|12 Months Ended|
Dec. 31, 2011
|Income Taxes [Abstract]|
11. Income Taxes
The domestic and foreign components of income (loss) before provision for income taxes were as follows:
Our (benefit) provision for income taxes consisted of the following components:
The reconciliation of our income tax (benefit) expense computed at the U.S. federal statutory tax rate to the actual income tax (benefit) expense is as follows:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
The net increase in valuation allowance for the years ended December 31, 2011 was $2.4 million, $3.2 million relating to our acquisition of MTS and SLN and $(0.8) million relating to various state net operating losses for which the benefit we have determined is more likely than not to be realized.
Our management periodically evaluates the realizability of the deferred tax assets and, if it is determined that it is more likely than not that the deferred tax assets are realizable, adjusts the valuation allowance accordingly. The determination of the level of valuation allowance at December 31, 2011 is based on an estimated forecast of future taxable income which includes many judgments and assumptions. Accordingly, it is at least reasonably possible that future changes in one or more assumptions may lead to a change in judgment regarding the level of valuation allowance required in future periods.
The acquisition of the stock of SLN and MTS resulted in an additional net deferred tax liability of $16.5 million. This net liability includes a deferred tax liability of $24.1 million related to intangibles that are not amortizable for tax purposes, a deferred tax asset, net of valuation allowance, of $6.4 million related to net operating loss carryforwards and other miscellaneous deferred tax assets of $1.2 million.
Our largest deferred tax assets are our federal and state net operating loss carryforwards of $163.5 million and $5.3 million respectively. The federal net operating losses will begin to expire in 2020 and the state net operating losses will begin to expire in 2012. Of the total net operating loss carryforwards, approximately $78.9 million is attributable to deductions originating from the exercise of non-qualified employee stock options, the benefit of which will be credited to paid-in capital and deferred tax asset when realized.
In connection with our acquisition of MTS on August 24, 2011, we assumed incentive stock options (“ISOs”) granted from the MTS Plan. No tax benefit is recognized for stock-based compensation attributable to ISOs until there is a disqualifying disposition, if any, for income tax purposes. A portion of our stock-based compensation is attributable to ISO shares; therefore, our effective tax rate is subject to fluctuation.
A cumulative change in ownership among material shareholders, as defined in Section 382 of the Internal Revenue Code, during a three-year period may limit utilization of the federal net operating loss carryforwards. Based on available information, we believe we are not currently subject the Section 382 limitation; however certain net operating losses generated by subsidiaries prior to their acquisition by the Company are subject to the Section 382 limitation. The limitation on these pre-acquisition net operating loss carryforwards will fully expire in 2020.
Our current state tax expense of $0.2 million is comprised of current tax expense in jurisdictions where the utilization of current net operating losses is temporarily suspended and where tax is considered an income tax for financial reporting purposes but is assessed on adjusted gross revenue rather than adjusted net income.
Our subsidiary in Hyderabad, India benefited from a tax holiday granted under the Software Technology Parks of India program. This holiday began upon commencement of business operations in 2008 and expired on March 31, 2011. During this holiday period we were required to pay a minimum alternative tax which is available to reduce our post holiday tax liability.
Our subsidiary in Manila, Philippines currently benefits from an income tax holiday incentives in the Philippines pursuant to the registrations with the Philippine Economic Zone Authority, or PEZA. Under such PEZA registrations, the income tax holiday of our PEZA-registered project in the Philippines expires in 2015. The expiration of this tax holiday will increase our effective income tax rate.
No provision has been made for U.S federal and state income taxes on the undistributed earnings of approximately $0.5 million relating to our foreign subsidiaries as such earnings are expected to be reinvested and are considered permanent in duration. If these earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of the subsidiaries were sold or transferred, we would likely be subject to additional U.S. income taxes, net of the impact of any available foreign tax credits. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings in the subsidiaries.
Uncertain Tax Positions
At December 31, 2011 and 2010, we had no unrecognized tax benefits. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense, and as of December 31, 2011 and 2010, there were no accrued interest and penalties.
We file consolidated and separate tax returns in the U.S. federal jurisdiction, numerous state jurisdictions and two foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2008 and are no longer subject to state and local income tax examinations by tax authorities for years before 2007. However, net operating losses from all years continue to be subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are not currently under audit for federal, state or any foreign jurisdictions.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef