Note 12 — Income Taxes

The Company recorded income tax provisions of $0.8 million, $1.2 million, and $2.2 million, for the years ended December 31, 2015, 2014, and 2013, respectively, related to its operations in China. Tax expense decreased for the years ended December 31, 2015 and 2014, compared to 2013, mainly related to a reduction in the Company’s liabilities (and associated accrued interest) for uncertain tax positions in China due to certain tax years becoming closed to assessment due to the statute of limitations and as a result of lower taxable income related to its China operations. The Company’s statutory tax rate in China was 25% in 2015, 2014 and 2013. The Company has not recorded any significant US federal or state income taxes for the years ended December 31, 2015, 2014, and 2013.

During the fourth quarter of fiscal 2015, the Company repatriated a special dividend distribution of $12.8 million from its foreign subsidiary related to the SEC settlement expense (as further described in Note 18) from the current year earnings and profits of its foreign subsidiaries, which were not part of the cumulative pool of undistributed earnings of foreign subsidiaries as of December 31, 2014. The Company recorded US federal income taxes for this income as a component of the 2015 income tax provision; however, the net effect of the special dividend distribution on the 2015 income tax provision was zero as the incremental taxable income (as well as the nondeductible applicable SEC settlement expenses) were fully offset by deductible operating expenses. The Company determined that as of December 31, 2015, $176.2 million of accumulated undistributed earnings of foreign subsidiaries, exclusive of the dividend repatriation which was entirely satisfied out of current year earnings and profits, continues to be indefinitely reinvested outside of the US. Accordingly, taxes have not been provided on this amount of accumulated undistributed earnings. Upon any distribution of accumulated undistributed 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 the Company’s current liquid resources and future operating plan, it does not need to repatriate undistributed earnings held by foreign subsidiaries accumulated through December 31, 2015. However, to meet future operating needs, the Company does anticipate repatriating a portion of future annual foreign earnings in a forthcoming annual period. The Company plans to accrue for US income taxes on future foreign earnings that it anticipates repatriating from its foreign subsidiaries beginning in 2016. However, the Company has significant accumulated net operating loss and tax credit carryforwards available to offset any tax liability on a dividend distribution from its foreign subsidiaries.

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


	2015		2014		2013
Domestic	$	(17,017)	$	(8,496)	$	(17,168)
Foreign		47,287		34,873		30,374
Pre-tax income	$	30,270	$	26,377	$	13,206

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



	2015		2014		2013
Tax at federal statutory rate	$	10,382	$	8,968	$	4,490
Foreign income taxed at different rates		(15,210)		(10,788)		(8,383)
Federal tax effect of dividend from foreign subsidiary		4,317		—		—
Effect of uncertain tax positions		(126)		127		297
Change in valuation allowance		1,092		2,672		5,254
Stock-based compensation		(86)		2		(87)
Non deductible expenses		189		189		670
Other		249		(1)		1
Provision for income tax	$	807	$	1,169	$	2,242

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



	2015		2014		2013
Federal	$	—	$	—	$	—
State		1		1		1
Foreign		793		1,489		2,032
Total current		794		1,490		2,033
Federal		—		—		—
State		—		—		—
Foreign		13		(321)		209
Total deferred		13		(321)		209
Provision for income tax	$	807	$	1,169	$	2,242

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):



	2015		2014
Deferred tax assets:
Net operating loss carryforwards	$	38,679	$	37,513
Research and development credit carryforwards		10,650		10,615
Intangibles		382		395
Other		2,692		2,527
Gross deferred tax assets		52,403		51,050
Valuation allowance		(52,104)		(50,724)
Total deferred tax assets		299		326
Deferred tax liabilities:
Other		—		—
Total deferred tax liabilities		—		—
Net deferred tax assets	$	299	$	326

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 by approximately $1.4 million, $3.4 million, and $4.4 million, in the years ended December 31, 2015, 2014, and 2013, respectively. Approximately $3.8 million of the valuation allowance relates to benefits associated with stock option deductions that, when recognized, will be credited directly to stockholders' equity.

As of December 31, 2015, the Company had US federal net operating loss carryforwards of approximately $114.2 million that expire in the years 2020 through 2035, and US federal research and development, orphan drug and investment tax credit carryforwards of approximately $12.2 million that expire in the years 2018 through 2035. As of December 31, 2015, the Company had approximately $52 million in net operating loss carryforwards related to its NovaMed Shanghai subsidiary that expire in the years 2016 through 2020. As of December 31, 2015, the Company had state net operating loss carryforwards of approximately $25.9 million that expire in the years 2016 through 2030, if not utilized, and state research and development tax credit carryforwards of approximately $2.2 million that do not expire.

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, 2015, the unrecognized tax benefit was $5.5 million, of which $1.8 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. Accrued interest associated with the liability for unrecognized tax benefits was $1.7 million as of December 31, 2015. A reconciliation of the beginning and ending amount of unrecognized tax benefit for the years ended December 31 is as follows (in thousands):



	2015		2014		2013
Balance beginning of period	$	5,876	$	6,138	$	6,053
Tax positions related to current year:
Additions for current year items		14		32		36
Additions for prior year items		—		—		88
Lapse of statute of limitations		(288)		(206)		(115)
Changes for foreign currency translation		(132)		(88)		76
Balance end of period	$	5,470	$	5,876	$	6,138

Tax years 1995-2015 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. 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 anticipates that its liability for unrecognized tax benefits will decrease over the next 12 months on account of expiries of statutes of limitations associated with certain tax jurisdictions, and that such decreases will favorably impact the effective tax rate.