Taxes

Domestic income before taxes was $41,226,000 in 2014, $29,576,000 in 2013, and $36,754,000 in 2012. Foreign income before taxes was $106,171,000 in 2014, $58,310,000 in 2013, and $49,876,000 in 2012.

The provision for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2014			2013		2012
Current:
Federal	$	23,484		$	8,720	$	11,284
State	973			721		789
Foreign	4,854			3,167		5,790
	29,311			12,608		17,863
Deferred:
Federal	(2,569		)	1,580		428
State	7			119		36
Foreign	(837		)	6		205
	(3,399		)	1,705		669
	$	25,912		$	14,313	$	18,532

A reconciliation of the United States federal statutory corporate tax rate to the Company’s effective tax rate was as follows:



	Year Ended December 31,
	2014		2013		2012
Income tax provision at federal statutory rate	35	%	35	%	35	%
State income taxes, net of federal benefit	1		1		1
Foreign tax rate differential	(17	)	(17	)	(14	)
Tax credit	—		(1	)	—
Discrete tax events	(1	)	(3	)	—
Other	—		1		(1	)
Income tax provision	18	%	16	%	21	%

The effective tax rate for 2014 included the impact of the following discrete events: (1) a decrease in tax expense of $674,000 from the final true-up of the prior year's tax accrual upon filing the actual returns, (2) a decrease in tax expense of $217,000 from the expiration of statutes of limitations for certain reserves for income tax uncertainties, (3) a decrease in tax expense of $553,000, which includes $296,000 for the release of certain tax reserves, related to the closing of the Internal Revenue Service audit of the Company for tax years 2010 and 2011, and (4) a decrease in tax expense, net of reserves, of $757,000 from the retroactive application of the 2014 research and development tax credit. The Tax Increase Prevention Act of 2014 was passed by Congress in December 2014 and the provisions under this act are to be applied retroactively to January 1, 2014. Interest and penalties included in these amounts was a decrease to tax expense of $46,000.

The effective tax rate for 2013 included the impact of the following discrete events: (1) a decrease in tax expense of $1,790,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties, (2) an increase in tax expense of $267,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns, and (3) a decrease in tax expense of $555,000 from the retroactive application of the 2012 research and development credit. The American Taxpayer Relief Act of 2012 was passed by Congress and signed into law on January 1, 2013 and the provisions under this act are to be applied retroactively to January 1, 2012. As a result of the law being signed on January 1, 2013, the financial impact of the retroactive provision was recorded as a discrete event in the first quarter of 2013. Interest and penalties included in these amounts was a decrease to tax expense of $854,000.

The effective tax rate for 2012 included the impact of the following discrete events: (1) a decrease in tax expense of $441,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties, (2) an increase in tax expense of $101,000 from the write-down of a noncurrent deferred tax asset based upon a change in the tax rate in Japan, and (3) an increase in tax expense of $84,000 from the final true-up of the prior year's tax accrual upon filing the actual tax returns. Interest and penalties included in these amounts was a decrease to tax expense of $58,000.

The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands):



Balance of reserve for income taxes as of December 31, 2012	$	4,024
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods	438
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	1,048
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities	—
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(1,102		)
Balance of reserve for income taxes as of December 31, 2013	4,408
Gross amounts of decreases in unrecognized tax benefits as a result of tax positions taken in prior periods	(226		)
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	1,095
Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities	(15		)
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(135		)
Balance of reserve for income taxes as of December 31, 2014	$	5,127

In the first quarter of 2014, management adopted Accounting Standards Update (ASU) 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU requires companies to present an unrecognized tax benefit, or a portion thereof, as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward or a similar tax loss or tax credit carryforward. In the first quarter of 2014, the Company reclassified a reserve for income taxes of $1,028,000 as a reduction to noncurrent deferred tax assets in compliance with this new guidance. Retroactive application was not required under this ASU, and therefore, prior periods were not restated.

The Company’s reserve for income taxes, including gross interest and penalties, was $5,651,000 as of December 31, 2014, which included $4,623,000 classified as a noncurrent liability and $1,028,000 recorded as a reduction to noncurrent deferred tax assets. The reserve for income taxes, including gross interest and penalties, was $4,765,000, as of December 31, 2013, all of which was classified as a noncurrent liability. The amount of gross interest and penalties included in these balances was $524,000 and $357,000 as of December 31, 2014 and December 31, 2013, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $900,000 to $1,000,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Japan, and within the United States, Massachusetts and California. Within the United States, the tax years 2012 through 2013 remain open to examination by the Internal Revenue Service, while the tax years 2011 through 2013 remain open to various state taxing authorities, and the tax years 2010 through 2013 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.

In 2010, the Company concluded its Competent Authority tax case with Japan. A settlement was finalized between Japan and Ireland as a transfer price adjustment and no finding of a permanent establishment against the Company in Japan was noted. This Competent Authority agreement closed the Company’s tax years 2002 through 2005 to future examination in Japan. In 2011, the Company finalized an Advanced Pricing Agreement (APA) with Japan that will cover tax years 2006 through 2011, with a requested extension to 2012. The Company is currently in negotiations for an APA between Japan and Ireland that will cover tax years 2014 through 2018 with retroactive application to 2013. The Company believes it is adequately reserved for these open years.

Deferred tax assets consisted of the following (in thousands):



	December 31,
	2014			2013
Current deferred tax assets:
Inventory and revenue related	$	4,911		$	5,614
Bonuses, commissions, and other compensation	2,280			1,377
Other	1,794			1,292
Gross current deferred tax assets	8,985			8,283
Valuation allowance	—			(672		)
Net current deferred tax assets	$	8,985		$	7,611
Noncurrent deferred tax assets:
Stock-based compensation expense	$	10,290		$	7,488
Federal and state tax credit carryforwards	4,547			5,418
Depreciation	1,945			1,831
Acquired completed technologies and other intangible assets	450			835
Unrealized investment gains and losses	355			601
Correlative tax relief and deferred interest related to reserves	342			252
Other	1,436			1,178
Gross noncurrent deferred tax assets	19,365			17,603
Noncurrent deferred tax liabilities:
Nondeductible intangible assets	(2,430		)	(3,662		)
Other	—			(548		)
Gross noncurrent deferred tax liabilities	(2,430		)	(4,210		)
Valuation allowance	(2,483		)	(1,086		)
Net noncurrent deferred tax assets	$	14,452		$	12,307

In 2014, the Company recorded a valuation allowance of $725,000 for state research and development tax credits that were not considered to be realizable. Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future state income tax liabilities. In addition, the Company had $5,575,000 of state research and development tax credit carryforwards, net of federal tax, as of December 31, 2014, which will begin to expire in 2016.

If certain of the Company’s tax liabilities were paid, the Company would receive correlative tax relief in other jurisdictions. Accordingly, the Company has recognized a deferred tax asset in the amount of $342,000 as of December 31, 2014, which represents this correlative tax relief and deferred interest.

The Company recorded certain intangible assets as a result of the acquisition of DVT Corporation in 2005. The amortization of these intangible assets is not deductible for U.S. tax purposes. A deferred tax liability was established to reflect the federal and state liability associated with not deducting the acquisition-related amortization expenses. The balance of this liability was $2,430,000 as of December 31, 2014.

While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pretax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to income in the period of determination.

The Company does not provide U.S. income taxes on its foreign subsidiaries’ undistributed earnings, as they are deemed to be permanently reinvested outside the United States. Non-U.S. income taxes are, however, provided on those foreign subsidiaries’ undistributed earnings. Upon repatriation, the Company would provide the appropriate U.S. income taxes on these earnings, net of applicable foreign tax credits. It is not practicable to determine the income tax liability that might be incurred if the earnings were to be distributed.

The Company recorded $354,000 and $141,000 of other income in 2013 and 2012, respectively, upon the expiration of the statutes of limitations relating to tax holidays, during which time the Company collected value-added taxes from customers that were not required to be remitted to the government authority.

Cash paid for income taxes totaled $17,549,000 in 2014, $8,831,000 in 2013, and $13,551,000 in 2012.