Income Taxes

The components of income before income taxes consist of the following:



	Year ended December 31,
	2016		2015		2014
Domestic	$	12,652	$	25,045	$	(4,785	)
Foreign	71,232		50,731		42,423
	$	83,884	$	75,776	$	37,638

The income tax expense consists of the following:



	Year ended December 31,
	2016			2015			2014
Current provision/(benefit):
Domestic	$	7,107		$	9,951		$	(1,069	)
Foreign	18,428			12,022			6,186
	$	25,535		$	21,973		$	5,117
Deferred provision/(benefit):
Domestic	$	(2,506	)	$	3,041		$	535
Foreign	(878		)	(803		)	(459		)
	$	(3,384	)	$	2,238		$	76
Income tax expense	$	22,151		$	24,211		$	5,193

The effective income tax rate differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes approximately as follows:



	December 31,
	2016			2015			2014
Expected tax expense	$	29,361		$	26,521		$	12,797
Change in valuation allowance	22			19			64
Impact of tax holiday	(4,027		)	(2,991		)	(3,208		)
Foreign tax rate differential	(2,716		)	(2,797		)	(3,327		)
Deferred tax (benefit)/provision	(878		)	(803		)	(459		)
Unrecognized tax benefits and interest	495			324			(1,846		)
State taxes, net of Federal taxes	202			1,327			593
Non-deductible expenses	144			26			15
Prior year tax expense/(benefit)	—			2,450			—
Other	(452		)	135			564
Tax expense	$	22,151		$	24,211		$	5,193

The effective tax rate decreased from 32.0% for the year ended December 31, 2015 to 26.4% for the year ended December 31, 2016. The decrease was the result of (i) higher income tax expense during the year ended December 31, 2015 due to certain adjustments; (ii) lower domestic profits in 2016; and (iii) higher earnings and incentives in lower tax jurisdictions.

We also derive benefit from a corporate tax holiday in the Philippines for our operations centers established there over the last several years. The tax holiday expired for two of our centers in 2014 and in 2016 and will expire over the next six years for other centers, which may lead to an increase in our overall tax rate. Following the expiry of the tax exemption, income generated from centers in the Philippines will be taxed at the prevailing annual tax rate, which is currently 5% on gross income.

Certain operations centers in India, which were established in Special Economic Zones (“SEZs”), are eligible for tax incentives until 2025. These operations centers are eligible for a 100% income tax exemption for first five years of operations and 50% exemption for a period of five years thereafter.

The diluted earnings per share effect of the tax holiday is $0.12, $0.09 and $0.10 for the years ended December 31, 2016, 2015 and 2014, respectively.

The components of the deferred tax balances as of December 31, 2016 and 2015 are as follows:



	December 31,
	2016			2015
Deferred tax assets:
Tax credit carry forward	$	4,806		$	5,164
Depreciation and amortization	3,765			3,777
Share-based compensation	10,385			8,099
Accrued employee costs and other expenses	5,130			3,079
Net operating loss carry forwards	1,856			3,746
Unrealized exchange loss	2,099			1,136
Deferred rent	1,307			1,292
Others	484			62
	$	29,832		$	26,355
Valuation allowance	(454		)	(595		)
Deferred tax assets	$	29,378		$	25,760
Deferred tax liabilities:
Unrealized exchange gain	$	1,414		$	848
Intangible assets	13,165			11,163
Deferred tax liabilities:	$	14,579		$	12,011
Net deferred tax assets	$	14,799		$	13,749

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases and operating loss carry forwards. At December 31, 2016 and 2015, the Company performed an analysis of the deferred tax asset valuation allowance for net operating loss carry forward for its domestic entities. Based on this analysis, the Company continues to carry a valuation allowance on the deferred tax assets on certain net operating loss carry forwards. Accordingly, the Company had recorded a valuation allowance of $351 and $512 as of December 31, 2016 and 2015, respectively. The Company also recorded a valuation allowance of $103 and $83 related to tax credit carry forward as of December 31, 2016 and 2015, respectively.

As a result of the multiple acquisitions over the last few years, the Company acquired federal and state net operating losses in the United States. As of December 31, 2016 and 2015, the Company has federal net operating loss carry forwards of approximately $4,052 and $9,063, respectively, which expire through various years until 2032. The Company’s federal net operating loss carry forwards are subject to certain annual utilization limitations under Section 382 of the United States Internal Revenue Code. The Company also has state and local net operating loss carry forwards of varying amounts, which are subject to limitations under the applicable rules and regulations of those taxing jurisdictions. The Company estimates that it will be able to utilize all of the losses before their expiration.

At December 31, 2016 and 2015, no deferred income taxes have been provided for the Company’s share of undistributed net earnings of foreign operations due to management’s intent to reinvest such amounts indefinitely. Such earnings totaled approximately $315,486 and $261,804 as of December 31, 2016 and 2015, respectively. The determination of the amount of such unrecognized deferred taxes is not practicable.

The Company’s income tax expense also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC topic 740, “Income Taxes”, as well as the related net interest. Tax exposures can involve complex issues and may require an extended resolution period. Although the Company believes that it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the income tax expense in the period in which such determination is made.

The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2016 through December 31, 2016



Balance as of January 1, 2016	$	2,797
Increases related to prior year tax positions	156
Decreases related to prior year tax positions	—
Increases related to current year tax positions	178
Decreases related to current year tax positions	—
Effect of exchange rate changes	(44		)
Balance as of December 31, 2016	$	3,087

The unrecognized tax benefits as of December 31, 2016 of $3,087, if recognized, would impact the effective tax rate.

The Company has recognized interest of $315 and $205 during the years ended December 31, 2016 and 2015, respectively, which is included in the income tax expense in the consolidated statements of income. As of December 31, 2016 and 2015, the Company has accrued interest and penalties of $1,553 and $1,269 relating to unrecognized tax benefits.