Note 6. Income Taxes

For the years ended December 31, 2013, 2012 and 2011, income tax expense is composed of the following (amounts in thousands):

	2013		2012		2011

Current income tax expense	$	2,101	$	4,566	$	1,175
Deferred income tax expense		1,029		1,719		2,809


	$	3,130	$	6,285	$	3,984

Current tax expense for the years ended December 31, 2013, 2012 and 2011 includes $1.9 million, $36,845 and $74,929 of foreign withholding tax, respectively.

For the years ended December 31, 2013, 2012 and 2011, the Company's income tax expense and effective tax rates were as follows:



Pre-tax book income—US Only	34.00	%	34.00	%	34.00	%
Pre-tax book income—PR Only	-3.85	%	24.72	%	—
Permanent items	-164.63	%	0.34	%	0.13	%
Return to provision true-ups	27.92	%	-0.11	%	—
Foreign rate differential	-7.43	%	-3.87	%	—
Branch tax benefit and foreign tax credits	90.23	%	-16.93	%	—
Current/deferred—rate difference	0.85	%	0.43	%	—
Change in valuation allowance	-212.63	%	—		—
Deferred foreign tax credit offset	-20.39	%	-1.55	%	—
State rate change	146.93	%	—		—
Federal rate change	-152.83	%	-0.86	%	—


	-261.83	%	36.17	%	34.13	%

For the year ended December 31, 2013, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded relate to permanent differences related to non-deductible expenses in conjunction with the Transaction, increases in taxes in Puerto Rico that will not generate offsetting U.S. foreign tax credits and the change in the valuation allowance. For the years ended December 31, 2012 and 2011, the items that significantly affected the differences between the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded, were increases in taxes in Puerto Rico that will not generate offsetting U.S. foreign tax credits and permanent differences for meals and entertainment, respectively. The Company may be audited by federal, state and local tax authorities, and from time to time these audits could result in proposed assessments. The Company has open tax years from 2008 forward for federal and state tax purposes. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated for preparing its income tax returns in accordance with tax regulations and the net tax effects of operating loss and tax credits carried forward. Net deferred tax assets consist of the following components as of December 31, 2013 and 2012 (amounts in thousands):

	2013			2012

Deferred tax assets:
Allowances for doubtful accounts	$	884		$	103
Interest rate swap agreement		—			87
Deferred branch tax benefit		17,159			13,551
Deferred income		48			58
Accrued expenses		3,052			2,886
Foreign tax credit		3,059			1,322
Stock compensation		1,962			—
Intangibles		2,281			1,495


		28,445			19,502
Less: valuation allowance		(2,514	)		—


		25,931			19,502


Deferred tax liabilties:
Prepaid expenses		(166	)		(85	)
Intangibles		(30,600	)		(12,116	)
Property and equipment		(4,215	)		(3,389	)
Amortization expense		(1,043	)		—
Other liabilities		(82	)		—


Total deferred tax liabilities		(36,106	)		(15,590	)


	$	(10,175	)	$	3,912

The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets at December 31, 2013 and 2012 as follows (amounts in thousands)

	2013		2012

Current assets	$	—	$	3,049
Noncurrent assets		—		863


	$	—	$	3,912




Current liabilities	$	8,135	$	—
Noncurrent liabilities		2,040		—


	$	10,175	$	—

The realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction during the future periods in which the related temporary differences become deductible. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. For the year ended December 31, 2013, the Company has provided a valuation allowance of $2.5 million on the deferred tax assets to reduce the total amount that management believes will be ultimately realized, due to the change in the Puerto Rico corporate tax rate from 30% to 39% in June 2013. For the year ended December 31, 2012, the Company believed it was more likely than not that it will realize the benefits of all of these deductible differences and did not provide a valuation allowance.

At December 31, 2013 and 2012, the Company has foreign tax credit carryforwards for U.S. federal purposes totaling $3.1 million and $1.3 million, respectively, which expire during the years 2018 through 2023.

Upon audit, taxing authorities may prohibit the realization of all or part of an uncertain tax position. While the Company has no history of tax audits, the Company regularly assesses the outcome of potential examinations in each of the tax jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2013 and 2012, the Company has accrued no uncertain tax position reserves or related interest and penalties.