NOTE 10—INCOME TAXES

Income (loss) before income taxes includes the following components (in thousands):

Years ended September 30,	2015			2014			2013
	(in thousands)
United States	$	(18,712	)	$	(22,788	)	$	(31,640	)
Foreign	90,623			112,199			71,411

Total	$	71,911		$	89,411		$	39,771

Significant components of the provision for income taxes are as follows:

Years ended September 30,	2015			2014			2013
	(in thousands)
Current:
Federal	$	(2,433	)	$	(8,049	)	$	8,198
State	723			918			2,437
Foreign	20,266			25,705			18,581

Total current	18,556			18,574			29,216


Deferred:
Federal	24,112			1,296			(14,182		)
State	5,710			(1,232		)	(2,720		)
Foreign	619			1,193			2,188

Total deferred	30,441			1,257			(14,714		)

Provision for income taxes	$	48,997		$	19,831		$	14,502

The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:

Years ended September 30,	2015			2014			2013
	(in thousands)

Tax expense at U.S. statutory rate	$	25,169		$	31,294		$	13,920
State income taxes, net of federal tax effect	(34		)	111			120
Nondeductible expenses	1,555			1,319			1,609
Change in reserve for tax contingencies	(1,192		)	(601		)	(673		)
Impact of goodwill impairment loss	—			—			10,046
Change in deferred tax asset valuation allowance	38,284			3,109			5,161
Foreign earnings taxed at less than statutory rate	(11,924		)	(12,783		)	(7,521		)
Tax credits generated in the current year	(1,696		)	(2,772		)	(4,319		)
Reinstatement of federal research and development credit	(1,247		)	—			(1,937		)
Manufacturing deduction	—			—			(1,333		)
Other	82			154			(571		)

Provision for income taxes	$	48,997		$	19,831		$	14,502

Significant components of our deferred tax assets and liabilities are as follows:

September 30,	2015			2014
	(in thousands)
Deferred tax assets:
Accrued employee benefits	$	12,597		$	13,944
Long-term contracts and inventory valuation reductions	13,297			9,554
Allowances for loss contingencies	3,793			5,121
Deferred compensation	4,252			4,310
Property, plant and equipment	1,611			1,507
Intangible assets	8,037			2,324
Retirement benefits	8,040			4,729
Tax credit carryforwards	11,151			7,285
Net operating losses carryforwards	14,795			15,662
Other	867			585


Total gross deferred tax assets	78,440			65,021
Valuation allowance	(54,759		)	(14,024		)


Total deferred tax assets	23,681			50,997



Deferred tax liabilities:
Deferred revenue	(23,981		)	(22,507		)
Other	(2,248		)	(1,943		)


Total deferred tax liabilities	(26,229		)	(24,450		)


Net deferred tax asset (liability)	$	(2,548	)	$	26,547

The deferred tax assets and liabilities for fiscal 2015 and 2014 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2015 includes changes that are recorded to Other Comprehensive Income (OCI).

We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and measure them using the enacted tax rates and laws that we expect will be in effect when the differences reverse.

As of September 30, 2015, we had net operating loss carryforwards of approximately $47.4 million for foreign and $33.3 million for state, and unused state tax credits of $15.8 million. In general, our foreign operating loss carryforwards and state tax credits are not subject to expiration. The state operating loss carryforwards will begin to expire in fiscal year 2026.

Companies are required to assess whether a valuation allowance should be recorded against their deferred tax assets (“DTAs”) based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are, (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. We have evaluated our U.S. DTAs, including an assessment of our cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance was required. A significant negative factor in our assessment was Cubic’s three-year cumulative U.S. GAAP loss as of the end of fiscal year 2015.

After a review of the four sources of taxable income described above and in view of our three-year cumulative U.S. loss, we recorded an increase in our valuation allowance on U.S. DTAs, with a corresponding charge to our net income tax expense, of $35.8 million. An additional $1.8 million valuation allowance was recorded against our foreign deferred tax assets for a total charge of $37.6 million. Through September 30, 2015, a total valuation allowance of $54.8 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets.

If sufficient positive evidence arises in the future, such as a sustained return to profitability in the U.S. or foreign jurisdictions, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.

The non-cash charge to establish a valuation allowance does not have any impact on our consolidated operations or cash flows, nor does such an allowance preclude our from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the Consolidated Statement of Income for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the Consolidated Statement of Income.

We do not provide for U.S. income taxes on the earnings of foreign subsidiaries which are considered indefinitely reinvested outside the U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available for repatriation. As of September 30, 2015, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $426.6 million of which $394.9 million originates from the U.K. We continually evaluate the financial requirements of our U.S. operations as well as funding requirements outside the U.S. for potential acquisitions, market growth and ongoing operations to determine the amount of excess capital, if any, that is available for distribution. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes and foreign withholding taxes, but would also be able to offset unrecognized foreign tax credit carryforwards, if any. It is not practicable for us to determine the total amount of unrecognized deferred U.S. income tax liability because of the complexities associated with its hypothetical calculation.

Accounting for Uncertainty in Income Taxes

During fiscal 2015 and 2014, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:

Years ended September 30,	2015			2014
	(in thousands)

Balance at beginning of year	$	7,306		$	8,441
Increase (decrease) related to tax positions in prior years:
Recognition of benefits from expiration of statutes	(1,068		)	(973		)
Settlements with taxing authorities	—			(728		)
Other	3,125			(54		)
Tax positions related to the current year	472			743
Tax positions related to current year acquisitions	2,784			—
Currency translation adjustment	—			(123		)

Balance at end of year	$	12,619		$	7,306

At September 30, 2015 and 2014, the amount of unrecognized tax benefits from permanent tax adjustments that, if recognized, would affect the effective tax rate was $4.5 million and $4.7 million, respectively. During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to approximately $3.7 million of the unrecognized tax benefits depending on the timing of examinations or expiration of statute of limitations, either because our tax positions are sustained or because we agree to the disallowance and pays the related income tax. The amount of net interest and penalties recognized as a component of income tax expense during 2015, 2014 and 2013 was not material. Interest and penalties accrued at September 30, 2015 and 2014 amounted to $1.2 million and $1.6 million, respectively, bringing the total net liability for uncertain tax issues to $10.9 million and $8.0 million, respectively, as of September 30, 2015 and 2014.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2015, the fiscal years open under the statute of limitations in significant jurisdictions include 2012 through 2015 in the U.S. We believe we have adequately provided for uncertain tax issues we have not yet resolved with federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a material adverse effect upon our financial condition or results of operations.

Cash amounts paid for income taxes, net of refunds received, were $15.2 million, $27.3 million and $42.1 million in 2015, 2014 and 2013, respectively.