20. INCOME TAXES

Income tax provision

The table below presents the components of income before income taxes for the years ended June 30, 2014, 2013 and 2012:


		2014			2013			2012

South Africa	$	121,338		$	38,654		$	67,054
United States		(9,923	)		(10,075	)		(6,340	)
Other		(2,273	)		(1,300	)		(333	)
Income before income taxes	$	109,142		$	27,279		$	60,381

Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2014, 2013 and 2012:


		2014			2013			2012

Current income tax	$	61,902		$	33,968		$	49,092
South Africa		41,326			15,418			26,787
United States		14,838			16,061			20,746
Other		5,738			2,489			1,559
Deferred taxation (benefit) charge		(7,887	)		(4,915	)		(4,598	)
South Africa		(3,345	)		(2,037	)		(2,941	)
United States		(107	)		(331	)		31
Other		(4,435	)		(2,547	)		(1,688	)
Capital gains tax		202			7			1,465
Secondary taxation on companies		-			-			327
Change in tax rate		-			-			(18,315	)
Foreign tax credits generated – United States		(14,838	)		(14,404	)		(12,035	)
Income tax provision	$	39,379		$	14,656		$	15,936

There were no significant capital gains taxes paid during the years ended June 30, 2014 and 2013, respectively. The capital gains tax paid during the year ended June 30, 2012, represents the taxes paid resulting from an intercompany capital transaction in South Africa.

The Company's South African subsidiary paid a dividend to Net1 after the tax law had changed but before the effective date of the South African dividends withholding tax which resulted in the payment of STC in the third quarter of the year ended June 30, 2012. For the first half of the year ended June 30, 2012, the Company's effective tax rate included an accrual for STC and therefore any STC obligation arising during these periods was charged against the STC liability provided. This STC liability was released during the year end June 30, 2012, as a result of the change in tax law discussed below.

There were no changes to the enacted tax rate in the years ended June 30, 2014 and 2013. On December 20, 2011, there was a change in South African tax law to impose a dividends withholding tax (a tax levied and withheld by a company on distributions to its shareholders) to replace STC. The change was effective on April 1, 2012. As a result, the Company has recorded a net deferred taxation benefit of approximately $18.3 million in income taxation expense in its consolidated statements of operations during the year ended June 30, 2012.

The movement in the valuation allowance for the year ended June 30, 2014, relates to releases of the valuation allowance resulting from the utilization of foreign tax credits during the year and deconsolidation of net operating loss carryforwards for MediKredit. The movement in the valuation allowance for the year ended June 30, 2013, relates to valuation allowances for foreign tax credits and valuation allowances related to net operating loss carryforwards for the Company's South African subsidiaries, primarily MediKredit. As a result of the change in South African tax law during the year ended June 30, 2012, and the Company's intention to permanently reinvest its undistributed earnings in South Africa, the Company did not believe it would be able to recover foreign tax credits previously recognized of $8.2 million. The movement in the valuation allowance during the year ended June 30, 2012, included a valuation allowance related to this foreign tax credits.

Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended June 30, 2014, 2013 and 2012, taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax credits as a result of the inclusion of the dividends in its taxable income. Net1 has applied certain of these foreign tax credits against its current income tax provision for the year ended June 30, 2014, 2013 and 2012, respectively.

A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company's effective tax rate, for the years ended June 30, 2014, 2013 and 2012 is as follows:


	2014		2013		2012
Income tax rate reconciliation:
Income taxes at fully-distributed South African tax rates	28.00	%	28.00	%	28.00	%
Non-deductible items	4.71	%	6.78	%	6.60	%
Foreign tax rate differential	1.89	%	10.39	%	7.22	%
Foreign tax credits	(13.59	%)	(52.80	%)	(21.12	%)
Taxation on deemed dividends in the United States	13.46	%	57.32	%	31.29	%
Capital gains tax paid	0.19	%	0.03	%	2.43	%
Secondary taxation on companies	-	%	-	%	0.54	%
Movement in valuation allowance	1.23	%	9.40	%	1.23	%
Prior year adjustments	0.19	%	(5.39	%)	0.53	%
Change in tax law	-	%	-	%	(30.33	%)
Income tax provision	36.08	%	53.73	%	26.39	%

The non-deductible items during the year ended June 30, 2014, relates principally to expenses that are not deductible for tax purposes, including the charge related to the equity awards issued pursuant to the Company's BEE transactions, stock-based compensation charges, costs incurred to support foreign related entities and interest expense. The non-deductible items during the year ended June 30, 2013, relates principally to expenses that are not deductible for tax purposes, including stock-based compensation charges, costs incurred to support foreign related entities and interest expense. The non-deductible items during the year ended June 30, 2012, relates principally to expenses that are not deductible for tax purposes, including stock-based compensation charges, interest expense and an equity award issued pursuant to the Company's BEE transaction. The foreign tax rate differential represents the difference between statutory tax rates in South Africa and foreign jurisdictions, primarily the United States.

Deferred tax assets and liabilities

Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities as at June 30, and their classification, were as follows :


		2014			2013
Total deferred tax assets

Net operating loss carryforwards	$	1,901		$	12,024
Provisions and accruals		5,470			3,164
FTS patent		909			1,088
Intangible assets		123			17,150
Foreign tax credits		23,338			24,637
Other		7,765			5,537
Total deferred tax assets before valuation allowance		39,506			63,600
Valuation allowances		(25,153	)		(54,117	)
Total deferred tax assets, net of valuation allowance		14,353			9,483

Total deferred tax liabilities:

Intangible assets		16,600			18,729
Other		5,824			4,543
Total deferred tax liabilities		22,424			23,272

Reported as
Current deferred tax assets		7,451			4,938
Long term deferred tax liabilities		15,522			18,727
Net deferred income tax liabilities	$	8,071		$	13,789

Decrease in total deferred tax assets before valuation allowance

Net operating loss carryforwards

Net operating loss carryforwards have decreased primarily due to the sale of MediKredit and substantial liquidation of Net1 UTA during the year ended June 30, 2014.

Net operating loss carryforwards related to these entities as of June 30, 2013, were provided in full in previous years. In addition, the Company provided for the full net operating losses incurred by MediKredit and Net1 UTA during the year ended June 30, 2014. The Company deconsolidated MediKredit's net operating loss carryforwards and associated valuation allowance of $3.1 million when it was sold in June 2014. Furthermore, as a result of the substantial liquidation of Net1 UTA in 2014, the full valuation allowance of $8.9 million has been applied against its net operating loss carryforwards.

Intangible assets

Included in total deferred tax assets – intangible assets as of June 30, 2013, is an intangible asset related to license rights in Net1 UTA. These license rights are termed software for Austrian tax purposes and were valued for Austrian tax purposes based on previous license payments at €50.76 million in June 2006. The Company expected to amortize these license rights in its tax returns over a period of 15 years. Any unused amounts were not expected to be carried forward to the subsequent year of assessment. During the years ended June 30, 2014, 2013 and 2012, Net1 UTA utilized approximately $0.02 million, $0.05 million and $0.04 million, respectively, of these license rights against its taxable income. As a result of the substantial liquidation of Net1 UTA in 2014, the full valuation allowance of $8.0 million has been applied against the gross carrying value of this deferred tax asset. Accordingly, there was no impact on the Company's income tax expense during the year ended June 30, 2014.

Net1 Applied Technologies Austria GmbH ("Net1Austria") generated tax deductible goodwill related to the acquisition of Net1 UTA in August 2008 and under Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as defined under Austrian tax law, over a period of 15 years. Unused amounts are carried forward to subsequent years of assessment and are included in net operating loss carryforwards. The Company did not utilize the goodwill deferred tax asset during the years ended June 30, 2014 and 2013, respectively. As a result of the substantial liquidation of Net1 UTA in 2014, the full valuation allowance of $7.9 million has been applied against the gross carrying value of this deferred tax asset. Accordingly, there was no impact on the Company's income tax expense during the year ended June 30, 2014.

Decrease in total deferred tax liabilities

Intangible assets

Deferred tax liabilities – intangible assets have decreased during the year ended June 30, 2014, primarily as a result of the amortization of the underlying KSNET intangible assets during the year.

Decrease in valuation allowance

At June 30, 2014, the Company had deferred tax assets of $14.4 million (2013: $9.5 million), net of the valuation allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

At June 30, 2014, the Company had a valuation allowance of $25.2 million (2013: $54.1 million) to reduce its deferred tax assets to estimated realizable value.

The movement in the valuation allowance for the years ended June 30, 2014 and 2013, is presented below:


											Net
					Foreign			Tax			operating
					tax			deductible			loss carry-			FTS
		Total			credits			goodwill			forwards			patent			Other
July 1, 2012	$	47,496		$	19,089		$	17,985		$	9,560		$	660		$	202
Reversed to statement of operations		-			-			-			-			-			-
Charged to statement of operations		8,201			5,547			-			2,621			-			33
Utilized		(1,733	)		-			(1,643	)		-			(90	)		-
Foreign currency adjustment		153			-			615			(367	)		(96	)		1
June 30, 2013		54,117			24,636			16,957			11,814			474			236
Reversed to statement of operations		(1,412	)		(1,412	)		-			-			-			-
Charged to statement of operations		1,442			113			-			1,329			-			-
Utilized		(26,698	)		-			(17,682	)		(9,016	)		-			-
Deconsolidation		(3,075	)		-			-			(3,075	)		-			-
Foreign currency adjustment		779			-			725			192			(105	)		(33	)
June 30, 2014	$	25,153		$	23,337		$	-		$	1,244		$	369		$	203

Net operating loss carryforwards and foreign tax credits

United States

As of June 30, 2014, Net1 had net operating loss carryforwards that will expire, if unused, as follows:


Year of expiration		US net
		operating loss
		carry
		forwards
2024	$	3,340

During the year ended June 30, 2014 and 2013, Net1 generated additional foreign tax credits related to the cash dividends received. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of June 30, 2014 and 2013, respectively. The unused foreign tax credits generated expire after ten years in 2023, 2022, 2021, 2020 and 2019.

South Africa

Net operating losses incurred in South Africa generally expire if a company does not trade during the year. In South Africa, the subsidiary companies that incurred the losses are currently trading and will continue to trade for the foreseeable future.

Uncertain tax positions

As of each of June 30, 2014 and 2013, respectively the Company has unrecognized tax benefits of $1.2 million, all of which would impact the Company's effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Austria, Botswana and in the US federal jurisdiction. As of June 30, 2014, the Company's South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2009. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations. The Company does not expect the change related to unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.

The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2014, 2013 and 2012:


		2014			2013			2012
Unrecognized tax benefits - opening balance	$	1,150		$	1,314		$	2,664
Gross decreases - tax positions in prior periods		-			(170	)		(1,159	)
Gross increases - tax positions in current period		38			216			97
Lapse of statute limitations		-			-			-
Foreign currency adjustment		(28	)		(210	)		(288	)
Unrecognized tax benefits - closing balance	$	1,160		$	1,150		$	1,314

As of each of June 30, 2014 and 2013, the Company had accrued interest related to uncertain tax positions of approximately $0.2 million, respectively, on its balance sheet.