INCOME TAXES

Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands):



	Years Ended August 31,
	2014		2013		2012
United States	$	34,927	$	30,377	$	38,121
Foreign	99,322		92,834		64,593
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates	$	134,249	$	123,211	$	102,714

Significant components of the income tax provision are as follows (in thousands):



	Years Ended August 31,
	2014			2013			2012
Current:
U.S.	$	11,921		$	7,214		$	7,593
Foreign	29,120			29,054			26,325
Total	$	41,041		$	36,268		$	33,918
Deferred:
U.S.	$	613		$	3,257		$	1,853
Foreign	(381		)	(402		)	(1,031		)
Valuation allowance charge (release)	99			(181		)	313
Total	$	331		$	2,674		$	1,135
Provision for income taxes	$	41,372		$	38,942		$	35,053

As of August 31, 2014, the Company has elected to present the reconciliation of income tax on a percentage basis as compared to a whole dollar basis. The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages):



	Years Ended August 31,
	2014		2013		2012
Federal tax provision at statutory rates	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.3		0.3		0.3
Differences in foreign tax rates	(5.2	)	(3.7	)	(3.6	)
Permanent items and other adjustments	0.8		0.2		2.1
Increase (decrease) in Foreign valuation allowance	(0.1	)	(0.2	)	0.3
Provision for income taxes	30.8	%	31.6	%	34.1	%

Significant components of the Company’s deferred tax assets as of August 31, 2014 and 2013 are shown below (in thousands):



	August 31,
	2014			2013
Deferred tax assets:
U.S. net operating loss carryforward	$	5,977		$	7,379
Foreign tax credits	862			2,096
Deferred compensation	1,621			2,087
U.S. timing differences and alternative minimum tax credits	2,647			1,708
Foreign net operating losses	7,169			7,137
Foreign timing differences:
Accrued expenses and other timing differences	2,935			5,179
Depreciation and Amortization	5,873			5,027
Deferred Income	3,688			3,534
Gross deferred tax assets	30,772			34,147
U.S. deferred tax liabilities (depreciation and other timing differences)	(2,354		)	(3,216		)
Foreign deferred tax liabilities netted against deferred tax assets	(2,066		)	(1,638		)
U.S. valuation allowance	(613		)	(700		)
Foreign valuation allowance	(7,737		)	(9,432		)
Net deferred tax assets	$	18,002		$	19,161

As of August 31, 2014 and 2013, the Company had deferred tax liabilities of $2.4 million and $2.7 million, respectively, arising from timing differences in certain subsidiaries.

The effective tax rate for fiscal year 2014 is 30.8%, as compared to the effective tax rate for fiscal year 2013 of 31.6%. For fiscal year 2014, the decrease in the effective rate versus the prior year was primarily attributable to the favorable impact of 0.9% resulting from a greater proportion of income falling into low tax jurisdictions.

For fiscal year 2014, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax assets, primarily because of the existence of negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. The Company had net foreign deferred tax assets of $9.9 million and $9.8 million as of August 31, 2014 and 2013, respectively.

The Company has U.S. federal and state tax NOL's at August 31, 2014 of approximately $15.3 million and $7.6 million, respectively. The Company maintains a valuation allowance on substantially all of its state NOL's due to the adoption of single sale factor apportionment in California, which significantly reduces taxable income in this state. The federal and state NOL's generally expire during periods ranging from 2015 through 2025, unless previously utilized. In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating sufficient taxable income during the carry-forward period.

The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, there will be annual limitations in the amount of U.S. taxable income of approximately $3.5 million that may be offset by NOLs. The Company does not believe this will impact the recoverability of these NOLs.

The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted to the U.S., because the Company considers these earnings to be permanently reinvested as management has no plans to repatriate undistributed earnings and profits of foreign affiliates. As of August 31, 2014 and 2013, the undistributed earnings of these foreign subsidiaries are approximately $326.9 million and $254.8 million, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more likely than not standard for recognition of tax benefits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2014			2013			2012
Balance at beginning of fiscal year	$	9,373		$	11,212		$	13,528
Additions based on tax positions related to the current year	964			349			575
Settlements	(1,093		)	(191		)	(591		)
Expiration of the statute of limitations for the assessment of taxes	(458		)	(1,997		)	(2,300		)
Balance at end of fiscal year	$	8,786		$	9,373		$	11,212

As of August 31, 2014, the liability for income taxes associated with uncertain tax benefits was $8.8 million and can be reduced by $7.8 million of tax benefits associated with timing adjustments which are recorded as deferred tax assets and liabilities. The net amount of $1.0 million, if recognized, would favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate.

The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the 12-month period ending August 31, 2015 could result in a total income tax benefit amounting up to $644,000.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2014 and 2013, the Company had accrued $$899,000 and $800,000, respectively, (before income tax benefit) for the payment of interest and penalties.

The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. For example, during the fiscal year 2014, the Company was required to make payments of $4.2 million to the governments in two countries with respect to various income tax cases that it is currently appealing, but the Company believes it will eventually prevail. These amounts have been recorded in the balance sheet as Other non-current assets, as the Company considers this a payment on account and expects to get a refund thereof upon eventually prevailing on these cases, but is unsure of the timing thereof.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below:



Tax Jurisdiction	Fiscal Years Subject to Audit
U.S. federal	1998, 2000 to 2005, 2007, 2011 to the present
California (U.S.) (state return)	2005, 2007 and 2010 to the present
Florida(U.S.) (state return)	2002 to 2005, 2007 and 2011 to the present
Aruba	2012 to the present
Barbados	2008 to the present
Costa Rica	2011 to the present
Colombia	2010 to the present
Dominican Republic	2009 and 2011 to the present
El Salvador	2009 to the present
Guatemala	2009 to the present
Honduras	2009, 2010, 2012 to the present
Jamaica	2008 to the present
Mexico	2011 to the present
Nicaragua	2010 to the present
Panama	2011 to the present
Trinidad	2004 to the present
U.S. Virgin Islands	2001 to the present

Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to audit.