Income Taxes

Income before provision for income taxes consisted of the following (in thousands):



	Year ended December 31,
	2015		2014		2013
Domestic	$	87,803	$	94,784	$	31,993
Foreign	98,298		95,585		61,146
Total Income before provision for income taxes	$	186,101	$	190,369	$	93,139

The provision for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2015			2014		2013
Federal
Current	$	28,596		$	1,569	$	26
Deferred	6,679			37,570		24,262
	35,275			39,139		24,288
State
Current	3,271			2,162		1,235
Deferred	(703		)	971		1,158
	2,568			3,133		2,393
Foreign
Current	4,305			1,596		3,113
Deferred	(67		)	669		(950		)
	4,238			2,265		2,163
Provision for income taxes	$	42,081		$	44,537	$	28,844

The differences between income taxes using the federal statutory income tax rate of 35% and our effective tax rate were as follows:



	Year Ended December 31,
	2015		2014		2013
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.5		1.6		2.5
Impact of differences in foreign tax rates	(16.2	)	(16.4	)	(20.4	)
Goodwill Impairment	—		—		15.3
Stock-based compensation	1.6		1.0		0.5
Other items not individually material	0.7		2.2		(1.9	)
	22.6	%	23.4	%	31.0	%

As of December 31, 2015, U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of foreign subsidiaries were not provided for on a cumulative total of $359.8 million. We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes and foreign withholding taxes, net of related foreign tax credits. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

In June 2009, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted a twelve year extension of certain tax incentives, which were previously granted in 2002. The incentive tax rates will expire in various years beginning in 2017. Under these incentives, all of the income in Costa Rica during these twelve year incentive periods is subject to reduced rates of Costa Rica income tax. In order to receive the benefit of the incentives, we must hire specified numbers of employees and maintain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2015, 2014 and 2013. As a result of these incentives, income taxes were reduced by $32.7 million, $32.5 million, and $27.7 million in 2015, 2014, and 2013, respectively. The benefit of the tax holiday on diluted net income per share was $0.40, $0.40, and $0.34 in 2015, 2014 and 2013, respectively.

As of December 31, 2015 and 2014, the significant components of our deferred tax assets and liabilities were (in thousands):



	Year Ended December 31,
	2015			2014
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	31,247		$	33,202
Credit carryforwards	1,932			1,446
Deferred revenue	24,432			15,685
Reserves and accruals	17,455			17,203
Translation gains	649			637
Stock-based compensation	16,523			11,964
	92,238			80,137
Deferred tax liabilities:
Prepaid expenses	601			709
Depreciation and amortization	8,555			6,878
	9,156			7,587
Net deferred tax assets before valuation allowance	83,082			72,550
Valuation allowance	(31,685		)	(32,498		)
Net deferred tax assets	$	51,397		$	40,052

We assess the likelihood that we will be able to realize our deferred tax assets quarterly. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not that we do not expect to realize our deferred tax assets, we will increase our provision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable. As of December 31, 2015, we believed, except for the items noted in the subsequent paragraph, that it was more likely than not that the amount of deferred tax assets recorded on the balance sheet will be realized.

As of December 31, 2015, we maintained a valuation allowance of $31.7 million against our deferred tax assets which primarily relate to Israel operating loss carryforwards and Australia capital loss carryforwards. These net operating and capital loss carryforwards would result in an income tax benefit if we were to conclude it is more likely than not that the related deferred tax assets will be realized. The valuation allowance decreased from December 31, 2014 by $0.8 million due to the decrease of foreign tax rate which resulted in lower tax impact on net operating and capital loss carryforwards.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The new guidance has been adopted on a prospective basis by the Company for the year ended December 31, 2015, thus resulting in the reclassification of $30.1 million of current deferred tax assets to noncurrent on the accompanying Consolidated Balance Sheets. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on our Consolidated Statements of Operations or Consolidated Statements of Comprehensive Income.

As of December 31, 2015, we have California net operating loss carryforwards of $20.5 million, which if not utilized, will begin to expire in 2016. As of December 31, 2015, we have California research credit carryforwards of approximately $3.9 million which can be carried forward indefinitely. In addition, we had foreign net operating loss carryforwards of approximately $127.6 million, which, if not utilized will expire beginning in 2017.

Our net operating loss carryforwards due to the excess tax benefits associated with share-based compensation deductions totaled $17.3 million as of December 31, 2015 for California state tax purposes, which was not included in our deferred tax assets. The reduction of income taxes payable by the excess tax benefits associated with the share-based compensation deductions during the fiscal year, and utilization of net operating loss carryover applicable to excess tax benefits were approximately $10.2 million, $21.4 million, and $27.1 million in 2015, 2014, and 2013, respectively. The excess tax benefits were credited directly to stockholders’ equity when realized. We follow the tax law ordering method to determine when excess tax benefits have been realized and consider only the direct impacts of awards when calculating the amount of windfalls or shortfalls.

In the event of a change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for fiscal year ended December 31, 2015, 2014, and 2013, is as follows (in thousands):



Unrecognized tax benefit as of December 31, 2012	$	20,639
Tax positions related to current year:
Additions for uncertain tax positions	6,110
Tax positions related to prior year:
Additions for uncertain tax positions	(81		)
Unrecognized tax benefit as of December 31, 2013	26,668
Tax positions related to current year:
Additions for uncertain tax positions	6,659
Tax positions related to prior year:
Decreases for uncertain tax positions	(260		)
Unrecognized tax benefit as of December 31, 2014	33,067
Tax positions related to current year:
Additions for uncertain tax positions	6,346
Tax positions related to prior year:
Decreases for uncertain tax positions	—
Unrecognized tax benefit as of December 31, 2015	$	39,413

We account for uncertain tax positions pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. We first determine whether it is more likely than not that a tax position will be sustained upon audit based on its technical merits. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. We adjust our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, or refinement of estimates due to new information. To the extent the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statements of Operations in the period in which such determination is made.

During fiscal year 2015, the amount of gross unrecognized tax benefits increased by $6.3 million. The total amount of unrecognized tax benefits, excluding interest, was $39.4 million as of December 31, 2015, all of which would impact our effective tax rate if recognized. We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The interest accrued as of December 31, 2015 is $0.7 million. As of December 31, 2014, the interest accrued was immaterial. We do not expect any significant changes to the amount of unrecognized tax benefits within the next twelve months.

We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions are U.S. federal and the State of California. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2000. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2007. Our subsidiary in Israel is under audit by the local tax authorities for calendar years 2006 through 2012. We are currently under audit by the California Franchise Tax Board for fiscal year 2011, 2012 and 2013.