Income Tax Expense

The following table presents the income tax expense and the effective tax rate:



	Three Months Ended						Nine Months Ended
	March 31, 2017			April 1, 2016			March 31, 2017			April 1, 2016
	(in millions)
Income tax expense	$	56		$	6		$	237		$	30
Effective tax rate	18		%	8		%	67		%	5		%

Income tax expense of $237 million for the nine months ended March 31, 2017 includes discrete effects consisting of income tax expense from the integration of SanDisk of $91 million and a valuation allowance on acquired tax attributes of $111 million. Income tax expense related to the SanDisk integration is partially offset by an income tax benefit of $98 million from deductible debt issuance costs, debt discounts and prepayment fees from debt refinancing.

The primary drivers for the difference between the effective tax rate for the three and nine months ended March 31, 2017 and the U.S. Federal statutory rate of 35% are the current year generation of tax credits, tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2017 through 2029, for both periods, and the discrete items described above for the nine months ended March 31, 2017. For the three and nine months ended April 1, 2016, the difference between the effective tax rate and the U.S. Federal statutory rate of 35% is primarily due to current year generation of tax credits and tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2017 through 2029.

During the nine months ended March 31, 2017, the Company recorded a net increase of $14 million in its liability for unrecognized tax benefits. As of March 31, 2017, the Company’s liability for unrecognized tax benefits was approximately $505 million. Accrued interest and penalties related to unrecognized tax benefits as of March 31, 2017 was $92 million.

The Internal Revenue Service (“IRS”) previously completed its field examination of the Company’s federal income tax returns for fiscal years 2006 through 2009 and proposed certain adjustments. The Company received Revenue Agent Reports from the IRS that seek to increase the Company’s U.S. taxable income which would result in additional federal tax expense totaling $795 million, subject to interest. The issues in dispute relate primarily to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances. The Company disagrees with the proposed adjustments and in September 2015, filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. Meetings with the IRS Appeals Office began in March 2017. The Company believes that its tax positions are properly supported and will vigorously contest the position taken by the IRS. In September 2015, the IRS commenced an examination of the Company’s fiscal years 2010 through 2012.

The Company believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. As of March 31, 2017, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.