Note 10 – Income Tax

The provision for income taxes is different from the amount computed by applying U.S. statutory rates to consolidated income before taxes. The significant reason for these differences is as follows (dollars in thousands):



		Quarter Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
		2015		2014		2015		2014
Expected tax provision	$	6,146	$	2,310	$	8,122	$	2,792
Increase (decrease) in tax expense resulting from:
Change in valuation allowance, other		(679)		(2,023)		(773)		(2,407)
Foreign tax provision		(911)		1,724		75		2,679
Foreign withholding tax provision		169		146		335		288
Reversal of tax expense on undistributed foreign earnings		(3,394)		--		(3,394)		--
Tax effect of foreign tax rates on current income		(293)		(287)		(293)		(385)
State and local tax provision		346		26		346		223
Tax litigation settlement		180		(54)		360		245
Tax litigation settlement adjustment		--		--		(690)		--
Actual tax provision	$	1,564	$	1,842	$	4,088	$	3,435

Pursuant to FASB ASC 740-10 – Income Taxes (“FASB ASC 740-10”), a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States.

During the second quarter of 2015, we adjusted our capital allocation strategy to require that earnings available in Australia be reinvested in Australia, supported by the continuing decline in the value of the Australian dollar during 2015, and by increased investment opportunities in Australia. Accordingly, as of June 30, 2015, our intent is that earnings of our Australian subsidiaries are permanently invested outside the United States. We realized a $3.4 million tax benefit arising from reversal of prior year U.S. tax expense previously recorded for undistributed earnings from Australia subsidiaries. If Australia earnings available as of June 30, 2015 had been considered to be distributed to the U.S., we would have incurred additional U.S. tax expense of approximately $5.1 million.

No cumulative earnings were available for distribution in the Reading New Zealand consolidated group of subsidiaries as of June 30, 2015. Accordingly, we recorded no U.S. tax expense related to Reading New Zealand earnings. Based on the facts available as of June 30, 2015, our intent regarding Reading New Zealand earnings is that such earnings are not permanently reinvested.

Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. In accordance with FASB ASC 740-10, we record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies, and recent financial performance. FASB ASC 740-10 presumes that a valuation allowance is required when there is substantial negative evidence about realization of deferred tax assets, such as a pattern of losses in recent years, coupled with facts that suggest such losses may continue.

We have accrued $12.8 million in total tax liabilities as of June 30, 2015, of which $5.6 million has been classified as taxes payable-current and $7.2 million have been classified as taxes payable – long-term. As part of current tax liabilities, we have accrued $3.5 million in connection with the settlement of the IRS claims against our subsidiary, Craig Corporation, relating to its 1996 tax year. This is an obligation of Craig Corporation, and not of Reading International, Inc. We believe that the $12.8 million represents an adequate provision for our income and other tax exposures, including income tax contingencies related to foreign withholding taxes.

In accordance with FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“FASB ASC 740-10-25”), we record interest and penalties related to income tax matters as part of income tax expense.

For the current quarter, our gross unrecognized tax benefits remains consistent with prior quarter. The net tax balance is approximately $2.7 million, and the interest balance is $5.6 million, all of which would affect the effective rate if recognized. For the period ending December 31, 2014, we recorded gross unrecognized tax benefits of approximately $3.7 million, of which $2.7 million would affect the effective rate if recognized. The interest balance was $5.5 million, all of which would affect the effective rate if recognized.

It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, we estimate that within the next 12 months the reserve for uncertain tax positions will increase within a range of $100,000 to $1.0 million. The reasons for such changes include but are not limited to tax positions expected to be taken during the next twelve months, re-evaluation of current uncertain tax positions, expiring statutes of limitations, and its interest related to the “Tax Audit/Litigation” settlement, which occurred January 6, 2011.

Our Company and subsidiaries are subject to U.S. federal income tax, income tax in U.S. states and possessions, and income tax in Australia and New Zealand. Generally, changes to our U.S. federal and most state income tax returns for the calendar year 2010 and earlier are barred by statutes of limitations. As of June 30, 2015, most changes to our income tax returns for Australia and New Zealand for the calendar year 2009 and earlier are barred by statutes of limitations.