Note 14 — Income Taxes

The Company recorded income tax provision (benefit) of $1.2 million, $2.2 million, and ($3.3) million, for the years ended December 31, 2014, 2013, and 2012, respectively, related to its operations in China. The Company’s statutory tax rate in China was 25% in 2014, 2013 and 2012. The Company has not recorded any significant US federal or state income taxes for the years ended December 31, 2014, 2013, and 2012. Undistributed earnings of the Company’s foreign subsidiaries that are considered to be indefinitely reinvested outside the US and for which no US taxes have been provided amounted to approximately $138.3 million as of December 31, 2014. Upon distribution of those earnings, the Company may be subject to US federal and state income taxes, although determining the amount is not practicable as it is dependent on a variety of factors, including but not limited to the amounts of US tax loss carryforwards and tax credit carryforwards available at the time of the repatriation. Based on our current operating plan, the Company does not anticipate the need to repatriate cash and cash equivalents held by foreign subsidiaries in the foreseeable future. Should circumstances change and it becomes apparent that some or all of the undistributed earnings will be remitted, the Company will accrue for income taxes not previously recognized.

The domestic and foreign components of income (loss) before provision (benefit) for tax for the years ended December 31 are as follows (in thousands):


	2014		2013		2012
Domestic	$	(8,496)	$	(17,168)	$	(11,541)
Foreign		34,873		30,374		17,813
Pre-tax income	$	26,377	$	13,206	$	6,272

A reconciliation of tax at the statutory federal income tax rate of 34% to the actual tax provision (benefit) for the years ended December 31 is as follows (in thousands):



	2014		2013		2012
Tax at federal statutory rate	$	8,968	$	4,490	$	2,132
Foreign income tax at different rates		(10,788)		(8,383)		(10,405)
Taxable dividend from foreign subsidiary		—		—		11,900
Uncertain tax positions accrual		127		297		999
Change in valuation allowance		2,672		5,254		(7,945)
Stock-based compensation		2		(87)		(41)
Non deductible expenses		189		670		11
Other		(1)		1		1
Income tax provision (benefit)	$	1,169	$	2,242	$	(3,348)

The provision (benefit) for income taxes for the years ended December 31 consisted of the following (in thousands):



	2014		2013		2012
Federal	$	—	$	—	$	—
State		1		1		1
Foreign		1,489		2,032		3,445
Total current		1,490		2,033		3,446
Federal		—		—		—
State		—		—		—
Foreign		(321)		209		(6,794)
Total deferred		(321)		209		(6,794)
Income tax provision (benefit)	$	1,169	$	2,242	$	(3,348)

During the year ended December 31, 2012, the Company identified an impairment indicator with respect to its intangible assets related to its promotion and distribution contract rights and recorded a charge of $42.7 million to recognize the full impairment of the assets. The Company recorded an income tax benefit of $6.8 million due to the impairment of the intangible assets as a result of the reversal of the deferred tax liabilities associated with the intangible assets.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows (in thousands):



	2014		2013
Deferred tax assets:
Net operating loss carryforwards	$	37,513	$	33,654
Research and development credit carryforwards		10,615		10,498
Intangibles		395		337
Other		2,527		2,867
Gross deferred tax assets		51,050		47,356
Valuation allowance		(50,724)		(47,350)
Total deferred tax assets		326		6
Deferred tax liabilities:
Other		—		—
Total deferred tax liabilities		—		—
Net deferred tax assets	$	326	$	6

Realization of deferred tax assets is dependent upon the Company generating future taxable income, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been largely offset by a valuation allowance. The valuation allowance increased (decreased) by approximately $3.4 million, $4.4 million, and ($7.7) million in the years ended December 31, 2014, 2013, and 2012, respectively.

As of December 31, 2014, the Company had federal net operating loss carryforwards of approximately $110.3 million that expire in the years 2020 through 2034, and federal research and development, orphan drug and investment tax credit carryforwards of approximately $12.2 million that expire in the years 2018 through 2034. As of December 31, 2014, the Company had state net operating loss carryforwards of approximately $26.9 million that expire in the years 2015 through 2030, if not utilized, and state research and development tax credit carryforwards of approximately $2.2 million that do not expire. Approximately $3.7 million of the valuation allowance relates to benefits associated with stock option deductions that, when recognized, will be credited directly to stockholders' equity.

Utilization of the Company’s net operating loss and credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitation could result in the expiration of the net operating loss and credit carryforwards before utilization.

As of December 31, 2014, the unrecognized tax benefit was $5.9 million, of which $2.2 million, if recognized would affect the effective tax rate, and $3.7 million, if recognized, would be offset by a change in the valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefit for the years ended December 31 is as follows (in thousands):



	2014		2013		2012
Balance beginning of period	$	6,138	$	6,053	$	5,715
Tax positions related to current year:
Additions for current year items		32		36		1,050
Additions for prior year items		—		88		—
Reductions for prior year items		(206)		(115)		(747)
Changes for foreign currency translation		(88)		76		35
Balance end of period	$	5,876	$	6,138	$	6,053

Tax years 1995-2014 remain open to examination by the major US taxing jurisdictions to which the Company is subject. The Internal Revenue Service concluded its examinations of the Company’s 2011, 2009 and 2008 US federal tax returns with no additional tax assessments or proposed adjustments relating to taxable income for any years. The Company’s China operations are generally subject to examination under China tax law for a period of five years and those five years remain open for examination. Although the outcome of income tax examinations is uncertain, and the amounts ultimately paid, if any, on resolution of any issues raised by the taxing authorities may differ materially from the amounts accrued for each year, the Company does not anticipate any material change to the amount of its unrecognized tax benefits over the next 12 months.