10. Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Income Tax Provision

The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands):



	Fiscal Year Ended
	September 30, 2016		September 25, 2015		September 26, 2014
United States	$	37,223	$	17,091	$	160,839
Foreign	198,681		228,691		115,260
Total	$	235,904	$	245,782	$	276,099



	Fiscal Year Ended
	September 30, 2016			September 25, 2015			September 26, 2014
Current:
Federal	$	19,226		$	24,262		$	20,533
State	521			130			543
Foreign	52,492			52,461			52,999
Total current	72,239			76,853			74,075

Deferred:
Federal	(19,540		)	(9,593		)	(2,345		)
State	(3,451		)	(3,686		)	(3,544		)
Foreign	254			(1,032		)	(807		)
Total deferred	(22,737		)	(14,311		)	(6,696		)
Provision for income taxes	$	49,502		$	62,542		$	67,379

Repatriation of Undistributed Foreign Earnings

Beginning in fiscal 2010, we initiated a policy election to indefinitely reinvest a portion of the undistributed earnings of certain foreign subsidiaries with operations outside of the U.S. We consider the earnings of these foreign subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. A majority of the amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs in order to fund operations and other growth of our foreign subsidiaries and acquisitions.

As a result, we have not recorded a deferred tax liability on undistributed earnings of foreign subsidiaries of approximately $678.1 million, which are permanently reinvested outside the U.S. If these undistributed earnings held by foreign subsidiaries are repatriated to the U.S., they may be subject to federal and state income taxes, less any applicable foreign tax credits and withholding taxes, estimated at approximately $173.0 million as of September 30, 2016. Accordingly, if a determination is made to repatriate some or all of these foreign earnings, we would need to adjust our income tax provision in the period that the determination is made to accrue for taxes payable on earnings that will no longer be indefinitely invested outside the U.S.

Withholding Taxes

We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax provision includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign tax provision. Withholding taxes were as follows (in thousands):



	Fiscal Year Ended
	September 30, 2016		September 25, 2015		September 26, 2014
Withholding taxes	$	45,151	$	45,372	$	47,131

Deferred Income Taxes

Deferred income taxes reflect the net 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, using enacted tax rates in effect for the year in which the differences are expected to reverse. Based upon the level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets are deductible, we believe it is more likely than not that the benefits of these deductible differences will be realized; therefore, a valuation allowance is not required.

A summary of the tax effects of the temporary differences were as follows (in thousands):



	Fiscal Year Ended
	September 30, 2016			September 25, 2015
Deferred income tax assets:
Investments	$	972		$	977
Inventories	7,855			8,800
Net operating loss	2,818			1,406
Accrued expenses	16,497			16,843
Stock-based compensation	31,397			32,359
Revenue recognition	54,043			52,282
Intangibles	—			401
Depreciation and amortization	26,364			6,443
Research and development credits	12,837			7,977
Foreign tax credits	9,727			11,119
Translation adjustment	1,223			719
Other	9,473			9,092
Total gross deferred income tax assets	173,206			148,418
Less: valuation allowance	—			—
Total deferred income tax assets	173,206			148,418

Deferred income tax liabilities:
Intangibles	(2,014		)	—
International earnings	(4,097		)	(4,646		)
Unrealized gain on investments	(305		)	(493		)
Deferred income tax assets, net (non-current)	$	166,790		$	143,279

NOL and Tax Credit Carryforwards

At September 30, 2016, the NOL carried forward for federal and California tax purposes were $3.0 million and $9.7 million, respectively, and will expire in fiscal 2029 if unused. Additionally, we had a total foreign NOL carryforward of $6.8 million as of September 30, 2016, an amount which is not subject to expiration. At September 30, 2016, we also had foreign tax credit and federal R&D tax credit carryforwards of $7.0 million and $4.9 million, respectively, which will expire between fiscal 2025 and fiscal 2035, and California and foreign R&D tax credits of $16.5 million and $1.0 million, respectively, which will be carried forward indefinitely.

Effective Tax Rate

Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods. The benefit associated with the foreign rate differential shown below is net of the impact of uncertain tax positions affecting the amount of income subject to foreign taxation. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:



	Fiscal Year Ended
	September 30, 2016		September 25, 2015		September 26, 2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal effect	0.7		0.7		0.6
Stock-based compensation expense rate	1.5		1.7		1.4
Research and development tax credits	(5.2	)	(3.0	)	(1.6	)
Tax exempt interest	(0.1	)	(0.2	)	(0.2	)
U.S. manufacturing tax incentives	(1.1	)	(0.3	)	(2.0	)
Foreign rate differential	(9.5	)	(9.1	)	(8.9	)
Audit settlements	(2.3	)	—		—
Other	2.0		0.6		0.1
Effective tax rate	21.0	%	25.4	%	24.4	%

Our effective tax rate decreased from 25.4% in fiscal 2015 to 21.0% in fiscal 2016. The decrease was primarily due to benefits from the settlement of a multi-year state audit and federal R&D tax credits that where retroactively reinstated in fiscal 2015.

Our effective tax rate increased from 24.4% in fiscal 2014 to 25.4% in fiscal 2015. Our effective tax rate in fiscal 2015 reflects an increase from taxes associated with the sale of our ownership interest in a U.S.-based jointly-owned real estate entity whose primary asset was a building. This sale had a higher marginal tax rate than our entity-wide blended average. In addition, our effective tax rate in fiscal 2015 reflects a benefit from a higher proportion of our overall earnings being attributable to lower tax-rate jurisdictions, and was also increased as a result of reduced benefits from U.S. manufacturing tax incentive deductions. The overall increase in the rate was partially offset by a discrete benefit from federal R&D tax credits that were retroactively reinstated for the 2014 calendar year only.

Uncertain Tax Positions

As of September 30, 2016, the total amount of gross unrecognized tax benefits was $75.2 million, of which $62.1 million, if recognized, would reduce our effective tax rate. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that this amount will be reduced by $2.7 million and $1.1 million as a result of the expiration of certain statute of limitations and the expected settlement of ongoing audits, respectively. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):



	Fiscal Year Ended
	September 30, 2016			September 25, 2015			September 26, 2014
Beginning Balance	$	65,161		$	31,351		$	32,468
Gross increases - tax positions taken during prior years	4,343			507			333
Gross increases - tax positions taken during current year	26,585			34,293			2,916
Gross decreases - settlements with tax authorities during current year	(20,086		)	—			—
Lapse of statute of limitations	(835		)	(990		)	(4,366		)
Ending Balance	$	75,168		$	65,161		$	31,351

Classification of Interest and Penalties

We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision. In fiscal 2016, our current tax provision was increased by interest expense of $0.4 million and reduced by penalties of $0.5 million, while in fiscal 2015, our current tax provision was increased by interest expense of $0.6 million and reduced by penalties of $0.4 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 30, 2016 and September 25, 2015 were as follows (in thousands):



	Fiscal Year Ended
	September 30, 2016		September 25, 2015
Accrued interest	$	1,936	$	2,977
Accrued penalties	53		589
Total	$	1,989	$	3,566

We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The material income tax jurisdictions are the United States (Federal), California, New York and the Netherlands. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.

During fiscal 2016, we settled two multi-year examinations of our tax filings by taxing authorities, and as a result, recognized a total net tax benefit of $5.5 million related to the settlement of these audits. During the first quarter of fiscal 2016, we settled the examination of our tax filings by the Internal Revenue Service (“IRS”) for the 2011 and 2012 fiscal years, and during the second quarter of fiscal 2016 settled the examination of our tax filings with the State of California for the 2007 and 2008 fiscal years.

We are currently under audit by the State of California for the 2009 through 2011 fiscal years and by the State of New York for the 2012 through 2013 fiscal years. In other major states and major foreign jurisdictions, the fiscal years subsequent to 2012 and 2009, respectively, remain open and could be subject to examination by the taxing authorities.

Management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution of any tax issues addressed in our current audits are done in a manner inconsistent with management’s expectations, we could be required to adjust our tax provision for income taxes in the period such resolution occurs.