13. Income Taxes

Components of the Company’s income (loss) from continuing operations before income taxes are as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Income (loss) from continuing operations before income taxes:
Canada	$	(1,872	)	$	(1,674	)	$	(20,212	)
U.S.		20,422			23,298			(9,661	)
Other		13,972			24,398			11,958
Total	$	32,522		$	46,022		$	(17,915	)

Components of the Company’s income tax provision (benefit) are as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Current
Canada	$	43		$	96		$	175
U.S.		9,678			8,136			3,615
Other		2,564			3,854			1,940
		12,285			12,086			5,730
Deferred
Canada		—			—			—
U.S.		(2,378	)		(3,239	)		(6,731	)
Other		612			1,547			(5	)
		(1,766	)		(1,692	)		(6,736	)
Total	$	10,519		$	10,394		$	(1,006	)

The Company is incorporated in Canada and therefore uses the Canadian statutory rate for income tax disclosure. The reconciliation of the statutory Canadian tax rate to the effective tax rate related to income before income taxes from continuing operations is as follows (in thousands, except percentage data):

	Year Ended December 31,
	2016			2015			2014
Statutory Canadian tax rate		28.50	%		27.00	%		27.00	%
Expected income tax provision at Canadian statutory tax rate	$	9,269		$	12,426		$	(4,837	)
International tax rate differences		891			304			(1,132	)
State income taxes, net		503			453			(271	)
Withholding and other taxes		441			731			421
Permanent differences		179			1,000			486
Acquisition contingent consideration adjustments		762			—			—
Transaction costs		649			270			8
Section 199 deduction		(1,063	)		(1,188	)		(574	)
Change in valuation allowance		1,202			(612	)		4,809
Provision to return differences		(93	)		(617	)		962
Tax credits		(1,095	)		(990	)		(1,678	)
Statutory tax rate change		(856	)		95			(13	)
Uncertain tax positions		(103	)		121			134
IRS audit		—			(748	)		241
JK Lasers divestiture		—			(1,432	)		—
Goodwill impairment		—			—			330
Other		(167	)		581			108
Reported income tax provision (benefit)	$	10,519		$	10,394		$	(1,006	)
Effective tax rate		32.3	%		22.6	%		5.6	%

Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Losses	$	9,557		$	9,985
Compensation related deductions		4,437			2,915
Tax credits		2,318			2,409
Restructuring related liabilities		471			294
Inventory		5,869			4,415
Depreciation		—			503
Amortization		3,082			3,205
Warranty		1,049			1,127
Other		1,688			1,281
Total deferred tax assets		28,471			26,134
Valuation allowance on deferred tax assets		(13,014	)		(12,537	)
Net deferred tax assets	$	15,457		$	13,597
Deferred tax liabilities:
Equity-method investment	$	(1,370	)	$	(1,733	)
Depreciation		(749	)		—
Amortization		(4,162	)		(2,791	)
Unrealized currency gains/losses		(659	)		(1,292	)
Other		(1,218	)		(345	)
Total deferred tax liabilities	$	(8,158	)	$	(6,161	)
Net deferred income tax assets (liabilities)	$	7,299		$	7,436

In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.

In 2016, the Company recorded valuation allowance of $1.3 million against its current year net operating losses and other timing items in certain tax jurisdictions. The Company also reduced its Canadian loss carryforward and other attributes and the related valuation allowance of $0.3 million. Further, the Company released $0.1 million of valuation allowance recorded on certain U.S. state tax net operating losses and utilized $0.4 million of its U.S. capital loss carryforward against the current year net capital gain.

In 2015, the Company recorded valuation allowance of $0.8 million against its current year net operating losses in certain tax jurisdictions. Further, the Company released $0.8 million of valuation allowance recorded on certain U.S. state tax net operating losses and utilized $0.6 million of its U.S. capital loss carryforward against the current year net capital gain.

In 2014, the Company recorded valuation allowance of $0.3 million against its current year net operating losses in certain tax jurisdictions and increased valuation allowance recorded on certain U.S. state tax net operating losses by $0.3 million and capital loss carryforwards by $0.4 million.

Valuation allowance continues to be provided on the remaining balances of certain U.S. state net operating losses and certain foreign tax attributes that the Company has determined that it is more likely than not that they will not be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.

As of December 31, 2016, the Company had net operating loss carryforwards of $4.4 million (tax effected) available to reduce future taxable income. Of this amount, approximately $1.3 million relates to the U.S. and expires through 2035; and $3.1 million relates to Canada and expires starting in 2031. In addition, the Company had capital loss carryforwards of $5.2 million, which had a full valuation allowance. Of this amount, $4.7 million and $0.5 million related to Canada and the U.K, respectively.

As of December 31, 2015, the Company had net operating loss carryforwards of $4.9 million (tax effected) available to reduce future taxable income. Of this amount, approximately $1.6 million relates to the U.S. and expires through 2034; $2.4 million relates to Canada and expires starting in 2031; $0.7 million relates to the U.K. and can be carried forward indefinitely; and $0.2 million relates to other countries and will started expiring in 2020. In addition, the Company had capital loss carryforwards of $5.1 million, which had a full valuation allowance. Of this amount, $4.3 million, $0.4 million and $0.4 million relates to Canada, the U.S. and the U.K., respectively.

As of December 31, 2016, the Company had tax credit carryforwards of approximately $2.3 million available to reduce income taxes in future years. Approximately $0.5 million relates to the U.S. state tax attributes, of which $0.4 million will expire through 2031 and $0.1 million can be carried forward indefinitely. The remaining $1.8 million tax credit carryforwards were related to Canada, of which $1.1 million expires through 2022 and $0.7 million can be carried forward indefinitely.

As of December 31, 2015, the Company had tax credit carryforwards of approximately $2.4 million available to reduce income taxes in future years. Approximately $0.7 million relates to the U.S. state tax attributes, of which $0.6 million will expire through 2030 and $0.1 million can be carried forward indefinitely. The remaining $1.7 million tax credit carryforwards were related to Canada, of which $1.1 million expires through 2022 and $0.6 million can be carried forward indefinitely.

Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The amount of undistributed earnings of foreign subsidiaries totaled $15.2 million as of December 31, 2016. The estimated unrecognized deferred income tax liabilities on this temporary difference is approximately $0.2 million.

As of December 31, 2016, the Company’s total amount of gross unrecognized tax benefits was $5.0 million, of which $4.0 million would favorably affect its effective tax rate. Over the next twelve months, the Company may need to record up to $1.7 million of previously unrecognized tax benefits in the event of statute of limitations closures. The Company believes there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes it has adequately provided for all income tax uncertainties.

As of December 31, 2015, the Company’s total amount of gross unrecognized tax benefits was $5.5 million, of which $4.1 million would favorably affect its effective tax rate. Over the next twelve months, the Company may need to record up to $1.2 million of previously unrecognized tax benefits in the event of statute of limitations closures. The Company believes there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes it has adequately provided for all income tax uncertainties.

The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):

Balance at December 31, 2013	$	7,074
Additions based on tax positions related to the current year		1,180
Additions for tax positions of prior years		2,601
Reductions for tax positions of prior years		(2,404	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(2,177	)
Balance at December 31, 2014		6,274
Additions based on tax positions related to the current year		752
Additions for tax positions of prior years		78
Reductions for tax positions of prior years		(626	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(226	)
Settlements with tax authorities		(762	)
Balance at December 31, 2015		5,490
Additions based on tax positions related to the current year		561
Additions for tax positions of prior years		88
Reductions for tax positions of prior years		(45	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(842	)
Settlements with tax authorities		(290	)
Balance at December 31, 2016	$	4,962

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016 and 2015, the Company had approximately $1.1 million and $0.9 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2016 and 2015, the Company recognized less than $0.1 million, of expense for an increase in interest and penalties related to uncertain tax positions.

The Company files income tax returns in Canada, the U.S., and various states and foreign jurisdictions. Generally, the Company is no longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years before 2007.

The Company’s income tax returns may be reviewed by tax authorities in the following countries for the following periods under the appropriate statute of limitations:

United States	2013 - Present
Canada	2011 - Present
United Kingdom	2015 - Present
Germany	2011 - Present
Netherlands	2011 - Present
China	2007 - Present
Japan	2012 - Present