11. INCOME TAXES

The following table sets forth income (loss) before taxes and the expense for income taxes for the years ended December 31, 2012, 2011 and 2010.


		December 31,
($ thousands)	2012		2011		2010
Income (loss) before taxes:
U.S.	$	12,060	$	(12,057)	$	(14,835)
Foreign		133,488		148,747		95,627
Total income before taxes		145,548		136,690		80,792
Income tax expense:
Current income taxes
U.S. federal		(6,364)		4,798		47
U.S. state		597		165		95
Foreign		22,953		19,758		17,923
Total current income taxes		17,186		24,721		18,065
Deferred income taxes:
U.S. federal		(3,981)		(2,338)		-
U.S. state		(4,016)		-		-
Foreign		5,016		1,519		(4,999)
Total deferred income taxes		(2,981)		(819)		(4,999)
Total income tax expense	$	14,205	$	23,902	$	13,066

The following table sets forth income reconciliations of the statutory federal income tax rate to our actual rates based on income or loss before income taxes as of December 31, 2012, 2011 and 2010.


	December 31,
($ thousands)	2012		2011		2010
Federal income tax rate	35.0	%	35.0	%	35.0	%
State income tax rate, net of federal benefit	(2.7)		0.3		(0.3)
Foreign income tax rate differential	(25.0)		(30.3)		(22.2)
Permanent items	4.6		3.2		12.5
Permanent portion of equity compensation	0.5		0.4		1.6
Charitable donations of inventory	(0.1)		-		(0.1)
Change in valuation allowance	(8.4)		3.6		(34.2)
Unremitted foreign earnings of subsidiary	2.0		-		21.7
Uncertain tax positions	3.5		8.7		1.4
Other	0.4		(3.4)		0.8
Effective income tax rate	9.8	%	17.5	%	16.2	%

The following table sets forth deferred income tax assets and liabilities as of December 31, 2012 and 2011.


	December 31,
($ thousands)	2012		2011
Current deferred tax assets:
Accrued expenses	$	12,934	$	12,575
Unrealized loss on foreign currency		2,026		-
Other		8		2,383
Valuation allowance		(3,492)		(6,054)
Total current deferred tax assets	$	11,476	$	8,904
Current deferred tax liabilities:
Unremitted earnings of foreign subsidiary	$	(7,596)	$	(4,746)
Total current deferred tax liabilities.	$	(7,596)	$	(4,746)
Non-current deferred tax assets:
Stock compensation expense	$	8,865	$	7,630
Long-term accrued expenses		3,067		-
Net operating loss and charitable contribution carryovers		23,255		26,219
Property and equipment		8,994		8,641
Future uncertain tax position offset		3,780		13,638
Unrealized loss on foreign currency		921		5,644
Foreign tax credit		5,392		3,177
Other		1,767		190
Valuation allowance		(22,406)		(33,889)
Total non-current deferred tax assets	$	33,635	$	31,250
Non-current deferred tax liabilities:
Intangible assets	$	(779)	$	(1,009)
Total non-current deferred tax liabilities	$	(779)	$	(1,009)

We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries in those operations. Generally, the earnings of our foreign subsidiaries become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. Exceptions may be made on a year-by-year basis to repatriate current year earnings of certain foreign subsidiaries based on cash needs in the U.S. As of December 31, 2012, we have provided for deferred U.S. income tax of $7.6 million on $38.6 million of foreign subsidiary earnings. No withholding tax is due with respect to the repatriation of these earnings to the U.S. and none has been provided for.

At December 31, 2012 and 2011, U.S. income and foreign withholding taxes have not been provided on for approximately $490.8 million and $371.0 million, respectively, of unremitted earnings of subsidiaries operating outside of the U.S. These earnings are estimated to represent the excess of the financial reporting over the tax basis in our investments in those subsidiaries. These earnings, which are considered to be indefinitely reinvested, would become subject to U.S. income tax if they were remitted to the U.S. The amount of unrecognized deferred U.S. income tax liability on the unremitted earnings has not been determined because the hypothetical calculation is not practicable.

We have deferred tax assets related to certain deductible temporary differences in various tax jurisdictions for which we have recorded a valuation allowance of $25.9 million against these deferred tax assets because we do not believe that it is more likely than not that we will be able to realize these deferred tax assets. The significant components of the deferred tax assets for which a valuation allowance has been applied consist of net operating losses in certain tax jurisdictions for which management believes there is not sufficient positive evidence that such net operating losses will be realized against future income and book expenses not deductible for tax purposes in the current year such as inventory impairment reserves, equity compensation and unrealized foreign exchange loss that would increase such net operating losses in the same jurisdictions. These temporary differences are amounts which arose in jurisdictions where (i) current losses exist, (ii) such losses are in excess of any loss carryback potential, (iii) no tax planning strategies exist with which to overcome such losses and (iv) no profits are projected for the following year. For these reasons it is determined that it is more likely than not that these deferred tax assets will not be realized and a valuation allowance has been provided with respect to these deferred tax assets.

At December 31, 2012, we had U.S. federal net operating loss carryforwards of $0.7 million, state net operating loss carryforwards of $89.6 million, charitable contribution carryforwards of $23.3 million and foreign tax credits of $5.0 million which will expire at various dates between 2014 and 2031. We do not believe that it is more likely than not that the benefit from certain state net operating losses will be realized. Consequently, we have a valuation allowance of $9.1 million on the deferred tax assets relating to these state net operating loss carryforwards and charitable contribution carryforwards.

At December 31, 2012, we have a foreign deferred tax asset of $11.4 million reflecting the benefit of $43.8 million in foreign net operating loss carryforwards, some of which have an indefinite life. We do not believe it is more likely than not that the benefit from certain foreign net operating loss carryforwards will be realized. Consequently, we have provided a valuation allowance of $7.7 million on the deferred tax assets relating to these foreign net operating loss carryforwards.

We had approximately $36.7 million in net deferred tax assets at December 31, 2012. Approximately $11.9 million of the net deferred tax assets were located in foreign jurisdictions for which a sufficient history and expected future profits indicated that it is more likely than not that such deferred tax assets will be realized. Pre-tax profit of approximately $47.4 million is required to realize the net deferred tax assets.

At December 31, 2012, approximately $3.8 million of net deferred tax assets consists of deferred tax assets related to estimated liabilities for uncertain tax positions that would be realized if such liabilities are actually incurred. The deferred tax assets represent primarily the reduction in tax expense that would occur upon an increase of intercompany royalty expense by various taxing authorities. Approximately $15.2 million of taxable income would have to be recognized to realize these deferred tax assets.

As a result of certain accounting realization requirements, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at December 31, 2012 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $11.8 million if and when such deferred tax assets are ultimately realized. We use ASC 740 ordering for purposes of determining when excess tax benefits have been realized.

The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits during the years ended December 31, 2012, 2011 and 2010.


($ thousands)	2012		2011		2010
Unrecognized tax benefit—January 1	$	44,537	$	33,042	$	29,163
Gross increases—tax positions in prior period		-		8,332		943
Gross decreases—tax positions in prior period		(425)		-		-
Gross increases—tax positions in current period		4,310		4,689		3,086
Settlements		(16,260)		(427)		-
Lapse of statute of limitations		(262)		(1,099)		(150)
Unrecognized tax benefit—December 31	$	31,900	$	44,537	$	33,042

Unrecognized tax benefits of $31.9 million, $44.5 million, and $33.0 million at December 31, 2012, 2011 and 2010, respectively, if recognized, would reduce our annual effective tax rate.

Interest and penalties related to income tax liabilities are included in income tax expense in the consolidated statement of operations. As of December 31, 2012, 2011 and 2010, we recorded approximately $0.6 million, $1.0 million, and $0.1 million, respectively, of penalties and interest which resulted in a cumulative accrued balance of penalties and interest of $4.4 million, 3.9 million, and $2.9 million at December 31, 2012, 2011 and 2010, respectively.

Unrecognized tax benefits consist primarily of tax positions related to intercompany transfer pricing in multiple international jurisdictions. The gross increase for tax positions in current and prior periods in 2012 of $3.9 million primarily includes specific transfer pricing exposures in various jurisdictions. We do not expect any significant changes in unrecognized tax benefits in the next twelve months.

The following table sets forth the remaining tax years subject to examination for the major jurisdictions where we conduct business as of December 31, 2012.


Netherlands	2006	to	2012
Canada	2007	to	2012
Japan	2007	to	2012
Singapore	2008	to	2012
United States	2010	to	2012