Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. We perform an evaluation of the realizability of our deferred tax assets on a quarterly basis. This evaluation considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, historical and projected future taxable income, and prudent and feasible tax planning strategies. The estimates and assumptions used by us in computing the income taxes reflected in our consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when such returns are finalized or the related adjustments are identified.

The following is a geographical breakdown of consolidated net income (loss) before income tax:



	Year Ended September 30,
	2012			2011			2010
United States	$	12,392		$	(10,234	)	$	33,211
Foreign	(16,740		)	1,603			(567		)
Total income (loss) before income tax	$	(4,348	)	$	(8,631	)	$	32,644

For 2012, 2011 and 2010, income tax expense consisted of the following:



	Year Ended September 30,
	2012			2011			2010
Current income taxes:
Federal	$	491		$	(338	)	$	(6	)
State and local	613			244			673
Foreign	3,511			1,390			320
Current income tax expense	4,615			1,296			987
Deferred income taxes:
Federal	1,276			606			12,659
State and local	(513		)	157			197
Foreign	(2,151		)	174			(1,343		)
Deferred income tax expense	(1,388		)	937			11,513
Income tax expense	$	3,227		$	2,233		$	12,500

A reconciliation of our effective income tax rate on income before taxes with the federal statutory rate is as follows:



	Year Ended September 30,
	2012	2011	2010
Statutory rate	35.0%	35.0%	35.0%
State and local taxes, net of federal income taxes	(5.5)	0.9	2.2
Research and development tax credits	11.8	23.0	(0.4)
Reserves for uncertainty in income taxes	(6.1)	(3.8)	1.7
Foreign rate differentials	(151.7)	3.2	(1.4)
Change in valuation allowance	(16.5)	(3.0)	0.1
Nondeductible expense	(3.6)	(18.0)	1.3
Acquisition-related contingent consideration	57.7	(56.6)	—
Other	4.7	(6.6)	(0.2)
Effective tax rate	(74.2)%	(25.9)%	38.3%

Our deferred income tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record deferred tax assets for the future tax benefit of net operating losses and tax credit carryforwards. Significant components of our deferred tax assets and liabilities as of September 30, 2012 and 2011, are as follows:



	September 30,
	2012			2011
Domestic deferred tax assets:
Net operating loss carryforwards	$	8,069		$	19,483
Credit carryforwards	11,167			10,701
Deferred revenue	28,196			24,612
Share-based compensation	21,347			14,128
Other compensation	4,874			4,026
Other	3,274			1,974
Total domestic deferred tax assets	76,927			74,924
Less: valuation allowance	(145		)	(141		)
Net domestic deferred tax assets	76,782			74,783
Domestic deferred tax liabilities:
Intangible assets	(10,305		)	(13,957		)
Property and equipment	(13,463		)	(10,526		)
Deferred costs	(24,718		)	(20,365		)
Other	(394		)	(1,193		)
Total domestic deferred tax liabilities	(48,880		)	(46,041		)
Net domestic deferred tax asset	$	27,902		$	28,742



	September 30,
	2012			2011
Foreign deferred tax assets:
Net operating loss carryforwards	$	3,741		$	2,804
Deferred revenue	1,368			697
Share-based compensation	1,480			1,023
Other	524			199
Total foreign deferred tax assets	7,113			4,723
Less: valuation allowance	(3,073		)	(157		)
Net foreign deferred tax assets	4,040			4,566
Foreign deferred tax liabilities:
Intangible assets	(3,975		)	(5,048		)
Deferred costs	(83		)	(89		)
Other	(506		)	(422		)
Total foreign deferred tax liabilities	(4,564		)	(5,559		)
Net foreign deferred tax liability	$	(524	)	$	(993	)

The deferred tax valuation allowance increased by $2,920 in 2012, compared to $257 for 2011. The increase in the valuation allowance for 2012 was due to the deferred tax asset related to acquired foreign net operating losses, incurred foreign net operating losses, and share based compensation.

To the extent that we are able to generate consistent taxable income within those operations with valuation allowances, we may reduce the valuation allowances, thereby reducing the income tax expense and increasing net income in the period the determination is made.

As of September 30, 2012, there are approximately $4.4 million of consolidated cumulative undistributed earnings of foreign subsidiaries. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, in the form of dividends or otherwise, we would be subject to additional U.S. income taxes. It is not currently practical to estimate the amount of unrecognized deferred U.S. income tax that might be payable if any earnings were to be distributed by individual foreign subsidiaries.

We conduct business in the Republic of the Philippines which grants “holidays” from income taxes for four to six year periods. These holidays expire in 2018. Without these tax “holidays", we would have incurred aggregate income taxes of $117 in 2012 with an immaterial related earnings per share impact.

As of September 30, 2012, we have total federal net operating loss carryforwards in the amount of $178.5 million, which will expire in the years 2017 to 2030. As of September 30, 2012, we had total foreign net operating loss carryforwards in the amount of $14.4 million, most of which can be carried forward subject to various time limits.

Our utilization of net operating loss carryforwards may be subject to annual limitations due to ownership change provisions of Internal Revenue Code Section 382 and similar foreign and state provisions. The annual limitations could result in the expiration of net operating losses before they can be utilized.

The above table of deferred tax assets and liabilities does not include certain deferred tax assets at September 30, 2012 and 2011 that arose directly from (or the use of which was postponed by) tax deductions related to share-based compensation arrangements in excess of compensation recognized for financial reporting. Tax deductions from share-based payment arrangements are not recorded until the deduction reduces current taxes payable when such in excess tax benefits have been realized; when such instance occurs, we record the amount of the reduction of cash tax owned as a credit to additional paid-in capital. Net operating loss ("NOL") created by tax deductions related to share-based compensation arrangements in excess of recorded compensation expense are not recognized in the deferred tax asset resulting in the deferred tax asset to be less than the actual NOL reported to the various federal, state, and foreign jurisdictions. On the other hand, any amount by which the tax deduction from share-based payment arrangements is less than the related amount of compensation recognized for financial reporting the deficiency (i.e., deferred tax asset write-off) shall first be charged against any remaining additional paid-in capital from excess tax benefits. The remaining balance, if any, of the write-off of a deferred tax asset related to a tax deficiency shall be recognized as income tax expense.

At September 30, 2012, we had $158.7 million of excess tax deductions related to share-based payment arrangements that will be credited to additional paid-in capital if and when such amounts are ultimately realized.

During the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

The reconciliation of our tax contingencies is as follows:



	Year Ended September 30,
	2012			2011
Gross tax contingencies — beginning of year	$	4,869		$	5,246
Increase due to acquisition	—			252
Gross increases to tax positions in prior periods	640			439
Gross decrease to tax positions in prior periods	(205		)	(1,735		)
Gross increases to current period tax positions	227			808
Gross decrease due to expiration	(416		)	(141		)
Gross tax contingencies — end of year	$	5,115		$	4,869

At September 30, 2012, and 2011, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $4.9 million and $4.3 million, respectively. We do not anticipate any significant changes to our unrecognized tax benefits within the next 12 months. Consistent with prior periods, we recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. The accrued interest at September 30, 2012, would not have a material impact on the effective tax rate if reversed. The provision for income taxes for each of the fiscal years ended September 30, 2012, and 2011, includes interest expense on unrecognized income tax benefits for current and prior years which is not significant to our consolidated statements of operations.

We are subject to income taxes in the United States and numerous foreign jurisdictions. In the normal course of business we are subject to examination by the Internal Revenue Service and various foreign jurisdictions and have different years open which are subject to audit.