15. Income taxes

The following table presents the provision for income taxes and our effective tax rate for the fiscal years ended July 31, 2014 and 2013:


	Years Ended July 31,
(in millions)	2014			2013
(Benefit from) provision for income taxes	$	(5.4	)	$	13.0
Effective tax rate		-19	%		29	%

The effective income tax rate is based on the actual income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolution of tax audits, tax contingencies or other discrete items.

A reconciliation of income taxes at the U.S. statutory rate to the effective tax rate follows:


	Years Ended July 31,
	2014			2013			2012
U.S. Federal statutory tax rate		35	%		35	%		35	%
State income taxes, net of federal tax benefit		(3	)		(1	)		(1	)
Domestic production benefit		(2	)		(2	)		(2	)
General business credit (U.S. R&D)		(3	)		(4	)		(1	)
Valuation allowance		—			1			1
Change in classification of Canadian entity		(40	)		—			—
Effect of international operations		(9	)		(2	)		(3	)
(Decrease) increase in tax reserves		(2	)		1			(26	)
Other items, net		5			1			—

Effective tax rate		(19	%)		29	%		3	%

Our effective tax rate before discrete items for fiscal year 2014 is lower than the statutory rate of 35%, primarily due to lower foreign tax rates and tax credits in the U.S. and Canada. The tax provision for fiscal year 2014 includes certain discrete tax benefits totaling $12.9 million. The discrete tax benefit for fiscal year 2014 consists primarily of a reduction in a net deferred tax liability of $8.8 million associated with a change in classification of our Canadian operations, a $2.7 million benefit associated with a US deduction for historical currency losses incurred as a result of operating offshore in a non-functional currency, and a $1 million reduction in uncertain tax positions primarily associated with federal tax credits for research and development, or R&D credits, following the conclusion of an Internal Revenue Service, or IRS, review for fiscal year 2009, along with $0.4 million of other items.

The effective tax rate for fiscal year 2013 was lower than the statutory rate of 35% due primarily to the reversal of tax reserves on U.S. federal and state tax returns as a result of the expiration of applicable statutes of limitations of $0.6 million including interest, the impact from retroactive extension of the U.S. R&D credit of $0.5 million, ongoing benefits of U.S. R&D credits, U.S. deductions for manufacturing activity, and lower foreign tax rates as compared to the U.S. statutory rate of 35%.

The components of the (benefit from) provision for income taxes are as follows:


	Years Ended July 31,
(in millions)	2014			2013			2012
Current income taxes provision (benefit):
U.S.:
Federal	$	(5.2	)	$	11.1		$	3.4
State		0.3			0.5			0.6
Non-U.S.		4.9			0.4			0.2

Current income tax provision	$	—		$	12.0		$	4.2

Deferred income taxes (benefit) provision:
U.S.:
Federal	$	(2.9	)	$	12.3		$	(3.4	)
State		(0.4	)		(0.1	)		—
Non-U.S.		(2.1	)		(11.2	)		0.3

Deferred income tax (benefit) provision		(5.4	)		1.0			(3.1	)

(Benefit from) provision for income taxes	$	(5.4	)	$	13.0		$	1.1

Income before income taxes from domestic and foreign operations is as follows:


	Years Ended July 31,
(in millions)	2014		2013		2012
Domestic	$	0.9	$	24.9	$	30.2
Foreign		28.1		19.2		14.0

Income before income taxes	$	29.0	$	44.1	$	44.2

Net deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:


	As of July 31,
	2014			2013
(in millions)
Assets
Compensation	$	10.1		$	11.6
Accruals and reserves		4.9			5.1
Comprehensive income		1.4			—
Net operating losses and credit carryforwards		16.6			8.9
Other		3.4			3.3

Deferred tax assets	$	36.4		$	28.9
Valuation allowance		(6.6	)		(6.3	)

Total deferred tax assets	$	29.8		$	22.6

Liabilities
Depreciation related	$	(7.9	)	$	(5.8	)
Goodwill and intangibles		(7.8	)		(4.3	)
Comprehensive income		—			(0.2	)

Total deferred tax liabilities	$	(15.7	)	$	(10.3	)

Net deferred taxes	$	14.1		$	12.3

As of July 31, 2014, we had net operating loss carryforwards in Belgium of approximately $3.7 million which have no expiration date, losses of $0.1 million in Italy that expire in 2017, losses of approximately $3.2 million in the United Kingdom which have no expiration date, losses of approximately $0.1 million in Denmark which have no expiration date, losses of $1.3 million in Canada that will expire in 2024, losses in the U.S. of $0.2 million that will expire in 2034 and losses of $1.0 million in France which have no expiration date. As of July 31, 2014, we also had state tax credit carryforwards of $9.6 million that will expire in 2029.

We do not provide for U.S. Federal income taxes on undistributed earnings of consolidated foreign subsidiaries of approximately $66 million, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.

We have determined that it is more likely than not that we will not recognize the benefit of certain foreign losses, state losses, and tax credits and, as a result, valuation allowances have been established at July 31, 2014 and 2013. The change in the valuation allowance in fiscal year 2014 is primarily the result of the addition of state credits and foreign losses where use is not more likely than not.

We perform a two-step evaluation of all tax positions, ensuring that these tax return positions meet the “more likely than not” recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. These evaluations provide us with a comprehensive model for how we should recognize, measure, present, and disclose in our financial statements certain tax positions that we have taken or expect to take on our income tax returns.

The following table summarizes the changes in our unrecognized income tax benefits for fiscal years 2014 and 2013:


	July 31,
(in millions)	2014			2013
Beginning balance	$	7.3		$	6.8
Increases based on tax positions related to current year		0.8			0.9
Increases for tax positions of prior years		0.4			0.2
Decreases for tax positions of prior years		(0.8	)		—
Decreases due to settlements with taxing authorities		(0.1	)		—
Decreases due to lapse of the applicable statute of limitations		(0.7	)		(0.6	)
Adjustment due to foreign exchange rate		—			—

Ending balance	$	6.9		$	7.3

Net interest as of end of fiscal year	$	0.6		$	0.7

The unrecognized tax benefits decreased to $6.9 million at July 31, 2014. If recognized in a future period, the timing of which is not estimable,we expect that approximately $5.2 million would reduce our effective tax rate, net of potential valuation allowances.

We are subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. We have concluded all U.S. Federal income tax matters through the year ended July 31, 2010. In the next four quarters, the statute of limitations for our fiscal year ended July 31, 2011 may expire for U.S. Federal and state income taxes and for foreign subsidiaries and it is reasonably expected that net unrecognized benefits, including interest, of approximately $2.8 million may be recognized. During the fiscal year 2014, we reduced our uncertain tax benefits and accrued interest by $1.9 million as a result of the completion of the audit of fiscal year 2009, closing of statutes of limitation for the fiscal year 2007 for foreign subsidiaries and 2010 for domestic entities and the remeasurement of uncertain tax benefits in open years.

We accrue interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is treated as a component of income tax expense. At July 31, 2014 and 2013, we had approximately $0.6 million and $0.7 million, respectively, accrued for interest and penalties on unrecognized tax benefits.

Refundable and deferred income taxes at July 31, 2014 consisted of deferred tax assets of $9.3 million and refundable income tax assets of $9.3 million. Refundable and deferred income taxes at July 31, 2013 consisted of deferred tax assets of $6.8 million and refundable income tax assets of $1.0 million. The refundable income tax assets include expected Federal, state, and foreign refunds that are expected to be received within the next twelve months.