20. INCOME TAXES

Income tax provision

The table below presents the components of income before income taxes for the years ended June 30, 2016, 2015 and 2014:

		2016			2015			2014

South Africa	$	119,097		$	137,138		$	121,338
United States		(5,915	)		(7,286	)		(9,923	)
Other		13,055			10,566			(2,273	)
Income before income taxes	$	126,237		$	140,418		$	109,142

Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2016, 2015 and 2014:


		2016			2015			2014

Current income tax	$	88,807		$	48,795		$	61,902
South Africa		31,815			39,901			41,326
United States		50,750			3,109			14,838
Other		6,242			5,785			5,738
Deferred taxation (benefit) charge		(161	)		(2,292	)		(7,887	)
South Africa		3,044			398			(3,345	)
United States		(274	)		485			(107	)
Other		(2,931	)		(3,175	)		(4,435	)
Capital gains tax		-			-			202
Foreign tax credits generated – United States		(46,566	)		(2,367	)		(14,838	)
Income tax provision	$	42,080		$	44,136		$	39,379

There were no significant capital gains taxes paid during the years ended June 30, 2016, 2015 and 2014.

There were no changes to the enacted tax rate in the years ended June 30, 2016, 2015 and 2014.

The movement in the valuation allowance for the year ended June 30, 2016, relates primarily to an increase in the valuation allowance resulting from the generation of unused foreign tax credits during the year. The movement in the valuation allowance for the year ended June 30, 2015, relates primarily to the release of the valuation allowance resulting from the utilization of foreign tax credits during the year. 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.

Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended June 30, 2016, 2015 and 2014, 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, 2016, 2015 and 2014.

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, 2016, 2015 and 2014 is as follows:

	2016		2015		2014
Income tax rate reconciliation:
Income taxes at fully-distributed South African tax rates	28.00	%	28.00	%	28.00	%
Non-deductible items	0.38	%	2.36	%	4.71	%
Foreign tax rate differential	7.42	%	0.06	%	1.89	%
Foreign tax credits	(36.88	%)	(1.68	%)	(13.59	%)
Taxation on deemed dividends in the United States	34.60	%	3.46	%	13.46	%
Capital gains tax paid	0.00	%	0.00	%	0.19	%
Movement in valuation allowance	(0.09	%)	(0.08	%)	1.23	%
Prior year adjustments	(0.09	%)	(0.69	%)	0.19	%
Income tax provision	33.34	%	31.43	%	36.08	%

Net1 received substantial dividends from one of its South African subsidiaries during the year ended June 30, 2016, which resulted in an increase in the amount of foreign tax credits generated and an increase in taxation on dividends received. A portion of these foreign tax credits generated were not used during the year and a valuation allowance has been created for unused foreign tax credits. The non-deductible items during the year ended June 30, 2015, include primarily legal and consulting fees incurred that are not deductible for tax purposes. 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 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 of June 30, and their classification, were as follows:

		2016			2015
Total deferred tax assets
Net operating loss carryforwards	$	1,982		$	1,216
Provisions and accruals		4,245			5,653
FTS patent		496			691
Intangible assets		733			616
Foreign tax credits		36,750			20,212
Other		7,448			7,330
Total deferred tax assets before valuation allowance		51,654			35,718
Valuation allowances		(38,834	)		(22,550	)
Total deferred tax assets, net of valuation allowance		12,820			13,168
Total deferred tax liabilities:
Intangible assets		11,799			11,510
Other		6,624			4,924
Total deferred tax liabilities		18,423			16,434
Reported as
Current deferred tax assets		6,956			7,298
Long term deferred tax liabilities		12,559			10,564
Net deferred income tax liabilities	$	5,603		$	3,266

Increase in total deferred tax liabilities

Intangible assets

Deferred tax liabilities – intangible assets have moderately increased during the year ended June 30, 2016, primarily as a result of the purchase of intangible assets identified in the Transact24 and Masterpayment acquisitions, partially offset by the amortization of the KSNET intangible assets during the year.

Foreign tax credits and valuation allowances

The increase in foreign tax credits as of June 30, 2016, resulted from the generation of foreign tax credits associated with the dividends received by Net1 during the year ended June 30, 2016. A portion of these foreign tax credits generated were not fully utilized during the year ended June 30, 2016. Accordingly, a valuation allowance has been created for all of these unused foreign tax credits.

Increase in valuation allowance

At June 30, 2016, the Company had deferred tax assets of $12.8 million (2015: $13.2 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, 2016, the Company had a valuation allowance of $38.9 million (2015: $22.6 million) to reduce its deferred tax assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2016 and 2015, is presented below:

									Net
					Foreign		Tax		operating
					tax		deductible		loss carry-			FTS
		Total			credits		goodwill		forwards			patent			Other
July 1, 2014	$	25,153		$	23,337		$-	$	1,244		$	369		$	203
Reversed to statement of operations		(3,126	)		(3,126	)	-		-			-			-
Charged to statement of operations		794			-		-		-			-			794
Utilized		(128	)		-		-		(128	)		-			-
Foreign currency adjustment		(143	)		-		-		(28	)		(115	)		-
June 30, 2015		22,550			20,211		-		1,088			254			997
Charged to statement of operations		16,537			16,537		-		-			-			-
Utilized		(128	)		-		-		(128	)		-			-
Foreign currency adjustment		(125	)		-		-		(29	)		(96	)		-
June 30, 2016	$	38,834		$	36,748		$-	$	931		$	158		$	997

Net operating loss carryforwards and foreign tax credits

United States

As of June 30, 2016, Net1 had net operating loss carryforwards that will expire, if unused, as follows:

Year of expiration		U.S. net operating
		loss carry
		forwards
2025	$	2,608

During the year ended June 30, 2016 and 2015, 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, 2016 and 2015, respectively. The unused foreign tax credits generated expire after ten years in 2026, 2024, 2023, 2022, 2021 and 2020.

Uncertain tax positions

As of June 30, 2016 and 2015, the Company has unrecognized tax benefits of $1.9 million and $2.3 million, respectively, all of which would impact the Company's effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Hong Kong, Botswana, Germany and in the U.S. federal jurisdiction. As of June 30, 2016, 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, 2011. 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, 2016, 2015 and 2014:

		2016			2015			2014
Unrecognized tax benefits - opening balance	$	2,322		$	1,160		$	1,150
Gross decreases - tax positions in prior periods		(609	)		-			-
Gross increases - tax positions in current period		641			1,311			38
Lapse of statute limitations		-			-			-
Foreign currency adjustment		(424	)		(149	)		(28	)
Unrecognized tax benefits - closing balance	$	1,930		$	2,322		$	1,160

As of June 30, 2016 and 2015, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million and $0.3 million, respectively, on its balance sheet.