NOTE 7 — INCOME TAXES

We recorded net income tax expense of $0.3 million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively. The net expense during the three months ended June 30, 2015 consisted of current income tax expense of $0.3 million and a deferred tax benefit of ($26,000). The current tax expense consists of income tax from our U.S., U.K. and India based operations and unrecoverable foreign withholding taxes in the U.K. The deferred tax benefit was primarily related to the increase of certain deferred tax assets in the U.K. and India. The net expense during the three months ended June 30, 2014 consisted of current income tax expense of $0.8 million and a deferred tax benefit of $10,000. The current tax expense consisted primarily of income tax from our U.S., U.K. and India based operations. The deferred tax benefit was primarily related to distributed foreign earnings, a decrease in deferred tax assets related to accrued liabilities and capitalized expenses for tax purpose related to the acquisition of Evolving Systems Labs, Inc.

We recorded net income tax expense of $0.8 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively. The net expense during the six months ended June 30, 2015 consisted of current income tax expense of $0.8 and a deferred tax benefit of ($24,000). The current tax expense consists primarily of income tax from our U.S., U.K. and India based operations, and unrecoverable foreign withholding taxes in the U.K. The deferred tax benefit was primarily related to the increase of certain deferred tax assets in the U.K. and India. The net expense during the six months ended June 30, 2014 consisted of current income tax expense of $1.1 and a deferred tax expense of $47,000. The current tax expense consisted primarily of income tax from our U.S., U.K. and India based operations, and unrecoverable foreign withholding taxes in the U.S. The deferred tax expense was primarily related to undistributed foreign earnings, a decrease in deferred tax assets related to accrued liabilities and capitalized expenses for tax purpose related to the acquisition of Evolving Systems Labs, Inc.

Our effective tax rate was 29% and 33% for the three months ended June 30, 2015 and 2014, respectively. The decrease in our effective tax rate relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate was decreased in 2015.

Our effective tax rate was 31% and 32% for the six months ended June 30, 2015 and 2014, respectively. The decrease in our effective tax rate relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate was decreased in the second quarter of 2015.

As of June 30, 2015 and December 31, 2014 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset. Such assets primarily consist of certain state Net Operating Loss (“NOL”) carryforwards, research and development tax credits and Alternative Minimum Tax (“AMT”) credits. The $0.7 million of net deferred tax assets as of June 30, 2015, were comprised of the following:


		June 30, 2015
Deferred tax assets:
Net operating loss carryforwards	$	503
Research & Development Credits		303
AMT credits		944
Stock Compensation		687
Depreciable assets		127
Intangibles		192
Accrued liabilities and reserves		475
Total deferred tax assets		3,231

Deferred tax liabilities
Undistributed Foreign Earnings	$	(785)
Total deferred tax liability		(785)

Net deferred tax assets, before valuation allowance	$	2,446
Valuation allowance		(1,750)
Net deferred tax asset	$	696

We have unrecognized tax benefit NOL’s which are comprised of windfall tax benefits related to stock-based compensation. Due to a recently adopted accounting pronouncement, ASU No. 2014-09, topic 740 “Income Tax”, these NOL’s were deducted from our NOL carryforwards and are not included in the above summarized net deferred tax asset. When utilized, windfall tax benefits related to stock-based compensation are recorded as a reduction to our taxes payable when realized, with a corresponding credit to additional paid in capital, not income tax expense.

As of June 30, 2015 and December 31, 2014 we had no liability for unrecognized tax benefits.

We conduct business globally and, as a result, Evolving Systems, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Throughout the world, in the normal course of business, we are subject to examination by taxing authorities up until, two years in the U.K. and four years in India, following the end of the accounting period. As of the date of this report, none of our income tax returns are under examination.