valuation allowances. The net change to the valuation allowance consisted of the following: a $0.1 million increase in certain state credits and NOLs that are now expected to be utilized prior to expiration, a $1.8 million increase in valuation allowance in Canada, Ireland, the Middle East and New Zealand for deferred tax assets that do not meet the “more-likely-than-not” standard, and a $2.1 million release of valuation allowance in the Philippines, United Kingdom and various other jurisdictions related to the utilization or write-off of deferred tax assets.

Activity in the Company’s valuation allowance accounts consists of the following (in thousands):


	Year Ended December 31,
	2016		2015		2014
Beginning balance	$	10,139	$	10,721	$	10,792
Additions of deferred income tax expense		1,914		4,300		946
Reductions of deferred income tax expense		(2,104)		(4,882)		(1,017)
Ending balance	$	9,949	$	10,139	$	10,721

As of December 31, 2016, after consideration of all tax loss and tax credit carry back opportunities, the Company had tax affected tax loss carry forwards worldwide expiring as follows (in thousands):


2017	$	—
2018		115
2019		240
2020		375
After 2020		15,114
No expiration		4,409
Total	$	20,253

As of December 31, 2016, domestically, the Company had federal tax credit carry forwards in the amount of $1.8 million that if unused will expire in 2023, $0.9 million that if unused will expire in 2024, $1.7 million that if unused will expire in 2025 and $1.5 million that if unused will expire in 2026. The Company also had state tax credit carry-forwards of $0.3 million that if unused will expire between 2017 and 2023.

As of December 31, 2016 the cumulative amount of foreign earnings considered permanently invested outside the U.S. was $533.6 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 if the Company remits 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 multiple agreements with an initial period of four years and additional periods for varying years, expiring at various times between 2017 and 2019. The aggregate benefit to income tax expense for the years ended December 31, 2016, 2015 and 2014 was approximately $12.4 million, $12.2 million and $20.2 million, respectively, which had a favorable impact on diluted net income per share of $0.27, $0.25 and $0.27, 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 Balance Sheets and Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2016, 2015 and 2014 was approximately $693 thousand, $709 thousand and $132 thousand, respectively.

The Company had a reserve for uncertain tax benefits, on a net basis, of $3.5 million and $3.7 million for the years ended December 31, 2016 and 2015, respectively. The liability for uncertain tax positions was reduced by $1.1 million during 2016 for tax positions that were resolved favorably or expired and increased by $0.8 million for new uncertain tax positions.

The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the three years ended December 31, 2016 is presented below (in thousands):


Balance as of December 31, 2013	$	358
Additions for current year tax positions		1,303
Reductions in prior year tax positions		—
Balance as of December 31, 2014		1,661
Additions for current year tax positions		1,048
Reductions in prior year tax positions		—
Balance as of December 31, 2015		2,709
Additions for current year tax positions		826
Reductions in prior year tax positions		(1,153)
Balance as of December 31, 2016	$	2,382

At December 31, 2016, the amount of uncertain tax benefits that, if recognized, would reduce tax expense was $3.5 million. Within the next 12 months, it is expected that the amount of unrecognized tax benefits will be reduced by $0.8 million as a 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, 2016 and subject to examination by the respective tax authorities:


Tax Jurisdiction		Tax Year Ended
United States		2013 to present
Argentina		2011 to present
Australia		2012 to present
Brazil		2011 to present
Canada		2009 to present
Mexico		2011 to present
Philippines		2014 to present
Spain		2012 to present

In accordance with ASC 740, the Company recorded a liability during the second quarter of 2015 of $1.75 million and during the first quarter of 2016 of $1.1 million, inclusive of penalties and interest, for an uncertain tax position. See Note 1 for further information on these items.

During the second quarter of 2016, $0.3 million of liability was released due to the closing of a statute of limitations.

During the third quarter of 2016, $0.8 million of liability was released due to the favorable outcome of communications with a revenue authority related to site compliance for locations with tax advantaged status.

During the third quarter of 2016, $0.5 million of liability was released due to the closing of a statute of limitations.

The Company’s U.S. income tax returns filed for the tax years ending December 31, 2013 to present, remain open tax years. The Company has been notified of the intent to audit, or is currently under audit of, income taxes for rogenSi in Hong Kong for the tax year 2014, Canada for tax years 2009 and 2010, and the state of Michigan in the United States for tax years 2012 through 2015. 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. The Company has successfully closed their audit in the U.S. during the second quarter of 2016 for the acquired entity Technology Solutions Group for the tax year 2012 (prior to acquisition), with no changes. The Company also closed their audit in the fourth quarter of 2016 in New Zealand for tax years 2013 and 2014 with no changes.