Income taxes

12 Months Ended

Dec. 26, 2014


(8)	Income taxes

Loss before income taxes was as follows (in thousands):



	Years Ended
	December 26, 2014			December 27, 2013
Domestic	$	(10,935	)	$	(14,832	)
Non-U.S.	(17,171		)	(7,808		)
Total	$	(28,106	)	$	(22,640	)

Income tax expense was as follows (in thousands):



	Years Ended
	December 26, 2014			December 27, 2013
Current:
Federal	$	554		$	462
State and local	65			55
Non-U.S.	4,986			2,952
	5,605			3,469
Deferred:
Federal	(101		)	140
State and local	—			(55		)
Non-U.S.	(752		)	829
	(853		)	914
Net tax expense	$	4,752		$	4,383

A reconciliation of the U.S statutory federal income tax rate with our effective income tax rate was as follows:



	Years Ended
	December 26, 2014		December 27, 2013
U.S. statutory federal income tax rate	35	%	35	%
Decrease (increase) resulting from:
Non-deductible expenses and other	(8	)%	(21	)%
Withholding taxes	(5	)%	(5	)%
Tax credits	6	%	5	%
Tax effect of valuation allowance	(11	)%	(8	)%
Foreign rate differential	(34	)%	(25	)%
Effective tax rate	(17	)%	(19	)%

The 2014 effective tax rate was primarily impacted by permanent non-deductible expenses in foreign jurisdictions. The 2013 effective tax rate was primarily impacted by assessments and permanent non-deductible expenses in foreign jurisdictions. At December 26, 2014 and December 27, 2013, we had approximately $2.4 million and $3.5 million accrued for uncertain tax positions, of which $1.8 million and $1.7 million was classified as other long-term liabilities, respectively. If all of our tax benefits were recognized as of December 26, 2014, approximately $2.1 million would impact the 2014 effective tax rate. During the three months ended December 26, 2014, we also recorded an out-of-period adjustment to decrease income tax expense by $0.9 million. The adjustment relates to our income tax provisions for previous years, and was determined to be immaterial to the prior years and current year financial statements.

A reconciliation of the liability for uncertain tax positions was as follows (in thousands):



	December 26, 2014			December 27, 2013
Unrecognized tax benefits at the beginning of the year	$	3,522		$	7,880
Additions to tax positions related to current year	628			1,202
Additions to tax positions related to prior years	28			—
Reductions to tax positions related to prior years	(24		)	(1,058		)
Settlements with tax authorities	(91		)	—
Lapses in statutes of limitation	(1,677		)	(4,502		)
Unrecognized tax benefits at the end of the year	$	2,386		$	3,522

As of December 26, 2014, we have approximately $0.3 million accrued for interest and penalties related to uncertain income tax positions.

We are subject to U.S. federal income tax as well as income tax in multiple state and non-U.S. jurisdictions. With respect to federal and state income tax, tax returns for all years after 2010 are subject to future examination by local tax authorities. With respect to material non-U.S. jurisdictions in which we operate, we have open tax years ranging from 2 to 10 years. We expect our unrecognized tax benefits to change by $0.3 million within the next twelve months.

Several of our foreign subsidiaries continue to operate under tax holidays or incentive arrangements as granted by various jurisdictions in China. The nature and extent of such arrangements vary, and the benefits of most arrangements will phase out in the future according to the specific terms as set forth by the foreign tax authorities. For the years ended December 26, 2014 and December 27, 2013, the favorable impact of tax holidays was not significant and the amount of benefit related to tax holidays was reduced due to losses and valuation allowances.

Deferred tax assets and liabilities included the following (in thousands):



	December 26, 2014			December 27, 2013
Assets:
Inventories	$	1,231		$	936
Plant and equipment	4,913			5,145
Vacation pay and other compensation	1,082			234
Pension expense	1,934			1,100
Stock awards	1,523			1,194
Accrued liabilities	2,065			1,896
Net operating losses – federal, state and foreign	21,816			19,739
Tax credits	8,736			7,368
Acquired intangibles	2,119			2,851
Other	4,142			5,844
Total deferred tax assets	49,561			46,307
Valuation allowance	(41,277		)	(38,191		)
Net deferred tax assets	8,284			8,116
Liabilities:
Foreign earnings not permanently invested	8,883			9,243
Restructuring	1,551			1,551
Acquired intangibles	639			583
Other	3,272			3,653
Total deferred tax liabilities	14,345			15,030
Net deferred tax liabilities	$	(6,061	)	$	(6,914	)

Deferred taxes are classified in the Consolidated Balance Sheets as follows:
Current tax assets (included in prepaid expenses and other current assets)	$	2,140		$	1,305
Current tax liabilities (included in accrued expenses and other liabilities)	(21		)	(990		)
Non-current tax assets	2,071			4,557
Non-current tax liabilities	(10,251		)	(11,786		)
Net deferred tax liabilities	$	(6,061	)	$	(6,914	)

We maintain a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized based on consideration of all available evidence. Our assumptions, judgments and estimates relative to the value of our deferred tax assets also takes into account predictions of the amount and the categories of future taxable income, carry-back and carry-forward periods and tax strategies which could impact the realization of a deferred tax asset. As of December 26, 2014, we could not sustain a conclusion that it was more likely than not that we would realize most of our deferred tax assets resulting from recent losses as well as other factors. Consequently, we continue to maintain a valuation allowance against those deferred tax assets. The majority of deferred tax assets which are not subject to a valuation allowance are located in China. We have maintained a valuation allowance as a result of weighing all positive and negative evidence, including our history of losses in recent years and the difficulty of forecasting future taxable income. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

Unless utilized, our net operating losses will expire in fiscal years 2015 through 2034, our foreign tax credit carry forwards will expire in fiscal years 2015 through 2024 and our research and development credit carry forwards will start to expire in 2019.

We have not generally provided for U.S. and foreign withholding taxes on our non-U.S. subsidiaries’ undistributed earnings which are considered permanently reinvested. We expect our foreign earnings will be used to service our non-U.S. debt and maintain our foreign operations and, thus are permanently reinvested outside of the U.S. for the majority of our foreign earnings. The majority of our cash requirements are generated by our non-U.S. subsidiaries, our manufacturing and operations are primarily outside of the U.S., and we anticipate that a significant portion of our opportunities for future growth will be outside the U.S. In addition, we expect to use a significant portion of the cash to service debt outside of the U.S. We continue to maintain our permanent reinvestment assertion with regard to the remaining undistributed earnings outside of the U.S. As of December 26, 2014, the amount of cash associated with permanently reinvested foreign earnings was approximately $14.7 million. We have not, nor do we anticipate the need to repatriate these funds to the U.S. However, if funds are repatriated, we would need to accrue and pay taxes on such amounts.

As of December 26, 2014, we have estimated there was approximately $237.1 million of accumulated and undistributed earnings in these foreign subsidiaries. Determination of the potential amount of unrecognized deferred income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References+ Details

PULSE ELECTRONICS CORP 10-K