INCOME TAXES

For financial reporting purposes, our income before income taxes includes the following:



	Year Ended
	June 30, 2018			July 1, 2017			July 2, 2016
	(Thousands)
Domestic	$	(237	)	$	(12,579	)	$	(856	)
Foreign	75,080			115,392			10,285
	$	74,843		$	102,813		$	9,429

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



	Year Ended
	June 30, 2018		July 1, 2017			July 2, 2016
	(Thousands)
Current:
Domestic	$	8	$	6		$	16
Foreign	3,138		629			1,023
Deferred:
Domestic	—		—			—
Foreign	9,244		(25,681		)	(190		)
	$	12,390	$	(25,046	)	$	849

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



	Year Ended
	June 30, 2018			July 1, 2017			July 2, 2016
	(Thousands)
Tax expense at U.S. federal statutory rate	$	20,609		$	34,957		$	3,206
Tax expense at state statutory rate	959			1,070			138
Other permanent adjustments	948			2,796			1,894
Foreign rate differential	(3,095		)	(9,043		)	(786		)
Change in valuation allowance	(39,876		)	(54,584		)	(3,705		)
Impact of Tax Cuts and Jobs Act - rate reduction	34,953			—			—
Other	(2,108		)	(242		)	102
Provision for (benefit from) income taxes	$	12,390		$	(25,046	)	$	849

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 June 30, 2018 and July 1, 2017, 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:



	June 30, 2018			July 1, 2017
	(Thousands)
Deferred tax assets:
Net operating loss carryforwards	$	157,411		$	189,620
Depreciation and capital losses	15,242			25,809
Capitalized research and development	5,977			8,531
Inventory valuation	4,724			3,234
Accruals and reserves	16,339			13,613
Tax credit carryforwards	7,063			6,736
Stock-based compensation	2,209			2,424
Other asset impairments	1,277			1,999
Deferred tax assets	210,242			251,966
Valuation allowance	(193,435		)	(225,643		)
Total deferred tax assets	16,807			26,323
Deferred tax liabilities:
Acquired intangibles	(182		)	(454		)
Withholding tax	(95		)	(95		)
Total deferred tax liabilities	(277		)	(549		)
Net deferred tax assets	$	16,530		$	25,774

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 our Japan subsidiary's operating profits in previous years, 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 $32.2 million, $60.0 million and $44.7 million for fiscal years 2018, 2017 and 2016, respectively.

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. As a result of the reduction in the corporate income tax rate, we revalued our net deferred tax asset at June 30, 2018. This resulted in a reduction in the value of the net deferred tax asset of approximately $35.0 million, which was offset by the change in valuation allowance of $35.0 million due to our full valuation allowance position.

Due to the complexity of the provision for the TCJA and the lack of the current guidance, under the guidance of Staff Accounting Bulletin 118, the accounting is incomplete and we have not estimated the GILTI impact on deferred taxes. Additionally, state and local authorities are reviewing federal conformity matters related to GILTI. Provisional amounts or adjustments to provisional amounts identified in the measurement period, would be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined. We have determined a reasonable estimate for the tax reform effects other than the impact of GILTI on our recognition of deferred tax assets, and reported the estimates as a provisional amount in our financial statements for which the accounting under ASC Topic 740 is completed. We will finalize the impact of the GILTI in fiscal year 2019.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based payment awards to their employees. We adopted ASU 2016-09 during the first quarter of fiscal year 2018. Under ASU 2016-09, excess tax benefits and deficiencies are required to be recognized prospectively as part of provision for income taxes rather than additional paid-in capital. We have adopted this requirement prospectively. We recognized additional $2.8 million and $0.2 million of deferred tax assets associated with the net operating loss on the excess tax benefits for federal and states, respectively.

Net operating loss carryforwards by jurisdiction are summarized as follows:



	June 30, 2018		Years of Expiration
	(Thousands)
United Kingdom	$	497,670	Indefinite
Federal	242,169		Varies (1)
California	167,944		2019 - 2038
Other Foreign	1,162		2019 - 2038
Total	$	908,945


(1)	Of the $242.2 million in federal net operating loss carryforwards, $236.0 million expires between 2019 and 2037, and $6.2 million has an indefinite life.

In addition to our net operating losses, as of June 30, 2018, we had U.S. federal, California and Canada research and development credits of approximately $0.3 million, $1.0 million and $1.9 million, respectively. The U.S. federal research credits will expire from 2019 through 2038. The California 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 $3.9 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 June 30, 2018 was approximately $3.1 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.3 million as of June 30, 2018. 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 $1.1 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 30, 2018, July 1, 2017 and July 2, 2016 is as follows:



	Year Ended
	June 30, 2018			July 1, 2017			July 2, 2016
				(Thousands)
Balance at beginning of period	$	3,515		$	3,779		$	4,058
Additions for tax positions related to the current year	100			21			639
Additions for tax positions related to prior years	93			6			538
Reductions for tax positions related to prior years	(14		)	(291		)	(1,016		)
Lapse of the applicable statute of limitations	(610		)	—			(440		)
Balance at end of period	$	3,084		$	3,515		$	3,779

We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on our consolidated statements of operations. As of June 30, 2018 and July 1, 2017, 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 June 30, 2018, our 2012 to 2018 tax returns were open to potential examination in one or more jurisdictions. In addition, in the U.S., 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.