Note 9 - Income taxes



Income (loss) from continuing operations	2015	2014
Domestic	($2,066)	$1,968
Foreign	5,076	5,320
Total	$3,010	$7,288



Components of income tax expense (benefit)	2015		2014
Current
Federal	$12		$49
Foreign	1,541		1,851
State and other	71		(80	)
Subtotal	1,624		1,820
Deferred
Federal	—		—
Foreign	(249	)	1,231
State and other	—		—
Subtotal	(249	)	1,231
Total	$1,375		$3,051

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.

ETR in 2015 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 the recognition of foreign earnings resulting from the dispositions of certain foreign operations. The Company remains in an NOL carryforward position.

During the fourth quarter of 2015, the Company sold its foreign filtration operations, the gain from which was taxable in the U.S. As such, the Company no longer considers the earnings of the remaining Denmark subsidiary permanently reinvested. Therefore, the Company has recorded a deferred tax liability of $0.2 million related to the U.S. federal and state income taxes on approximately $0.7 million of undistributed earnings.

The Company has not provided Federal tax on remaining unremitted earnings of its Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate earnings 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 could 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 of 2014, the Company concluded that not all of the undistributed earnings of Perma-Pipe India Ltd, will remain permanently reinvested outside the U.S. and are available for use in the U.S. or in entities in other foreign countries. As such, the Company recorded a deferred tax liability of $0.2 million and $0.9 million for the periods ending January 31, 2016 and 2015, respectively, related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $2.8 million and $4.2 million of undistributed earnings. The decrease in deferred tax liability primarily relates to a $2.0 million dividend paid during January 2016 along with a decrease in accumulated earnings and profits. Future earnings related to this subsidiary are not deemed permanently reinvested. No U.S. cash tax payments will be made upon distribution of these foreign earnings as long as the Company has sufficient tax attributes in the U.S. to reduce the cash tax consequences of potential repatriation.

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



	2015			2014
Tax benefit at federal statutory rate	$1,023			$2,478
Permanent differences management fee allocation	619			1,946
Domestic valuation allowance	804			—
Permanent differences other	214			(540		)
Valuation allowance for state NOLs	88			(318		)
Differences in foreign tax rate	(780		)	(291		)
Foreign tax credit	(761		)	(793		)
Domestic deferred tax true ups	(346		)	—
Research tax credit	(54		)	(29		)
Repatriation	821			1,530
Valuation allowance for foreign NOLs	32			35
Nontaxable income from the Canadian joint venture	(205		)	(666		)
State taxes, net of federal benefit	(58		)	(131		)
All other, net expense	(22		)	(170		)
Total		$1,375			$3,051

The Company has a Federal operating loss carryforward of $11.5 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 $1.4 million relates to amounts that expire at various times from 2016 to 2031. The amount that expired in 2015 is approximately $1 thousand.

The Company has a DTA foreign NOL carryforward of $0.1 million for its subsidiary in Saudi Arabia 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 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, 2016, 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 be generated.

The Company has a deferred tax asset of $2.9 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, 2016, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $40.4 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	2015		2014
U.S. Federal NOL carryforward	$3,044		$3,156
Non-qualified deferred compensation	2,382		2,363
Research tax credit	2,057		2,032
Foreign NOL carryforward	231		483
Foreign tax credit	2,861		2,088
Stock compensation	1,061		1,033
Other accruals not yet deducted	438		901
State NOL carryforward	1,419		1,291
Accrued commissions and incentives	723		584
Accrued pension	—		735
Inventory valuation allowance	73		430
Other	106		561
Inventory uniform capitalization	10		94
Deferred tax assets, gross	14,405		15,751
Valuation allowance	(13,333	)	(14,201	)
Total deferred tax assets, net of valuation allowances	$1,072		$1,550

Components of the deferred income tax liability
Depreciation	$633		$851
Foreign subsidiaries unremitted earnings	412		863
Prepaid	88		310
Total deferred tax liabilities	$1,133		$2,024

Deferred tax liability, net	$(61)		$(474)

Balance sheet classification
Long-term assets	$99		$260
Long-term liability	160		734
Total deferred tax liabilities, net of valuation allowances	$(61)		$(474)

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



	2.015	2.014
Balance at beginning of the year	$1,288	$1,358
Increases in positions taken in a prior period	11	17
Increases in positions taken in a current period	14	—
Decreases due to lapse of statute of limitations	—	(42	)
Decreases due to settlements	—	(45	)
Balance at end of the year	$1,313	$1,288

Included in the total UTP liability at January 31, 2016 were estimated accrued interest of $28 thousand and penalties of $17 thousand and at January 31, 2015, accrued interest was $17 thousand and penalties were $15 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, 2016, the Company did not anticipate any significant adjustments to its unrecognized tax benefits within the next twelve months. Included in the balance at January 31, 2016 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, 2016 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.