Note 9 - Income taxes



(Loss) income from continuing operations	2016	2015
Domestic	($8,465)	($2,066)
Foreign	(4,512)	5,076
Total	($12,977)	$3,010



Components of income tax (benefit) expense	2016	2015
Current
Federal	($106)	$12
Foreign	837	1,541
State and other	(1,309)	71
Subtotal	(578)	1,624
Deferred
Federal	—	—
Foreign	(33)	(249)
State and other	—	—
Subtotal	(33)	(249)
Total	($611)	$1,375

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 2016 has been significantly impacted by the Company reporting a pre-tax loss for the year, a portion of which was generated by the subsidiary in the U.A.E., which receives no tax benefit due to a zero tax rate in that country and due to the impact of the full valuation allowance maintained against domestic deferred tax assets. Other changes in the ETR from the prior year-to-date to the current year-to-date are due to the Canadian acquisition and the allocation of tax expense between continuing operations, other comprehensive income and discontinued operations when applying intraperiod allocation rules. The Company remains in a domestic NOL carryforward position.

The Company has not provided U.S. 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 $0.1 million and $0.2 million for the periods ending January 31, 2017 and 2016, respectively, related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $0.5 million and $2.8 million of undistributed earnings, respectively. Future earnings related to this subsidiary, and the Canadian and Denmark subsidiaries 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 U.S. Federal statutory rate of 34% was as follows:



	2016	2015
Tax (benefit) expense at federal statutory rate	($4,412)	$1,023
Permanent differences management fee allocation	—	619
Domestic valuation allowance	567	804
Permanent differences other	205	214
Valuation allowance for state NOLs	122	88
Differences in foreign tax rate	2,131	(780)
Foreign tax credit	(1,249)	(761)
Domestic deferred tax true ups	—	(346)
Research tax credit	—	(54)
Repatriation	1,338	821
Valuation allowance for foreign NOLs	(36)	32
Nontaxable loss (income) from the Canadian joint venture	551	(205)
Nondeductible interest	242	—
State taxes, net of federal benefit	(103)	(58)
All other, net expense	33	(22)
Total	($611)		$1,375

The Company has a U.S. Federal operating loss carryforward of $28.4 million that will begin to expire in the year ending January 31, 2031. In addition, there are suspended excess tax benefits of $0.3 million.

The deferred tax asset ("DTA") for state NOL carryforwards of $1.9 million relates to amounts that expire at various times from 2017 to 2031.

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, 2017, 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 on 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 $4.7 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, 2017, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $36.6 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	2016		2015
U.S. Federal NOL carryforward	$9,348		$3,044
Deferred compensation	346		2,382
Research tax credit	2,703		2,057
Foreign NOL carryforward	186		231
Foreign tax credit	4,695		2,861
Stock compensation	804		1,061
Other accruals not yet deducted	514		438
State NOL carryforward	1,877		1,419
Accrued commissions and incentives	765		723
Inventory valuation allowance	110		73
Other	4		116
Deferred tax assets, gross	21,352		14,405
Valuation allowance	(18,437	)	(13,333	)
Total deferred tax assets, net of valuation allowances	$2,915		$1,072

Components of the deferred income tax liability
Depreciation	($2,778)		($633)
Foreign subsidiaries unremitted earnings	(1,750	)	(412	)
Prepaid	(69	)	(88	)
Total deferred tax liabilities	($4,597)		($1,133)

Deferred tax liability, net	($1,682)		($61)

Balance sheet classification
Long-term assets	$147		$99
Long-term liability	(1,829	)	(160	)
Total deferred tax liabilities, net of valuation allowances	($1,682)		($61)

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



	2016		2015
Balance at beginning of the year	$1,313		$1,288
Increases in positions taken in a prior period	3		11
Increases in positions taken in a current period	19		14
Decreases due to lapse of statute of limitations	(4	)	—
Balance at end of the year	$1,331		$1,313

Included in the total UTP liability on January 31, 2017 were estimated accrued interest of $30 thousand and penalties of $16 thousand and on January 31, 2016, accrued interest was $28 thousand and penalties were $17 thousand. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheets. The Company's policy is to include interest and penalties in income tax expense. On January 31, 2017, the Company did not anticipate any significant adjustments to its unrecognized tax benefits within the next twelve months. Included in the balance on January 31, 2017 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 on January 31, 2017 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. The Internal Revenue Service, ("IRS"), began an audit of the fiscal year ended January 31, 2015 in August 2016. Subsequent to year-end, in March 2017, the Company received an informal notice from the IRS that it had concluded the tax audit for the year ended January 31, 2015. No changes were made to the reported tax. Tax years related to January 31, 2014, 2015 and 2016 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 other long-term liabilities on the consolidated balance sheet.