7. INCOME TAXES

The provision for income taxes is based on the following pretax income (loss):

Domestic and Foreign Pretax Income (Loss)	FY16		FY15
Domestic	$	6,139,543	$	(472,667)
Foreign		(572,168)		534,011

Total	$	5,567,375	$	61,344

Income Tax Expense (Benefit)		FY16		FY15

Current:
Federal	$	225,180	$	(222,315)
State and other taxes		(40,555)		129,895
Foreign		1,553,589		1,246,378

Deferred:
Domestic	$	156,448	$	(11,661,427)
Valuation allowance-deferred tax asset		(181,338)		2,170,109
Foreign		—		—
Total	$	1,713,324	$	(8,337,360)

The following is a reconciliation of the effective income tax rate to the Federal statutory rate:

	2016			2015
Statutory rate		34.00	%		34.00	%
State Income Taxes, Net of Federal Tax Benefit		1.77	%		(592.85	%)
Adjustment to Deferred		8.86	%		84.97	%
Foreign Dividend and Subpart F Income		10.93	%		758.69	%
Brazil Worthless Stock Deduction		(14.21	%)		(19,135.81	%)
Original Issue Discount		—			1,077.32	%
Argentina Flow Through Loss		(1.76	%)		(170.62	%)
Permanent Differences		(8.78	%)		(38.02	%)
Valuation Allowance-Deferred Tax Asset		(3.26	%)		4,802.37	%
Other		3.22	%		(411.60	%)
Effective Rate		30.77	%		(13,591.55	%)

The tax effects of temporary differences which give rise to deferred tax assets at January 31, 2016 and 2015 are summarized as follows:

	2016		2015
Deferred tax assets:
Inventories	$	1,266,718	$	1,153,094
US tax loss carryforwards, including work opportunity credit*		9,335,575		11,155,620
Accounts receivable and accrued rebates		238,261		80,748
Accrued compensation and other		266,272		137,860
India reserves - US deduction		75,053		164,190
Equity based compensation		201,925		573,966
Foreign tax credit carry-forward		3,388,051		2,170,109
State and local carry-forwards		899,824		980,872
Argentina timing difference		116,194		—
Depreciation and other		103,372		146,857
Amortization		(217,811)		(148,516)
Allowance for Note Receivable - Brazil		834,510		—
Deferred tax asset		16,507,944		16,410,800
Less valuation allowance		2,170,309		2,170,309
Net deferred tax asset - USA	$	14,337,635	$	14,244,491
Shown on the accompanying balance sheet as follows:
Current	$	1,554,407	$	1,143,893
Non-current	$	12,783,228	$	13,100,598

*The federal net operating loss (“NOL”) that is left after FY16 will expire after 1/31/2034 (20 years from the generated date of 1/31/2014). The credits will begin to expire after 1/31/2020 (10 years from the 1st carryover year generated date of 1/31/2010) and will fully expire after 1/31/2025.

The state NOLs will begin to expire after 1/31/2025 and will continue to expire at various periods up until 1/31/2035 when they will be fully expired. The states have a larger spread because some only carryforward for 15 years and some allow 20 years.

Valuation Allowance

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 considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that the Company would not be able to realize deferred income tax assets in the future in excess of net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. The valuation allowance was $2.2 million at January 31, 2015 ($0 at January 31, 2014 and corrected as below). As discussed below, the Company has taken a worthless stock deduction related to its Brazilian operations in 2015. Since the future use of the foreign tax credits both current and carryovers from prior years are dependent on generating sufficient future foreign source income, the future use of foreign tax credits is uncertain. As such, the Company has established a valuation allowance of $2.2 million to reflect this uncertainty.

Offsetting corrections to the FY 15 Deferred Tax Account

Prior year balances in the Deferred Tax Asset account reflect offsetting corrections to the US tax loss carryforwards and the Valuation Allowance.

Worthless stock deduction in USA for Brazil operations

For US tax purposes, the Company claimed a worthless stock deduction in FY15 for its Brazilian operations which yielded a tax benefit of $9.5 million. This will generate an operating loss carryforward available to offset future USA taxable income.

Tax Audit

Income Tax Audit/Change in Accounting Estimate

The Company is subject to US federal income tax, as well as income tax in multiple US state and local jurisdictions and a number of foreign jurisdictions. The Company has received a final “No Change Letter” from the IRS for FY07 dated August 20, 2009. The Company has not had any recent US corporate income tax returns examined by the Internal Revenue Service. Returns for the year since 2011 are still open based on statutes of limitation only.

Chinese tax authorities have performed limited reviews on all Chinese subsidiaries as of tax years 2008, 2009, 2010, 2011, 2012, 2013, 2014, and 2015 with no significant issues noted. We believe our tax positions are reasonably stated as of January 31, 2016. In October 2015, Weifang Meiyang Protective Products Co., Ltd., one of our Chinese operations (Meiyang), was reviewed by the tax authority concerning all accounting documents from 2012 to 2014. For the convenience of supervision, the tax authority asked Meiyang to transfer to a pure trade company from a manufacturing company. As a result, in October 2015, Meiyang became a trade company. The audit of Meiyang is now complete.

Our operations in the UK are profitable and continue to be subject to UK taxation. Management is not aware of any exposure in the UK.

Lakeland Protective Wear, Inc., our Canadian subsidiary, follows Canada tax regulatory framework recording its tax expense and tax deferred assets or liabilities. As of this statement filing date, we believe the Lakeland Protective Wear, Inc.’s tax situation is reasonably stated in accordance with accounting principles generally accepted in the United States of America, and we do not anticipate future tax audit liability.

In connection with the exit from Brazil as described in Note15, we have claimed a worthless stock deduction in the FY 15 tax return which the Company estimates has generated a tax benefit of approximately US $9.5 million. While the Company and its tax advisors believe that this deduction is valid, there can be no assurance that the IRS will not challenge it and, if challenged, there is no assurance that the Company will prevail. Except in Canada, it is our practice and intention to reinvest the earnings of our non-US subsidiaries in their operations and therefore FIN 48 reserve has not been recorded. As of January 31, 2016, the Company had not made a provision for US or additional foreign withholding taxes on approximately $22.3 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration ($21.6 million at January 31, 2015). Generally, such amounts become subject to US taxation upon remittance of dividends and under certain other circumstances. If these earnings were repatriated to the US, the deferred tax liability associated with these temporary differences would be approximately $3.1 million and $3.2 million at January 31, 2016 and 2015, respectively.

In China, a dividend of $3.2 million was declared and paid to the Company in May 2015 from the Company’s China subsidiary, Weifang Lakeland Safety Products Co., Ltd. (“Weifang”). The Company’s Board of Directors has instituted a tentative plan to pay annual dividends of $1.0 million to the Company from Weifang’s future profits and 33% of Meiyang’s future profits beginning in FY16. All other retained earnings are expected to be reinvested indefinitely.