Note 8 - Income taxes



Income (loss) from continuing operations	2014	2013
Domestic	($2,226)	($7,485)
Foreign	5,549	19,785
Total	$3,323	$12,300



Components of income tax expense (benefit)
Current
Federal	$45		($245)
Foreign	1,834		3,024
State and other	(77	)	(82	)
Subtotal	1,802		2,697
Deferred
Federal	—		(2,715	)
Foreign	1,439		(475	)
State and other	—		—
Subtotal	1,439		(3,190	)
Total	$3,241		$(493)

The determination of the consolidated provision for income taxes, deferred tax assets and liabilities, and the related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the Company is required to calculate and provide for estimated income tax expense for each of the tax jurisdictions. The process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, in tax laws, and resulting from tax audits can affect the overall effective tax rate ("ETR"), which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The ETR in 2014 was higher than the statutory U.S. federal income tax rate, mainly due to the impact of the full valuation allowance maintained against domestic deferred tax assets and repatriation of foreign earnings. Although the domestic deferred tax assets had a full valuation allowance in both years, there was no impact last year due to the intraperiod allocation rules and the tax expense allocated to discontinued operations. This had the effect of fully benefiting the continuing operation domestic loss last year, versus no benefit this year. The Company remains in an NOL carryforward position.

During the third quarter of 2014, the Company received a distribution of foreign earnings of $0.8 million from a Denmark subsidiary. These foreign earnings were previously considered to be indefinitely reinvested outside the U.S. The repatriation by the Denmark subsidiary was a one-time nonrecurring event. The Company has not provided Federal tax on unremitted earnings of its Denmark and Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate investments from these subsidiaries. The Company intends and has the ability to reinvest these earnings for the foreseeable future outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

During the fourth quarter, the Company has concluded that not all of the undistributed earnings of Perma-Pipe India Ltd, will remain permanently reinvested outside the U.S. and are now available for use in the U.S. or in entities in other foreign countries. As a result of that conclusion, the Company has provided deferred taxes on the basis differences in the stock of this subsidiary. In the fourth quarter of 2014, MFRI recorded $0.8 million in tax expense related to withholding tax that would be paid to the Indian government in the event that a dividend of up to $4.2 million is paid to its foreign parent company. Future earnings related to this subsidiary will not be deemed permanently reinvested. No U.S. cash tax payments will be made upon distribution of these foreign earnings as long as the Company is in a net loss operating position.

The difference between the provision for income taxes and the amount computed by applying the Federal ETR of 34% was as follows:



	2014			2013
Tax benefit at federal statutory rate	$1,130			$4,182
Domestic valuation allowance	1,778			—
Valuation allowance for state NOLs	119			—
Differences in foreign tax rate	455			(3,049		)
Foreign tax credit	(793		)	—
Research tax credit	(29		)	—
Repatriation	847			—
Valuation allowance for foreign NOLs	15			(1,209		)
Nontaxable income from the Canadian joint venture	(666		)	(179		)
State taxes, net of federal benefit	(62		)	(192		)
All other, net expense	447			(46		)
Total		$3,241			($493	)

The Company has a Federal operating loss carryforward of $11.8 million that will begin to expire in the year ending January 31, 2030. In addition, there are suspended excess tax benefits of $0.3 million.

The deferred tax asset ("DTA") for state NOL carryforwards of $1.3 million relates to amounts that expire at various times from 2015 to 2031. The amount that expired in 2014 is approximately $3 thousand.

The Company has a DTA for foreign NOL carryforwards of $0.5 million that can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the foreign tax jurisdictions. The Company has a DTA foreign NOL carryforward of $0.4 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does not have a valuation allowance recorded against it.

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and may make further adjustments based on management's outlook for continued profits in each jurisdiction

For the year ending January 31, 2015, the Company has determined that there is not a greater than 50% likelihood that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full valuation allowance against the remaining domestic net DTAs as of January 31, 2013 net of uncertain tax positions ("UTP"). The Company continues to have a valuation allowance on its domestic DTAs since domestic losses continue to being generated.

The Company has a deferred tax asset of $2.1 million for U.S. foreign tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will expire in January 31, 2022. As of January 31, 2015, we have not made a provision for U.S. or additional foreign withholding taxes on approximately $55.3 million of undistributed earnings of foreign subsidiaries indefinitely reinvested outside of the U.S., mainly in the Middle East.



Components of deferred income tax assets	2014		2013
U.S. Federal NOL carryforward	$3,156		$2,298
Non-qualified deferred compensation	2,363		2,358
Research tax credit	2,032		1,965
Foreign NOL carryforward	483		1,004
Foreign tax credit	2,088		1,294
Stock compensation	1,033		1,162
Other accruals not yet deducted	901		581
State NOL carryforward	1,291		1,173
Accrued commissions and incentives	584		814
Accrued pension	735		182
Inventory valuation allowance	430		413
Other	561		217
Inventory uniform capitalization	94		102
Deferred tax assets, gross	15,751		13,563
Valuation allowance	(14,201	)	(11,591	)
Total deferred tax assets, net of valuation allowances	$1,550		$1,972

Components of the deferred income tax liability
Depreciation	$851		$963
Foreign subsidiaries unremitted earnings	863		—
Prepaid	310		231
Total deferred tax liabilities	$2,024		$1,194

Deferred tax asset, net	$(474)		$778

Balance sheet classification
Long-term assets	$0		$1,667
Long-term liability	309		—
Current liabilities	165		889
Total deferred tax assets, net of valuation allowances	$(474)		$778

The following table summarizes UTP activity, excluding the related accrual for interest and penalties:



	2014		2013
Balance at beginning of the year	$1,358		$1,373
Increases in positions taken in a prior period	17		—
Increases in positions taken in a current period	—		11
Decreases due to lapse of statute of limitations	(42	)	(26	)
Decreases due to settlements	(45	)	—
Balance at end of the year	$1,288		$1,358

Included in the total UTP liability at January 31, 2015 were estimated accrued interest of $17 thousand and penalties of $15 thousand and at January 31, 2014, accrued interest was $18 thousand and penalties were $25 thousand. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet. The Company's policy is to include interest and penalties in income tax expense. At January 31, 2015, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of the ongoing tax examinations detailed above, or other factors, within the next twelve months. Included in the balance at January 31, 2015 were amounts offset by deferred taxes (i.e., temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Thus, $1.3 million of the amount accrued at January 31, 2015 would impact the ETR, if reversed.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In July 2014, the Company received a notice from the Internal Revenue Service that it had concluded the tax audit for the years ended January 31, 2012 and 2013. No changes were made to the reported tax. Tax years back to January 31, 2011 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2002 through January 31, 2009 are subject to adjustment on audit, up to the amount of research tax credit generated in those years.

The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in current liabilities on the consolidated balance sheet.