Note 13 — Income Taxes

The Company recorded income tax (benefit) expense of ($3.3) million, $0.7 million, and $2.2 million for the years ended December 31, 2012, 2011, and 2010, respectively, related to its operations in China. The Company’s statutory tax rate in China was 25% in 2012, 24-25% in 2011, and 22% for the year ended 2010. The Company has not recorded any US federal or state income tax expense for the years ended December 31, 2012, 2011, and 2010. Undistributed earnings of the Company’s foreign subsidiaries that are considered to be permanently invested outside the US and for which no US taxes have been provided amounted to approximately $45.0 million at December 31, 2012. Upon distribution of those earnings, the Company may be subject to US federal and state income taxes, although determining the amount is not practical as it is dependent on the amount of US tax losses at the time of the repatriation.

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


			2011
			Restated
	2012		(Note 2)		2010
Domestic	$	(11,541)	$	(17,939)	$	(19,315)
Foreign		17,813		46,731		42,572
Pre-tax income	$	6,272	$	28,792	$	23,257

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


			2011
			Restated
	2012		(Note 2)		2010
Tax at federal statutory rate	$	2,132	$	9,789	$	7,907
Foreign income tax at different rates		(10,405)		(16,137)		(13,085)
Taxable dividend from foreign subsidiary		11,900		10,506		6,724
Uncertain tax positions accrual		999		925		795
Change in valuation allowance		(7,945)		(4,674)		(318)
Stock-based compensation		(41)		30		53
Non deductible expenses		11		237		350
Other		1		(6)		(250)
Income tax (benefit) expense	$	(3,348)	$	670	$	2,176

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


			2011
			Restated
	2012		(Note 2)		2010
Federal	$	—	$	(5)	$	(9)
State		1		1		1
Foreign		3,445		2,259		2,184
Total current		3,446		2,255		2,176
Federal		—		—		—
State		—		—		—
Foreign		(6,794)		(1,585)		—
Total deferred		(6,794)		(1,585)		—
Income tax (benefit) expense	$	(3,348)	$	670	$	2,176

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 at December 31 are as follows (in thousands):


			2011
			Restated
	2012		(Note 2)

Deferred tax assets:
Net operating loss carryforwards	$	28,625	$	37,501
Research and development credit carryforwards		10,143		10,600
Intangibles		388		—
Other		4,627		5,455
Gross deferred tax assets		43,783		53,556
Valuation allowance		(42,932)		(50,606)
Total deferred tax assets		851		2,950
Deferred tax liabilities:
Intangibles		—		(9,569)
Other		(635)		—
Total deferred tax liabilities		(635)		(9,569)
Net deferred tax liabilities	$	216	$	(6,619)

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 decreased by approximately $7.7 million, $4.9 million, and $0.7 million, in the years ended December 31, 2012, 2011, and 2010, respectively.

At December 31, 2012, the Company had federal net operating loss carryforwards of approximately $87.4 million that expire in the years 2020 through 2030, and federal research and development, orphan drug and investment tax credit carryforwards of approximately $11.7 million that expire in the years 2018 through 2031. At December 31, 2012, the Company has state net operating loss carryforwards of approximately $18.9 million that expire in the years 2028 through 2030, if not utilized, and state research and development tax credit carryforwards of approximately $2.1 million that do not expire. Approximately $4.2 million of the operating loss carryforwards relate 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, 2012, the unrecognized tax benefit was $6.1 million, of which $2.5 million, if recognized would affect the effective tax rate, and $3.6 million would be offset by a valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in thousands):


	December 31,
	2012		2011
Balance beginning of period	$	5,715	$	4,225
Tax positions related to current year:
Additions for current year items		1,050		955
Additions for prior year items		—		510
Reductions for prior year items		(747)		(33)
Changes for foreign currency translation		35		58
Balance end of period	$	6,053	$	5,715

Tax years 1995-2012 remain open to examination by the major taxing jurisdictions to which the Company is subject, although during 2012 the Internal Revenue Service concluded its examination of the Company’s 2008 and 2009 US federal tax returns with no additional tax assessments or proposed adjustments relating to taxable income for any years. Although the timing of further income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year, we do not anticipate any material change to the amount of our unrecognized tax benefits over the next 12 months.

In January 2013, the United States enacted an extension of the federal research tax credit through December 31, 2013. As a result, the Company expects that its income tax provision for the first quarter of 2013 will include an increase in the gross deferred tax assets of $0.3 million reflecting the full year 2012 federal research tax credit. However, due to the Company's full valuation allowance against its deferred tax assets it will not impact the Company's provision as the increase in the gross deferred tax asset will be offset by the increase in the valuation allowance.