Note 13. Income taxes

The Company’s income tax expense for the three months ended March 31, 2013 is primarily related to income taxes of the Company’s non-U.S. operations. The Company recorded an income tax provision of $183,000 and an income tax benefit of $60,000 for the three months ended March 31, 2013 and 2012, respectively.


(in thousands, except percentages)	Three months ended March 31,
(in thousands, except percentages)	2013			2012
Income tax (expense) benefit	$	(183	)	$	60
Effective tax rate		2	%		1	%

The Company’s income tax expense in 2013 was primarily related to income taxes of the Company’s non-US operations. The Company’s income tax benefit in the three months ended March 31, 2012 was due to the loss before income taxes realized in the Company’s foreign subsidiaries.

The Company conducts its business globally and operating income is subject to varying rates of tax in the United States, China and Japan. Consequently, the Company’s effective tax rate is dependent upon the geographic distribution of earnings or losses and the tax laws and regulations in each geographical region. The Company expects that its income taxes will vary in relation to the Company’s profitability and the geographic distribution of its profits. Historically, the Company has experienced net losses in the United States and in the short term, the Company expects this trend to continue. One of the Company’s subsidiaries in China generates a cash tax liability. The subsidiary has qualified for a preferential 15% tax rate available for high technology enterprises as opposed to the statutory 25% tax rate.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases using tax rates expected to be in effect during the years in which the basis differences reverse.

Due to historic losses in the U.S., the Company has a full valuation allowance on the U.S. federal and state deferred tax assets. The Company also recorded a full valuation allowance for the deferred tax assets of the Company’s NeoPhotonics Semiconductor subsidiary as it was determined that the deferred tax assets were not more likely than not to be realized. Management continues to evaluate the realizability of its deferred tax assets and the related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

As of March 31, 2013, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2012.