Note 11. Income Taxes

The consolidated effective tax rate was 35.4% and 36.7% for the nine months ended April 30, 2013 and 2012, respectively. The decrease in the consolidated effective tax rate was principally due to the finalization of tax examinations in March 2013, Federal tax legislation enacted in January 2013 and the prior year unfavorable impact of recording a loss relating to the impairment of an investment, partially offset by a lower level of deductions in the current year as a percentage of pre-tax income, as described below.

For the nine months ended April 30, 2013 and 2012, approximately 96% and 97%, respectively, of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 36.4% and 37.5%, respectively. The lower overall effective tax rate for the nine months ended April 30, 2013 was principally caused by (i) Federal tax legislation that had expired in December 2011, but was re-enacted retroactively in January 2013 that enabled us to claim the research and experimentation tax credit for calendar 2012, (ii) the simultaneous finalization in March 2013 of an IRS examination in the United States and a Dutch tax authority examination in the Netherlands that resulted in a favorable tax adjustment in the United States and (iii) not recording a tax benefit in the prior year on a loss relating to the impairment of an investment as a result of the uncertainty of utilizing a capital loss tax benefit in the future. Partially offsetting these factors was a lower overall level of tax credits and deductions as a percentage of pre-tax income as the underlying basis for the various credits and deductions did not increase as much as the increase in pre-tax income.

For the nine months ended April 30, 2013 and 2012, approximately 4% and 3%, respectively, of our income before income taxes was generated from our operations in Canada, Singapore and the Netherlands. Collectively, these operations had an overall effective tax rate of 10.1% and 12.5% for the nine months ended April 30, 2013 and 2012, respectively. All three of these locations have lower statutory income tax rates compared to the United States. The lower effective tax rate for the nine months ended April 30, 2013 was the result of the recording of a tax benefit in our third quarter of fiscal 2013 due to removing a valuation allowance on our net operating loss carryforwards (“NOLs”) in the Netherlands since we believe it is more likely than not that we will utilize the remaining NOLs in the near future as we now have certainty of the amount of remaining NOLs and the likely future pre-tax income in the Netherlands due to the simultaneous finalization in March 2013 of an IRS examination in the United States and a Dutch tax authority examination in the Netherlands. The effective tax rate for the nine months ended April 30, 2012 was favorably affected by the recognition of tax benefits upon resolution of income tax uncertainties.

We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our Condensed Consolidated Financial Statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. However, if our unrecognized tax benefits are recognized in our financial statements in future periods, there would not be a significant impact to our overall effective tax rate due to the size of the unrecognized tax benefits in relation to our income before income taxes. We do not expect such unrecognized tax benefits to significantly decrease or increase in the next twelve months.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:

	Unrecognized Tax Benefits

Unrecognized tax benefits on July 31, 2011	$	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on July 31, 2012	124,000
Activity during the nine months ended April 30, 2013	—
Unrecognized tax benefits on April 30, 2013	$	124,000

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2005.

Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our Condensed Consolidated Financial Statements. However, such amounts have been relatively insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.