INCOME TAXES

For financial reporting purposes, our loss from continuing operations before income taxes includes the following:



	Year Ended
	June 28, 2014			June 29, 2013			June 30, 2012
	(Thousands)
Domestic	$	(22,197	)	$	685		$	(9,032	)
Foreign	(89,293		)	(120,954		)	(52,939		)
	$	(111,490	)	$	(120,269	)	$	(61,971	)

The components of our income tax provision are as follows:



	Year Ended
	June 28, 2014			June 29, 2013			June 30, 2012
	(Thousands)
Current:
Domestic	$	49		$	(156	)	$	(13	)
Foreign	2,873			1,564			6,565
Deferred:
Domestic	(13,054		)	(1,513		)	(4,852		)
Foreign	767			131			326
	$	(9,365	)	$	26		$	2,026

Reconciliations of our income tax provision at the statutory rate to our income tax provision are as follows:



	Year Ended
	June 28, 2014			June 29, 2013			June 30, 2012
	(Thousands)
Tax benefit at U.S. federal statutory rate	$	(37,907	)	$	(40,890	)	$	(21,070	)
Tax benefit at state statutory rate	(999		)	(3,404		)	(7,214		)
Permanent adjustments	1,165			(29,746		)	3,677
Foreign rate differential	21,666			33,010			16,199
Change in valuation allowance	18,286			40,027			11,969
Non-deductible goodwill impairment loss	—			4,018			—
Intraperiod tax allocation	(13,054		)	(1,513		)	(4,852		)
Other	1,478			(1,476		)	3,317
Provision for income taxes	$	(9,365	)	$	26		$	2,026

We have not provided for U.S. federal and state income taxes on non-U.S. subsidiaries’ undistributed earnings as of June 28, 2014 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries, except for our Shanghai, China; Korean; and Japanese entities, where closure will eventually follow our decision to exit certain businesses in fiscal year 2014. We recorded a tax liability of $0.3 million for the withholding taxes that would be owed upon distribution of these entities' earnings. Determination of the amount of unrecognized deferred U.S. income tax liability on unremitted earnings is not practicable due to the complexities associated with its hypothetical calculation.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:



	June 28, 2014			June 29, 2013
	(Thousands)
Deferred tax assets:
Net operating loss carryforwards	$	254,483		$	314,792
Depreciation and capital losses	47,453			65,286
Capitalized research and development	15,999			18,162
Inventory valuation	14,074			30,114
Accruals and reserves	10,525			10,710
Tax credit carryforwards	3,579			3,469
Stock-based compensation	2,902			4,858
Other asset impairments	2,011			1,629
Foreign pension plan	—			2,585
Other	—			20
Deferred tax assets	351,026			451,625
Valuation allowance	(346,949		)	(444,114		)
Total deferred tax assets	4,077			7,511
Deferred tax liabilities:
Acquired intangibles	(4,077		)	(4,499		)
Withholding tax	(339		)	—
Total deferred tax liabilities	(4,416		)	(4,499		)
Net deferred tax assets	$	(339	)	$	3,012

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance, the recorded cumulative net losses in prior fiscal periods and the uncertainty of the timing of future profits, we have provided a full valuation allowance against our U.S. and foreign deferred tax assets. Our valuation allowance decreased by $97.2 million, increased by $177.4 million and increased by $3.4 million for fiscal years 2014, 2013 and 2012, respectively.

We have elected to derecognize both the gross deferred income tax assets and the offsetting valuation allowance pertaining to net operating loss and tax credit carryforwards that represent excess tax benefits from stock-based awards. Recognition of a deferred tax asset for excess tax benefits due to stock-based compensation deductions that have not yet been realized through a reduction in income taxes payable is prohibited. Such unrecognized deferred tax benefits totaled $3.3 million for federal and state as of June 28, 2014, and if and when realized through a reduction in income taxes payable, will be accounted for as a credit to additional paid-in capital.

As of June 28, 2014, we had foreign net operating loss carry forwards of approximately $548.8 million, $168.6 million and $1.7 million in the United Kingdom, Japan and Israel, respectively. The United Kingdom and Israel net operating losses do not expire. The Japan net operating loss will expire at various times from 2018 through 2023. We also have U.S. federal and California net operating losses of approximately $205.8 million and $161.0 million, respectively, which will expire in various years from 2015 through 2034 if unused. As of June 28, 2014, we had U.S. federal, California and foreign research and development credits of approximately $0.1 million, $0.8 million and $1.5 million, respectively. The U.S. federal research credits will expire from 2019 through 2034. The California research credit may be carried forward indefinitely and the foreign credit will expire at various times from 2027 through 2032 if unused. In addition, we have foreign tax credits of approximately $1.4 million, which will expire from 2018 through 2024.

Utilization of net operating loss carryforwards and credit carryforwards are subject to annual limitations due to ownership changes as provided in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign tax laws. This annual limitation may result in the expiration of a significant portion of the net operating loss carry forwards and tax credits before utilization.

Our total amount of unrecognized tax benefits as of June 28, 2014 was approximately $4.2 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $3.6 million as of June 28, 2014. While it is often difficult to predict the final outcome of any particular uncertain tax position, management believes unrecognized tax benefits could decrease by approximately $1.7 million in the next twelve months.

A reconciliation of the beginning balance and the ending balance of gross unrecognized tax benefits, net of interest and penalties, for fiscal year ended June 28, 2014, June 29, 2013 and June 30, 2012 is as follows:



	Year Ended
	June 28, 2014			June 29, 2013			June 30, 2012
				(Thousands)
Balance at beginning of period	$	8,016		$	7,248		$	6,853
Additions for tax positions related to the current year	522			1,851			380
Additions for tax positions related to prior years	606			130			125
Reductions for tax positions related to prior years	(741		)	(1,055		)	(110		)
Lapse of the applicable statute of limitations	(4,239		)	(158		)	—
Balance at end of period	$	4,164		$	8,016		$	7,248

We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on our consolidated statements of operations. For fiscal years 2014, 2013 and 2012, we recognized $0.2 million, $0.3 million and $0.1 million, respectively, in interest and penalties related to unrecognized tax benefits. As of June 28, 2014 and June 29, 2013, we have accrued approximately $0.9 million and $0.7 million for payment of interest and penalties related to unrecognized tax benefits, respectively.

We file U.S. federal, U.S. state and foreign tax returns and have determined that our major tax jurisdictions are the United States, the United Kingdom, Italy, Japan and China. Certain jurisdictions remain open to examination by the appropriate governmental agencies; U.S. federal, Italy, Japan and China tax years 2008 to 2014, various U.S. states for tax years 2007 through 2014, and the United Kingdom tax years 2007 to 2014. In addition, in the U.S., any net operating loss and credit carryforwards may be subject to examination in the years they are utilized on the tax returns. We have currently been contacted for examination in Korea and Israel and we believe that our tax returns are supportable as filed. However, we cannot predict the outcome of the examination. We are not currently under any U.S., state, or other foreign examinations.