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 29, 2017		September 30, 2016		September 25, 2015
United States	$	28,221	$	37,223	$	17,091
Foreign	228,423		198,681		228,691
Total	$	256,644	$	235,904	$	245,782



	Fiscal Year Ended
	September 29, 2017			September 30, 2016			September 25, 2015
Current:
Federal	$	30,719		$	19,226		$	24,262
State	610			521			130
Foreign	55,531			52,492			52,461
Total current	86,860			72,239			76,853

Deferred:
Federal	(27,345		)	(19,540		)	(9,593		)
State	(4,596		)	(3,451		)	(3,686		)
Foreign	(702		)	254			(1,032		)
Total deferred	(32,643		)	(22,737		)	(14,311		)
Provision for income taxes	$	54,217		$	49,502		$	62,542

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 $868.0 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 $224.8 million as of September 29, 2017. 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 29, 2017		September 30, 2016		September 25, 2015
Withholding taxes	$	48,012	$	45,151	$	45,372

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 29, 2017			September 30, 2016
Deferred income tax assets:
Investments	$	2,327		$	972
Inventories	6,821			7,855
Net operating loss	2,806			2,818
Accrued expenses	19,732			16,497
Stock-based compensation	26,970			31,397
Revenue recognition	53,843			54,043
Depreciation and amortization	52,876			26,364
Research and development credits	15,504			12,837
Foreign tax credits	10,140			9,727
Translation adjustment	625			1,223
Other	6,696			9,473
Total gross deferred income tax assets	198,340			173,206
Less: valuation allowance	—			—
Total deferred income tax assets	198,340			173,206

Deferred income tax liabilities:
Intangibles	(2,277		)	(2,014		)
International earnings	(4,855		)	(4,097		)
Unrealized gain on investments	(293		)	(305		)
Deferred income tax assets, net (non-current)	$	190,915		$	166,790

NOL and Tax Credit Carryforwards

At September 29, 2017, the NOL carried forward for federal and California tax purposes were $2.2 million and $9.7 million, respectively, and will expire in fiscal 2029 if unused. Additionally, we had a total foreign NOL carryforward of $7.9 million as of September 29, 2017, an amount which is not subject to expiration. At September 29, 2017, we also had foreign tax credit and federal R&D tax credit carryforwards of $7.7 million and $4.9 million, respectively, which will expire between fiscal 2025 and fiscal 2035, and California and foreign R&D tax credits of $20.9 million and $1.5 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 29, 2017		September 30, 2016		September 25, 2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal effect	0.7		0.7		0.7
Stock-based compensation expense rate	1.4		1.5		1.7
Research and development tax credits	(3.7	)	(5.2	)	(3.0	)
Tax exempt interest	(0.1	)	(0.1	)	(0.2	)
U.S. manufacturing tax incentives	(0.8	)	(1.1	)	(0.3	)
Foreign rate differential	(11.7	)	(9.5	)	(9.1	)
Audit settlements	(0.6	)	(2.3	)	—
Other	0.9		2.0		0.6
Effective tax rate	21.1	%	21.0	%	25.4	%

Our effective tax rate remained unchanged in fiscal 2017, from 21.0% in fiscal 2016 to 21.1% in fiscal 2017. The effective tax rate in fiscal 2017 compared to fiscal 2016 reflects a benefit from a higher proportion of our overall earnings being attributable to lower tax-rate jurisdictions, offset by reduced benefits from both federal R&D tax credits and lower settlements from prior years' state audits.

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 were retroactively reinstated in fiscal 2015.

Uncertain Tax Positions

As of September 29, 2017, the total amount of gross unrecognized tax benefits was $98.7 million, of which $85.0 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 $3.7 million as a result of the expiration of certain statute of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):



	Fiscal Year Ended
	September 29, 2017			September 30, 2016			September 25, 2015
Beginning Balance	$	75,168		$	65,161		$	31,351
Gross increases - tax positions taken during prior years	308			4,343			507
Gross decreases - tax positions taken during prior years	—			—			—
Gross increases - tax positions taken during current year	26,724			26,585			34,293
Gross decreases - settlements with tax authorities during current year	(1,101		)	(20,086		)	—
Lapse of statute of limitations	(2,434		)	(835		)	(990		)
Ending Balance	$	98,665		$	75,168		$	65,161

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 2017, our current tax provision was increased by interest expense of $1.8 million, while in fiscal 2016, our current tax provision was increased by interest expense of $0.4 million and reduced by penalties of $0.5 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 29, 2017 and September 30, 2016 were as follows (in thousands):



	Fiscal Year Ended
	September 29, 2017		September 30, 2016
Accrued interest	$	3,733	$	1,936
Accrued penalties	55		53
Total	$	3,788	$	1,989

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 2017, we settled two multi-year examinations of our tax filings by taxing authorities, and as a result, recognized a total net tax benefit of $1.5 million related to the settlement of these audits. We settled the examination of our tax filings with the State of California for the 2009 through 2011 fiscal years and our tax filings with the State of New York for the 2011 through 2013 fiscal years.

We are currently under audit by the State of New York for the 2014 through 2015 fiscal years. In the U.S federal jurisdiction, other major states, and major foreign jurisdictions, the fiscal years subsequent to 2013, 2011, and 2010, 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.