13. Income Taxes

Income before income taxes consisted of the following for the periods indicated:

	Year Ended January 31,
	2017		2016		2015
	(in thousands)
U.S. operations	$	3,092	$	3,190	$	1,978
Non-U.S. operations		57,789		82,019		50,058
Income before income taxes	$	60,881	$	85,209	$	52,036

Income tax provision consisted of the following for the periods indicated:

	Year Ended January 31,
	2017			2016			2015
	(in thousands)
Current:
U.S. federal tax	$	818		$	5,273		$	3,135
U.S. state taxes		(212	)		541			93
Non-U.S. foreign taxes		1,454			1,874			1,348
		2,060			7,688			4,576
Deferred:
U.S. federal tax		1,174			1,050			(3,208	)
U.S. state taxes		—			—			—
Non-U.S. foreign taxes		(163	)		(37	)		97
		1,011			1,013			(3,111	)
Provision for income taxes	$	3,071		$	8,701		$	1,465

The Company consists of a Cayman Islands parent company with various foreign and U.S. Subsidiaries. The primary jurisdiction where our foreign earnings are derived is the Cayman Islands, where the Company is domiciled. Under the current laws of the Cayman Islands, the Company is not subject to tax on its income. For purposes of the reconciliation between the provision (benefit) for income taxes at the statutory rate and the effective tax rate, a notional U.S. 34% rate is applied to pretax income as a result of the following for the periods indicated:

	Year Ended January 31,
	2017			2016			2015
	(in thousands)
Provision at U.S. notional statutory rate	$	20,700		$	28,971		$	17,692
U.S. state taxes		(216	)		541			90
Non-U.S. foreign tax differential		(18,357	)		(26,253	)		(15,644	)
Stock-based compensation		1,605			2,896			1,601
U.S. R&D credit		(2,226	)		(3,517	)		(2,298	)
Valuation allowance		1,901			6,090			—
Other		(336	)		(27	)		24
Provision for income taxes	$	3,071		$	8,701		$	1,465

Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities at January 31, 2017 and 2016 were as follows:

	As of January 31,
	2017			2016
	(in thousands)
Deferred tax assets:
Federal and state credits	$	14,782		$	11,852
Expenses not currently deductible		2,381			2,331
Stock-based compensation		3,561			2,503
Foreign deferred		161			—
Gross deferred tax assets		20,885			16,686
Valuation allowance		(15,061	)		(12,072	)
Total deferred tax assets	$	5,824		$	4,614
Deferred tax liabilities
Property and equipment		(1,383	)		(1,378	)
Foreign deferred		—			(33	)
Net deferred tax assets	$	4,441		$	3,203

Tax valuation allowance for the periods indicated below were as follows:

							Deductions
					Additions		Charged to
	Balance at		Additional		Charged to		Expenses		Balance at
	Beginning of		Charged to		Other		or Other		End of
	Period		Expenses		Account		Accounts		Period
	(in thousands)
Tax Valuation Allowance
Year ended January 31, 2017	$	12,072		2,989		—		—	$	15,061
Year ended January 31, 2016	$	3,996		8,076		—		—	$	12,072
Year ended January 31, 2015	$	2,302		1,694		—		—	$	3,996

The Company conducts its business in several countries and regions and is subject to taxation in those jurisdictions. The Company is incorporated in the Cayman Islands with foreign subsidiaries in the U.S., China, Taiwan, Italy and other foreign countries and regions. As such, the Company’s worldwide operating income is subject to varying tax rates and its effective tax rate is highly dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region. Consequently, the Company has experienced lower effective tax rates as a substantial amount of its operations are conducted in lower-tax jurisdictions. If the Company’s operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if the Company was to commence operations in jurisdictions assessing relatively higher tax rates, its effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. Dividend distributions received from the Company’s U.S. subsidiary and certain other foreign subsidiaries may be subject to local country withholding taxes when, and if, distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain subsidiaries because management’s intent is to indefinitely reinvest any undistributed earnings in those subsidiaries. If dividend distributions from those subsidiaries were to occur, the liability as of January 31, 2017 would be $5.6 million. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $44.0 million at January 31, 2017.

As of January 31, 2017 and 2016, the Company had deferred tax assets (net of deferred tax liabilities) before valuation allowance, of $19.5 million and $15.3 million, respectively. Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain.

The Company also has Federal and California state research and development credit carryforwards of approximately $10.9 million and $13.8 million, respectively, at January 31, 2017. The Federal credits begin to expire in fiscal year 2033. The California credits can be carried forward indefinitely.

The Company reports its U.S. state deferred tax assets and related valuation allowance, net of the U.S federal tax rate of 35%. As of January 31, 2017, the Company has recorded a valuation allowance of $15.1 million against all of its U.S. federal research credit and all U.S. state deferred tax assets due to uncertainty regarding the future utilization of these deferred tax assets.

Utilization of the research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations as defined by the U.S. Internal Revenue Code Section 382, as amended, and similar state provisions. The annual limitation may result in the expiration of the U.S. Federal and state research credit carryforwards before utilization. The Company does not expect any tax credit carryforwards to expire as a result of a Section 382 limitation.

The Company applies the provisions of FASB’s guidance on accounting for uncertainty in income taxes. As of January 31, 2017, the Company had approximately $38.0 million in unrecognized tax benefits, $30.1 million of which would affect the Company’s effective tax rate if recognized. The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:

	Year Ended January 31,
	2017			2016			2015
	(in thousands)
Beginning balance:	$	30,211		$	4,671		$	3,583
Additions based on tax positions related to the current year		7,830			17,169			1,284
Additions for tax positions of prior years		911			8,810			324
Reductions for tax positions in prior years		—			(37	)		—
Settlements for prior periods		—			—			(43	)
Lapse of applicable statute of limitations		(975	)		(402	)		(477	)
Ending balance:	$	37,977		$	30,211		$	4,671

The Company classified $1.8 million and $10.8 million of income tax liabilities as other long term liabilities as of January 31, 2017 and 2016, respectively, because payment of cash or settlement is not anticipated within one year from the balance sheet date.

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company recorded $64,000 benefit from interest accruals as a result of reserve released due to the lapse of statute of limitations for the year ended January 31, 2017 and recorded $6,000 and $7,000 of interest expense and penalties related to uncertain tax positions for the years ended January 31, 2016 and 2015, respectively. The Company recorded noncurrent liabilities of $103,000 and $166,000 related to interest and penalties for uncertain tax positions at January 31, 2017 and 2016, respectively.

The primary jurisdiction where our foreign earnings are derived is the Cayman Islands, where the Company is domiciled. Income earned in other jurisdictions was immaterial. The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. state and foreign jurisdictions. The tax years 2012 to 2016 remain open to examination by U.S. federal tax authorities. The tax years 2007 to 2016 remain open to examination by U.S. state tax authorities. The tax years 2011 to 2016 remain open to examination by foreign tax authorities. Fiscal years outside of the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those earlier years, which have been carried forward and may be audited in subsequent years when utilized.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

As of January 31, 2017, the Company’s long-term income taxes payable, including estimated interest and penalties, was approximately $1.9 million. The Company was unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes.

On July 27, 2015, in Altera Corp. v. Commissioner, the United States Tax Court issued an opinion invalidating the 2003 final Treasury regulations that requires participants in a qualified cost-sharing arrangement to share stock-based compensation. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation in intercompany cost-sharing arrangements from its regulations. In February 2016, the IRS appealed the ruling to the United States Court of Appeals for the Ninth Circuit. Due to the uncertainty related to the final resolution of this issue, the Company has not recorded tax benefits in its Consolidated Statements of Operations for the year ended January 31, 2017. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.