INCOME TAXES

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



	Year Ended
	July 1, 2017			July 2, 2016			June 27, 2015
	(Thousands)
Domestic	$	(12,579	)	$	(856	)	$	(5,725	)
Foreign	115,392			10,285			(42,181		)
	$	102,813		$	9,429		$	(47,906	)

The components of our income tax provision (benefit) are as follows:



	Year Ended
	July 1, 2017			July 2, 2016			June 27, 2015
	(Thousands)
Current:
Domestic	$	6		$	16		$	(5	)
Foreign	629			1,023			543
Deferred:
Domestic	—			—			—
Foreign	(25,681		)	(190		)	(210		)
	$	(25,046	)	$	849		$	328

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



	Year Ended
	July 1, 2017			July 2, 2016			June 27, 2015
	(Thousands)
Tax expense (benefit) at U.S. federal statutory rate	$	34,957		$	3,206		$	(16,288	)
Tax expense (benefit) at state statutory rate	1,070			138			(487		)
Other permanent adjustments	2,796			1,894			1,815
Foreign rate differential	(9,043		)	(786		)	11,635
Change in valuation allowance	(54,584		)	(3,705		)	4,165
Other	(242		)	102			(512		)
Provision for (benefit from) income taxes	$	(25,046	)	$	849		$	328

We plan to permanently reinvest the unremitted earnings of our non-U.S. subsidiaries except for those subsidiaries where the closure of these subsidiaries is expected to be imminent. We recorded a tax liability of $0.1 million and $0.1 million for the withholding taxes that would be owed upon distribution of these entities' earnings as of July 1, 2017 and July 2, 2016, respectively.

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 and liabilities are as follows:



	July 1, 2017			July 2, 2016
	(Thousands)
Deferred tax assets:
Net operating loss carryforwards	$	189,620		$	216,768
Depreciation and capital losses	25,809			27,373
Capitalized research and development	8,531			11,579
Inventory valuation	3,234			6,656
Accruals and reserves	13,613			14,126
Tax credit carryforwards	6,736			6,142
Stock-based compensation	2,424			1,905
Other asset impairments	1,999			2,016
Deferred tax assets	251,966			286,565
Valuation allowance	(225,643		)	(285,683		)
Total deferred tax assets	26,323			882
Deferred tax liabilities:
Acquired intangibles	(454		)	(693		)
Withholding tax	(95		)	(95		)
Total deferred tax liabilities	(549		)	(788		)
Net deferred tax assets	$	25,774		$	94

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 most of our U.S. and foreign deferred tax assets with the exception of our Italy investment tax credit and Japan. Based on a recent history of profitability, firm sales backlog and future income projections, management has released the valuation allowance on all of our Japan subsidiary's deferred tax assets during the fourth quarter of fiscal year 2017. Our valuation allowance decreased by $60.0 million, $44.7 million and $16.6 million for fiscal years 2017, 2016 and 2015, respectively.

We have elected to release 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 $18.1 million for federal and state as of July 1, 2017, and if and when realized through a reduction in income taxes payable, will be accounted for as a credit to the statement of operations upon the adoption of ASU 2016-09 in the first quarter of fiscal year 2018.

Net operating loss carryforwards by jurisdiction are summarized as follows:



	July 1, 2017		Years of Expiration
	(Thousands)
United Kingdom	$	468,436	Indefinite
Federal	236,633		2018 - 2037
California	166,527		2018 - 2037
Japan	44,898		2022 - 2026
Other Foreign	1,374		2018 -2037
Total	$	917,868

In addition to our net operating losses, as of July 1, 2017, we had U.S. federal, California, United Kingdom and Canada research and development credits of approximately $0.1 million, $1.0 million, $0.6 million and $2.0 million, respectively. The U.S. federal research credits will expire from 2018 through 2037. The California and United Kingdom research credit may be carried forward indefinitely. The Canada research credit will expire during 2026 if unused. In addition, we have foreign tax credits of approximately $3.1 million, which will expire from 2028 through 2036, and an Italy investment tax credit of $0.1 million.

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 carryforwards and tax credits before utilization.

Our total amount of unrecognized tax benefits as of July 1, 2017 was approximately $3.5 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.9 million as of July 1, 2017. While it is often difficult to predict the final outcome of any particular uncertain tax position, management believes that unrecognized tax benefits could decrease by $1.3 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 July 1, 2017, July 2, 2016 and June 27, 2015 is as follows:



	Year Ended
	July 1, 2017			July 2, 2016			June 27, 2015
				(Thousands)
Balance at beginning of period	$	3,779		$	4,058		$	4,164
Additions for tax positions related to the current year	21			639			232
Additions for tax positions related to prior years	6			538			759
Reductions for tax positions related to prior years	(291		)	(1,016		)	(473		)
Lapse of the applicable statute of limitations	—			(440		)	(624		)
Balance at end of period	$	3,515		$	3,779		$	4,058

We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on our consolidated statements of operations. As of July 1, 2017 and July 2, 2016, we have accrued approximately $0.7 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. At July 1, 2017, our 2011 to 2017 tax returns were open to potential examination in one or more jurisdictions. In addition, in the U.S. and Japan, any net operating loss and credit carryforwards may extend the ability of the tax authorities to examine our tax returns beyond the regular limits. We are not currently under any U.S. federal, U.S. state, or other foreign tax examinations.