Income Taxes

The income tax expense (benefit) applicable to income before income taxes consists of the following:



	Year Ended
	January 29, 2012			January 30, 2011			January 31, 2010
	(In thousands)
Current income taxes:
Federal	$	7,099		$	141		$	177
State	789			(511		)	438
Foreign	7,630			6,827			6,966
Total current	15,518			6,457			7,581
Deferred taxes:
Federal	25,111			(3,063		)	(22,013		)
State	—			—			—
Foreign	(6,055		)	417			866
Total deferred	19,056			(2,646		)	(21,147		)
Charge in lieu of taxes attributable to employer stock option plans	47,732			14,212			(741		)
Income tax expense (benefit)	$	82,306		$	18,023		$	(14,307	)

Income (loss) before income taxes consists of the following:



	Year Ended
	January 29, 2012		January 30, 2011		January 31, 2010
	(In thousands)
Domestic	$	120,768	$	82,531	$	(105,793	)
Foreign	542,628		188,638		23,499
	$	663,396	$	271,169	$	(82,294	)

The income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 35% to income (loss) before income taxes as follows:



	Year Ended
	January 29, 2012			January 30, 2011			January 31, 2010
	(In thousands)
Tax expense computed at federal statutory rate	$	232,189		$	94,909		$	(28,803	)
State income taxes, net of federal tax effect	2,302			(391		)	(196		)
Foreign tax rate differential	(142,071		)	(49,585		)	26,902
Research tax credit	(24,270		)	(28,729		)	(22,270		)
Stock-based compensation	10,983			1,668			10,114
Other	3,173			151			(54		)
Income tax expense (benefit)	$	82,306		$	18,023		$	(14,307	)

The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:



	January 29, 2012			January 30, 2011
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	99,518		$	40,128
Accruals and reserves, not currently deductible for tax purposes	109,245			14,997
Property, equipment and intangible assets	40,245			39,765
Research and other tax credit carryforwards	232,001			255,111
Stock-based compensation	38,177			37,701
Gross deferred tax assets	519,186			387,702
Less: valuation allowance	(212,285		)	(148,016		)
Total deferred tax assets	306,901			239,686
Deferred tax liabilities:
Acquired Intangibles	(53,120		)	—
Unremitted earnings of foreign subsidiaries	(329,679		)	(275,509		)
Gross deferred tax liabilities	$	(382,799	)	$	(275,509	)
Net deferred tax asset (liability)	$	(75,898	)	$	(35,823	)

We recognized income tax expense (benefit) of $82.3 million, $18.0 million, and $(14.3) million during fiscal years 2012, 2011 and 2010, respectively. Income tax expense (benefit) as a percentage of income (loss) before taxes, or our annual effective tax rate, was 12.4% in fiscal year 2012, 6.7% in fiscal year 2011 and 17.4% in fiscal year 2010.

Our effective tax rate on income or loss before tax for the fiscal years was lower than the United States federal statutory rate of 35% due to income or loss earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate of 35%, favorable recognition in these fiscal years of the U.S. federal research tax credit and the expiration of statutes of limitations in certain non-U.S. jurisdictions for which we had not previously recognized related tax benefits. A significant portion of our earnings were earned by our British Virgin Islands subsidiary.

As of January 29, 2012 and January 30, 2011 we had a valuation allowance of $212.3 million and $148.0 million respectively, related to state and certain foreign deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. The increase in the valuation allowance from fiscal year 2011 to fiscal year 2012 is primarily related to the acquired tax attributes of Icera that management has determined not likely to be realized due to projection of future taxable income. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period.

Our deferred tax assets do not include the excess tax benefit related to stock-based compensation that are a component of our federal and state net operating loss and research tax credit carryforwards in the amount of $526.0 million as of January 29, 2012. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards will be accounted for as a credit to stockholders' equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to utilize the with-and-without approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.

As of January 29, 2012, we had a federal net operating loss carryforward of $935.2 million, combined state net operating loss carryforwards of $826.0 million, and combined foreign net operating loss carryforwards of $379.1 million. The federal net operating loss carryforwards will expire beginning in fiscal year 2021 and the state net operating loss carryforwards will begin to expire in fiscal year 2013 in accordance with the rules of each particular state. The foreign net operating loss carryforwards, include $69.5 million attributable to Germany, $273.6 million attributable to UK and $0.8 million attributable to Hong Kong which may be carried forward indefinitely. The remaining amount of $35.2 million, of which $28.2 million is attributable to Canada, relates to other foreign jurisdictions that begin to expire in fiscal year 2013. As of January 29, 2012, we had federal research tax credit carryforwards of $314.2 million that will begin to expire in fiscal year 2018. We have other federal tax credit carryforwards of $1.5 million that will begin to expire in fiscal year 2014. The research tax credit carryforwards attributable to states is in the amount of $290.7 million, of which $280.8 million is attributable to the State of California and may be carried over indefinitely, and $9.9 million is attributable to various other states and will expire beginning in fiscal year 2014 according to the rules of each particular state. We have other state tax credit carryforwards of $2.9 million that will expire in fiscal year 2026 and other foreign tax credit carryforwards of $5.1 million, of which $4.5 million may be refunded in fiscal year 2016 if not utilized and $0.6 million that will expire in fiscal year 2021. Our tax attributes, net operating loss and tax credit carryforwards, remain subject to audit and may be adjusted for changes or modification in tax laws, other authoritative interpretations thereof, or other facts and circumstances. Utilization of federal, state, and foreign net operating losses and tax credit carryforwards may also be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state and foreign tax provisions. If any such limitations apply, the federal, states, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before utilization.

As of January 29, 2012, United States federal and state income taxes have not been provided on approximately $1.29 billion of undistributed earnings of non-United States subsidiaries as such earnings are considered to be indefinitely reinvested. We have not provided the amount of unrecognized deferred tax liabilities for temporary differences related to investments in our foreign subsidiaries as the determination of such amount is not practicable.

We had a tax holiday in effect for its business operations in India which terminated in March 2011. This tax holiday provided for a lower rate of taxation on certain classes of income based on various thresholds of investment and employment in such jurisdiction. For fiscal years 2010 through 2012, the aggregate tax savings of this holiday was approximately $2.0 million with no material per-share impact in these years.

As of January 29, 2012, we had $138.3 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. However, included in the unrecognized tax benefits that would affect our effective tax rate if recognized of $138.3 million is $31.0 million and $0.2 million related to state and foreign income tax, respectively, that, if recognized, would be in the form of a carryforward deferred tax asset that would likely attract a full valuation allowance. The $138.3 million of unrecognized tax benefits as of January 29, 2012 consists of $53.5 million recorded in non-current income taxes payable and $84.8 million reflected as a reduction to the related deferred tax assets.

A reconciliation of unrecognized tax benefits is as follows:



	January 29, 2012			January 30, 2011			January 31, 2010
	(In thousands)
Balance at beginning of period	$	121,034		$	109,765		$	95,319
Increases in tax positions for prior years	385			—			351
Decreases in tax positions for prior years	(293		)	(3,585		)	(131		)
Increases in tax positions for current year	22,181			18,628			18,342
Settlements	—			(358		)	—
Lapse in statute of limitations	(5,045		)	(3,416		)	(4,116		)
Balance at end of period	$	138,262		$	121,034		$	109,765

We classify an unrecognized tax benefit as a current liability, or as a reduction of the amount of a net operating loss carryforward or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year. Likewise, the amount is classified as a long-term liability if we anticipate payment or receipt of cash for income taxes during a period beyond a year.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 29, 2012, January 30, 2011, and January 31, 2010, we had accrued $9.5 million, $11.2 million, and $11.2 million, respectively, for the payment of interest and penalties related to unrecognized tax benefits, which is not included as a component of our unrecognized tax benefits. As of January 29, 2012, non-current income taxes payable of $63.0 million consists of unrecognized tax benefits of $53.5 million and the related interest and penalties of $9.5 million.

While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 29, 2012, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of January 29, 2012, the material tax jurisdictions that may be subject to examination include the United States, Taiwan, Canada, China, Germany, Hong Kong, France, UK, and India for fiscal years 2003 through 2011. As of January 29, 2012, the material tax jurisdictions for which we are currently under examination include India and Taiwan for fiscal years 2003 through 2011.